Schumpeter – Page 14 – artdiamondblog.com

Leapfrog Competition in Video Game Machines

Source of book image: http://www.amazon.com/gp/product/customer-reviews/0385479492/ref=cm_cr_dp_2_1/104-0758544-2447945?%5Fencoding=UTF8&customer-reviews.sort%5Fby=-SubmissionDate&n=283155

Co-opetition is a readable book with some plausible discussion of interesting cases. The central message is that business is not always a zero-sum game (in contrast, say, to competitive sports). One implication is that the firm’s complementary relationships with other firms, may deserve as much attention as its competitive relationships.

One qualitfication: I think the book too much emphasizes game theory as the sine qua non source of the book’s insights. About the only game theory you really need to understand 99% of the book’s analysis is the concept of the "zero-sum game."

In a couple of places, the book discusses "leapfrog" competiton in the video game industry:

(p. 102) By mid-1995 the price of the 3DO machine was down to $400 (with $150 worth of software thrown in). Cumulative sales passed half a million. Progress, surely, but as of early 1996, 3DO’s future remains uncertain. It no longer has the 32-bit game to itself. Sega is shipping its 32-bit Saturn machine at $400. Sony has launched its 32-bit PlayStation at $300. Looking to leapfrog them all is Nintendo, whose 64-bit Ultra machine is due out in April 1996 at a price under $250.

(p. 114) Could a challenger hope to breach Nintendo’s virtuous circle? Not once the circle had got rolling. Forget about alternatives–TV, books, sports. From a kid’s perspective, there were no good alternatives to a video game. The only real threat came from alternative video game systems. Here, software was key, as always. With a huge library of Nintendo titles to choose from, why would anyone buy another machine? Perhaps a challenger could take successful Nintendo games over to its platform and then offer its own library. But the exclusivity clause killed that option. No game could be taken to another platform for a two-year period, by which time the game was passe. A challenger would have had to start from scratch. While large profits and shortages normally invite entry, the virtuous circle made competing in Nintendo’s game hopeless. The only hope was to leapfrog Nintendo with a new technology; that’s what Sega ultimately did, as we’ll see in the Scope chapter.

Source:

Brandenburger, Adam M., and Barry J. Nalebuff. Co-Opetition; a Revolution Mindset That Combines Competition and Cooperation; the Game Theory Strategy That’s Changing the Game of Business, 1st ed. Currency, 1996.

Leonard Read’s Comparative Advantage

When I was a student at Wabash College, Ben Rogge arranged for Liberty Fund to finance my attendance at a couple of weekend seminars at the Foundation for Economic Education in New York. The seminars were taught by Rogge, Edmund Opitz, and Leonard Read. I remember upon returning to Wabash after one of the seminars, Rogge asking me what I thought of Read. I said something along the lines that I didn’t much like his presentation style. I remember saying that he expressed himself in a way that I associated with used car salesmen. (So unlike Rogge’s low-key, witty, intensity.)

My memory is that Rogge did not respond directly to my comment, but (perhaps with a hint of a smile) mentioned that among many audiences, especially in business, Leonard Read was an extremely effective speaker.

I do not doubt that, and I also do not doubt that Read belongs in the pantheon of free market defenders. His essay "I, Pencil" is by itself sufficient for admission. But he did more than write and speak; he nurtured and called attention to others who had wisdom to offer. For one small example, many of us learned about Albert Jay Nock’s "The Remnant" through Leonard Read’s The Freeman.

I believe that the last time I saw Read was at the memorial service at Wabash College for Ben Rogge. I ended up sitting near Read and Opitz, who had flown in from New York. I introduced myself as a Rogge student who had attended FEE seminars.

I remember Read looking very sad, and depressed, and almost lost. I also remember that he expressed some mild indignation that more of Rogge’s students hadn’t made it back for the memorial service.

But as a serious reader of "The Remnant," Read on further reflection probably realized that the attendance at a memorial service is not a good measure of a teacher’s influence on his students.

Apparently one student, whom Read himself influenced, was Charles Koch:

(p. A8) Whereas the bookshelves of most of America’s leading CEOs are stocked with pop corporate management and "how to succeed" books, Mr. Koch’s office is a wall-to-wall shrine to writings in classical economics, or, as he calls it, "the science of liberty." The authors who have had the most profound influence on his own political philosophy include F.A. Hayek, Ludwig von Mises, Joseph Schumpeter, Julian Simon, Paul Johnson and Charles Murray. Mr. Koch says that he experienced an intellectual epiphany in the early 1960s, when he attended a conference on free-market capitalism hosted by the late, great Leonard Read.

