Schumpeter – Page 4 – artdiamondblog.com

Creative Destruction Book Is Useful for Documenting Dynamism of U.S. Firms

Source of book image: http://www.innovation-creative.com/IMAGES/Livres_innovation_2/Foster_&_Kaplan/Foster_&_Kaplan-(US).jpg

The first couple of chapters of Creative Destruction are useful at providing some statistics on the degree of dynamism in U.S. companies over the past century or so.
In the rest of the book the authors present some interesting examples and refer to some useful research, but too often fall into the too-quick and too-easy management fad-advice mode—and Christensen and Raynor make a sound point in claiming that Foster and Kaplan sometimes oversell their main point.
Still there is some thought-provoking material here and there. I will be quoting a couple of the neater insights in the next couple of weeks.

Book discussed:
Foster, Richard N., and Sarah Kaplan. Creative Destruction: Why Companies That Are Built to Last Underperform the Market—and How to Successfully Transform Them. New York: Currency Books, 2001.

“A Rare Phenomenon in Europe — A Genuine Business Celebrity”

“Nicolas Hayek was asked to help shut the troubled Swiss watch industry, but instead he revived it by introducing the Swatch.” Source of caption and photo: online version of the NYT article quoted and cited below.

Richard Langlois has used the story of Nicolas Hayek to illustrate why Schumpeter was wrong when he worried that the entrepreneur might become obsolete.

(p. A23) Nicolas Hayek, a Lebanese-born business consultant who is widely credited with having saved the Swiss watch industry with the introduction of the Swatch, the inexpensive, plastic — and, as it transpired, highly collectible — wristwatch that made its debut in 1983, died Monday in Biel, Switzerland. He was 82.

Mr. Hayek, a founder and the chairman of the Swatch Group, died of heart failure while working at the company’s headquarters, according to an announcement on the company Web site.
The formation of the Swatch Group, which in addition to Swatch today comprises high-end watch brands like Breguet, Omega, Longines, Tissot, Calvin Klein and Mido, made Mr. Hayek one of Switzerland’s wealthiest men. The exquisite irony is that the company came about after Mr. Hayek was brought in to help shut the foundering Swiss watch industry altogether.
A flamboyant figure with a roguish sense of humor, Mr. Hayek was “a rare phenomenon in Europe — a genuine business celebrity,” as The Harvard Business Review described him in 1993.

For the full story, see:
MARGALIT FOX. “Nicolas Hayek Dies at 82; His Swatch Saved an Industry.” The New York Times (Tues., June 29, 2010): A23.
(Note: the online version of the article is dated June 28, 2010.)

Nicolas Hayek’s entrepreneurship is nicely summarized and analyzed on pp. 59-65 of:
Langlois, Richard N. The Dynamics of Industrial Capitalism: Schumpeter, Chandler and the New Economy. London: Routledge, 2006.

At Apple Wozniak Was the Inventor, and Jobs Was the Entrepreneur

Source of book image: http://1.bp.blogspot.com/_TwOg8fVl5Og/SkXmn7MyaxI/AAAAAAAAAug/G-klN-KQHis/s1600/iWoz.jpg

iWoz is a fun read, with wild fluctuations in the significance of what is written. When Wozniak writes about the ingredients of inventiveness, it is significant. When he talks about his pranks, or his obsessions with certain number combinations, it is strange. (Maybe I just haven’t figured out the significance of Wozniak’s quirks—I once heard George Stigler say that even the mistakes of a great mind were worth pondering.)
In the next few weeks I’ll be quoting a few of the more significant passages.
An over-riding lesson from the book, is the extent to which both Wozniak and Jobs were necessary for the Apple achievement. Wozniak was a genius inventor, but he did not have the drive or the skills, or the judgment of the entrepreneur.
Schumpeter famously distinguished invention from innovation. Wozniak was the inventor, and Jobs was the innovator (aka, the entrepreneur).

Book discussed:
Wozniak, Steve, and Gina Smith. iWoz: Computer Geek to Cult Icon: How I Invented the Personal Computer, Co-Founded Apple, and Had Fun Doing It. New York: W. W. Norton & Co., 2006.

The Entrepreneur as the Agent of Creative Destruction

(p. 132) . . . the function of entrepreneurs is to reform or revolutionize the pattern of production by exploiting an invention or, more generally, an untried technological possibility for producing a new commodity or producing an old one in a new way, by opening up a new source of supply of materials or a new outlet for products, by reorganizing an industry and so on. Railroad construction in its earlier stages, electrical power production before the First World War, steam and steel, the motorcar, colonial ventures afford spectacular instances of a large genus which comprises innumerable humbler ones–down to such things as making a success of a particular kind of sausage or toothbrush. This kind of activity is primarily responsible for the recurrent “prosperities” that revolutionize the economic organism and the recurrent “recessions” that are due to the disequilibrating impact of the new products or methods. To undertake such new things is difficult and constitutes a distinct economic function, first, because they lie outside of the routine tasks which everybody understands and, secondly, because the environment resists in many ways that vary, according to social conditions, from simple refusal either to finance or to buy a new thing, to physical attack on the man who tries to produce it. To act with confidence beyond the range of familiar beacons and to overcome that resistance requires aptitudes that are present in only a small fraction of the population and that define the entrepreneurial type as well as the entrepreneurial function. This function does not essentially consist in either inventing anything or otherwise creating the conditions which the enterprise exploits. It consists in getting things done.

Source:
Schumpeter, Joseph A. Capitalism, Socialism and Democracy. 3rd ed. New York: Harper and Row, 1950.
(Note: ellipsis added.)