For the full commentary, see:

STEPHEN MOORE. "THE WEEKEND INTERVIEW with Charles Koch; Private Enterprise." The Wall Street Journal (Sat., May 6, 2006): A8.

(Note: In the quotation above, I have corrected the WSJ’s misspelling of Read’s last name.)

“Everybody wants to be like Bill Gates”

Vietnamese university students hoping to see Bill Gates. Source of image: http://www.nytimes.com/2006/04/27/world/asia/27vietnam.html?ex=1303790400&en=255d4d4996b1a9a6&ei=5088&partner=rssnyt&emc=rss

HANOI, Vietnam, April 26 — It was Lenin’s birthday. The most important Communist Party meeting in five years was under way. And the star of the show was the world’s most famous capitalist, Bill Gates.

The president, the prime minister and the deputy prime minister all excused themselves from the party meeting on Saturday to have their pictures taken with Mr. Gates, who has more star power in Vietnam than any of them.

When people heard he was in town, hundreds climbed trees and pushed through police lines to get a glimpse of him. He was the subject of the lead article in the next day’s newspapers.

This is where Vietnam stands today, moving cautiously toward a new version of communism while the people and their leaders lunge eagerly for the brass ring of capitalist development.

"That was very symbolic," said Le Dang Doanh, an official in the Ministry of Planning, speaking of the reception for Mr. Gates. "It is a very clear sign of the new mood of society and the people. Everybody wants to be like Bill Gates."

For the full story, see:

SETH MYDANS. "Communist Vietnam Lunges for Capitalism’s Brass Ring." The New York Times (Thurs., April 27, 2006): A3.

Note: the version of the article above corrects an error in the print version that had misidentified the day of Lenin’s birth, and Gates visit as a Sunday (it was a Saturday).

Hunter-Gatherers Prefer Civilization

Source of photo: online version of NYT article cited below.

(p. A13) The newly arrived Nukak do not provide much detail about why they left. They just say that "the Green Nukak," a possible reference to Marxist guerrillas, who wear camouflage, told them to leave.

"The Green Nukak said we could not keep walking in the jungle, or else there would be problems," explained Va-di, another Nukak man, whose words were translated from Nukak by Belisario. "The Green Nukak told us to go where it is safe."

. . .

In Aguabonita, the scene on a recent day was full of commotion and laughter. Naked children tugged at the shirts of two foreign journalists, offering big smiles and hugs. The men quickly welcomed the visitors into a makeshift shelter, where they laughed at some of the questions and, it seemed, wholly innocently at their own odd predicament.

Are they sad? "No!" cried a Nukak named Pia-pe, to howls of laughter. In fact, the Nukak said they could not be happier. Used to long marches in search of food, they are amazed that strangers would bring them sustenance — free.

What do they like most? "Pots, pants, shoes, caps," said Mau-ro, a young man who went to a shelter to speak to two visitors.

Ma-be added, "Rice, sugar, oil, flour." Others said they loved skillets. Also high on the list were eggs and onions, matches and soap and certain other of life’s necessities.

"I like the women very much," Pia-pe said, to raucous laughs.

One young Nukak mother, Bachanede, breast-feeding her infant as she talked, said she was happy just to stay still. "When you walk in the jungle," she said, "your feet hurt a lot."

The men still go into the jungle, searching for monkeys, a delicacy the Nukak cannot seem to live without. Monkeys are grilled, dismembered and boiled, then eaten piece by piece. The women still spend their time carefully weaving intricate wristbands and hammocks, using threads from palm leaves.

All live in shelters now, enjoy constant medical attention and, on weekends, stroll into town to take in the sights. "Nukak life is hard in the jungle," Dr. Maldonado said. "You wake up thinking about food and you go hunt, you go search for nuts. So when they see us they think their food problems are over."

That is not to say the Nukak do not have plans.

Ma-be explained that the idea is to grow plantains and yucca and take the crops to town. "We can exchange it for money," he said, "and exchange the money for other things." But first they need to learn how to cultivate crops. The Nukak say they would like their children to go to school. They also say they do not want to lose traditions, like hunting or speaking their language. "We do want to join the white family," Pia-pe said, speaking of Colombian society, "but we do not want to forget words of the Nukak."

For the full story, see:

JUAN FORERO. "Leaving the Wild, and Rather Liking the Change." The New York Times (Thurs., May 11, 2006): A1 & A13.

(Note: ellipsis added.)

Omit the Footnotes?

When I was a graduate student at Chicago, Milton Friedman was rumored to have given a presentation on how to write a doctoral dissertation in which he said something like:

Take everything nonessential, and move it into footnotes. Then collect all the footnotes into an appendix. Finally, delete the appendix.

My memory is that Deirdra McCloskey, in her wonderful advice on how to write economics clearly, also advises against footnotes. I at least attribute this advice to McCloskey (and Friedman) when I pass it on to students.

But sometimes, when I write an article, a misguided referee, or editor, insists that I omit some stuff that I think is really good. When that happens, sometimes, if I feel strongly, I sneak some of that material back into the paper in footnotes. Maybe no one will ever read it, but I feel better that it is still there.

And every once in awhile, it may turn out that the footnotes are what matter most:

It was typical of Schumpeter’s love for theory that he rejected Marshall’s view that the reader could skip the footnotes and appendixes. If time were short, Schumpeter advised, read them and skip the text! (p. 7; italics in original.)

In this case, though, I suspect that Marshall was right, and Schumpeter wrong.

Source:

Samuelson, Paul. "Compete as an Economic Theorist." In Schumpeterian Economics, edited by Helmut Frisch, New York: Praeger Publishers, 1981, pp. 1-27.

Will Google Leapfrog Microsoft?

Microsoft co-founder Bill Gates and Google CEO Eric Schmidt. Source of photo: online version of NYT article quoted and cited below.

The Microsoft-Google rivalry is shaping up as a titanic corporate clash for the ages.

It may not turn out that way. Markets and corporate fortunes routinely defy prediction. But it sure looks as if the two companies are on a collision course, as the realms of desktop computing and Internet services and software overlap more and more.

Microsoft, of course, is the reigning powerhouse of computing and Google is the muscular Internet challenger. On each side, the battalions are arrayed: executives, engineers, marketers, lawyers and lobbyists. The spending and competition are escalating daily. For each, it seems, the other passes what Andrew S. Grove, a founder and former chairman of Intel, calls the "silver bullet test" of strategic competition. "If you had one bullet, who would you shoot with it?"

How the Microsoft-Google confrontation plays out could shape the future of competition in computing and how people use information technology.

Do the pitched corporate battles of the past shed any light on how this one might turn out?

Business historians and management experts say the experience in two of the defining industries of the 20th century, mass-market retailing and automobiles, may well be instructive. The winners certainly scored higher in the generic virtues of business management: innovation, execution and leadership.

But perhaps even more significant, those who came out on top, judging from history, had two more specific attributes. They were the companies, according to business historians, that proved able to adapt to change instead of being prisoners of past success. And in their glory days, these corporate champions were magnets for the best and brightest people.

For the full story, see:

STEVE LOHR. "And in This Corner . . . Microsoft and Google Grapple for Supremacy as Stakes Escalate." The New York Times (Weds., May 10, 2006): C1 & C14.

Source of graphic: online version of NYT article quoted and cited above.

Static Versus Dynamic Pictures

Schumpeter distinguished the static picture of capitalism in the textbook model, with the dynamic reality captured in the process of creative destruction. Apparently Ronald Reagan also understood that a dynamic view is better than a static snapshot. Michael Deaver recounts:

(p. 75) . . . I told him that I noticed his aversion to sitting for photo shoots. He looked at me surprised. "That’s funny, in all these years, nobody’s ever noticed that." I asked him to elaborate. "Well, you can never recover from a still shot."

Reagan was most comfortable with moving film, he went on to say. He truly believed the television camera was a friend, a device that would separate the real from the phony. Still cameras could always be used to make a candidate look like a fool. When he explained this to me in the (p. 76) late 1960s, he said, "You know how I sometimes touch my nose before I make a point? Well, a still shot would show me picking my nose, while a live shot would show me making my point."

Source:

Deaver, Michael K. A Different Drummer: My Thirty Years with Ronald Reagan. Reprint ed. Harper Paperbacks, 2003.

Successful Mutual Fund Expert Claims Capitalism is Revitalized by Creative Destruction

SAN FRANCISCO — One morning in November 2003, 15 Dodge & Cox senior managers gathered in a conference room here to decide an issue brewing for years: Was it time to close the flagship Dodge & Cox Stock Fund to new investors?

For months, senior managers had stood in the hallways and gathered in glass-paned offices, questioning what long had been a point of pride in the mutual-fund world: huge sums of money pouring in for investment. It became "a water-cooler kind of issue," recalls Kenneth Olivier, the firm’s president.

. . .

Dodge also faces some other issues: In December, longtime Chief Investment Officer John Gunn became chief executive, and a new president and executive vice president were named. Another CEO switch could occur when Mr. Gunn turns 65 in 2008. That would be a relatively large amount of turnover for a firm that has had only five CEOs in its history.

. . .

. . . , Mr. Gunn often speaks at mutual-fund forums and investor conferences. The ruffled-hair Mr. Gunn resembles a college professor, wearing gray pants with yellow pinstripes, a light orange shirt and a yellow tie with zebras one recent day. His feet on a chair, he quoted 20th century Austrian economist Joseph Schumpeter when talking about media stocks, noting "capitalism is revitalized by waves of creative destruction." Ancient Asian artifacts, like a pink stone statue from a 14th-century tomb, adorn the office.

As for the flagship fund’s future, Mr. Pohl said as he and Mr. Gunn sat at a conference-room table, "the fact that we have outperformed" since closing to new investors, "I think is proof" that the decision was made at the right time.

"So far," Mr. Gunn added, half-jokingly.

For the full story, see:

DIYA GULLAPALLI. "When Mutual Funds Don’t Want Your Cash Dodge & Cox Says No To Many New Customers; Angst at the Water Cooler." The Wall Street Journal (Mon., May 1, 2006): R1 & R?.

(Note: ellipses added.)

Source of graphic: online version of WSJ article cited above.

Charles Koch Participates in Schumpeter’s Process of Creative Destruction

Charles Koch. Source of image: online version of WSJ article cited below.

I heard Charles Koch speak at the April 2005 Orlando meetings of the Association of Private Enterprise Education. Part of his speech involved how he has tried to apply in his own business, Schumpeter’s process of creative destruction. For a long time Koch has been a stalwart defender of the free market in word and deed.

Ideas seem to exhilarate him. This no doubt explains in part why this professorial CEO delivers "dozens and dozens" of lectures around the country to his employees on these very topics. But what does any of this have to do with explaining his company’s prodigious profitability? Well, everything — he believes. Mr. Koch contends that the key insight of his business career was melding these philosophical insights about the way the wealth-creation process works into a business operating system called "Market Based Management." This system, which he has trademarked, enables every division of his business empire to operate as a separate, autonomous, profit-maximizing unit. It is intended to reward employees who think like entrepreneurs.

"Long-term success entails constantly discovering new ways to create value for customers and building new capabilities to capture new opportunities," he instructs. "In this sense, maintaining a business is, in reality, liquidating a business." Mr. Koch likens the cycle to Schumpeter’s "creative destruction" — where the old and inefficient are ruthlessly swept away by the new.

For the full commentary, see:

STEPHEN MOORE. "THE WEEKEND INTERVIEW with Charles Koch; Private Enterprise." The Wall Street Journal (Sat., May 6, 2006): A8.

Benjamin Rogge in 1973 Discussed Leapfrog Competition

Ben Rogge and the members of Wabash College’s John Van Sickle Club in 1973. Source of image: The Wabash 1973 Yearbook, p. 173.

In explaining Schumpeter’s concept of competition within the process of creative destruction, I have long thought the phrase "leapfrog competition" was apt. I have no memory of Schumpter himself using the phrase, but did think I remembered Rogge using the phrase.

Today (4/21/06) I used the Amazon.com "Search within the Book" feature to search for the "leapfrog", "leap-frog", and "frog" in Schumpeter’s Capitalism, Socialism and Democracy. No use of any of the three was found. This provides some support to my belief that Schumpeter himself did not use the phrase.

I also today examined my lecture notes from Benjamin Rogge’s Comparative Economic Systems course at Wabash College. In the midst of a discussion of creative destruction on 1/25/73, I note "leap-frogging analogy" which supports my memory that Rogge made use of the phrase "leapfrog competition" in class.

In terms of in-print uses of the analogy, I have performed the same three searches using Liberty Fund’s HTML version of Rogge’s Can Capitalism Survive? I found one "hit" which appears on p. 22 of the print versions of the book.

The technical description of the market structure, in the language of the textbook model, would be that of “oligopoly”—the rule of the few.

All of this Schumpeter would label as nonsense. Why? Because the investigator would be examining “each year—taken separately” rather than the never-ending game of leapfrog that the data reveal and that represents the true nature of the competitive process.

I will be in the debt of anyone who can show me an earlier use of the word "leapfrog" in the context of a discussion of competiton in Schumpeter’s process of creative destruction.