Establishments Assume New Methods Are Unsound Methods

(p. 188) For the next two years, Conway coordinated her efforts under Sutherland at PARC with Mead’s ongoing work at Caltech. But she was frustrated with the pace of progress. There was no shortage of innovative design ideas; computerized design tools had advanced dramatically since Mead’s first efforts several years before. Yet the industry as a whole continued in the old rut. As Conway put it later, the problem was “How can you take methods that are new, methods that are not in common use and therefore perhaps considered unsound methods, and turn them into sound methods?” [Conway’s italics].

She saw the challenge in the terms described in Thomas Kuhn’s popular book The Structure of Scientific Revolutions. it was the problem that took Boltzmann to his grave. It was the problem of innovation depicted by economist Joseph Schumpeter in his essays on entrepreneurship: new systems lay waste to the systems of the past. Creativity is a solution for the creator and the new ventures he launches. But it wreaks dissolution–“creative destruction,” in Schumpeter’s words– for the defenders of old methods. In fact, no matter how persuasive the advocates of change, it is very rare that an entrenched establishment will reform its ways. Establishments die or retire or fall in revolution; they only rarely transform themselves.

Source:

Gilder, George. Microcosm: The Quantum Revolution in Economics and Technology. Paperback ed. New York: Touchstone, 1990.
(Note: italics in original.)

The Economist Starts a Column Named “Schumpeter”

Source of Schumpeter stairway to innovation graphic (my name for it): http://media.economist.com/images/20090919/D3809WB0.jpg

Thanks to Shane Eloe for alerting me that in their Sept. 19th issue, The Economist started a column named “Schumpeter.” Here are a couple of paragraphs from their first installment:

(p. 78) Joseph Schumpeter was one of the few intellectuals who saw business straight. He regarded business people as unsung heroes: men and women who create new enterprises through the sheer force of their wills and imaginations, and, in so doing, are responsible for the most benign development in human history, the spread of mass affluence. “Queen Elizabeth [I] owned silk stockings,” he once observed. “The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort…The capitalist process, not by coincidence but by virtue of its mechanism, progressively raises the standard of life of the masses.” But Schumpeter knew far too much about the history of business to be a cheerleader. He recognised that business people are often ruthless monomaniacs, obsessed by their dreams of building “private kingdoms” and willing to do anything to crush their rivals.

Schumpeter’s ability to see business straight would be reason enough to name our new business column after him. But this ability rested on a broader philosophy of capitalism. He argued that innovation is at the heart of economic progress. It gives new businesses a chance to replace old ones, but it also dooms those new businesses to fail unless they can keep on innovating (or find a powerful government patron). In his most famous phrase he likened capitalism to a “perennial gale of creative destruction”.

For the full commentary, see:
“Schumpeter; Taking flight; This week we launch a new column on business and management. Why call it Schumpeter?” The Economist (Sat., Sept. 19, 2009): 78.
(Note: the online version was dated Thurs., Sept. 17th)
(Note: ellipsis in original.)

Obama Should Remember that a Tariff War Helped Create the Great Depression

As an economics graduate student at Harvard, David Rockefeller was a student of Joseph Schumpeter.
After Schumpeter died, his wife spent the last few years of her life working to pull together the disorganized, but nearly completed, manuscript of Schumpeter’s magnificent History of Economic Analysis. In her preface, Mrs. Schumpeter writes: “It seems appropriate at this point to acknowledge gratefully a gift from David Rockefeller and a grant from the Rockefeller Foundation which made possible much of the secretarial and editorial assistance outlined above.” (p. x)
Below I quote a few passages from David Rockefeller’s reaction to Obama’s imposition of tariffs on Chinese automobile tires:

(p. A21) AS if he needed another policy concern to distract him from the health care debate, President Obama now finds himself embroiled in a quarrel with China over his imposition of a steep tariff on automobile tires from that country that is to take effect this week. The Chinese have responded by threatening to impose higher tariffs on American chicken. This may seem like a petty dispute, but the controversy could endanger the global economic recovery if the underlying issue — the rise in protectionism –is not resolved quickly and forcefully. Perhaps Washington has justification for increasing tariffs in this particular case, but in general it sets a bad precedent.

President Obama should resist the desire to accommodate the forces of protectionism from unions, environmentalists and cable television pundits alike. Giving in to their demands may be politically astute, but it would send the wrong message to our trading partners and, more important, inflict damage on the already weakened American economy. Despite the recent rally in the stock market, the next two or three years could still be very painful.
I lived through the stock market crash of 1929 and the Great Depression that followed it, and I saw that there was no direct cause and effect relationship. Rather, there were specific governmental actions and equally important failures to act, often driven by political expediency, that brought on the Depression and determined its severity and longevity.
One critical mistake was America’s retreat from international trade. This not only helped to turn the 1929 stock market decline into a depression, it also chipped away at trust between nations, paving the way for World War II.

For the full commentary, see:
DAVID ROCKEFELLER. “Present at the Trade Wars.” The New York Times (Mon., September 21, 2009): A21.
(Note: the online version of the commentary is dated Sun., Sept. 20.)

When the Berries Are Scarce, Keep Your Eyes Open for Gold

“Harriet Svensson, left, and Siv Wiik, amateur geologists and berry-picking grandmothers, at the site where they found gold.” Source of photo and caption: online version of the NYT article quoted and cited below.

Schumpeter focued on entrepreneurial innovation, while Kirzner focused on entrepreneurial alertness.
The article quoted below, presents a neat example of a couple of Kirznerian entrepreneurs:

(p. A9) OVERTURINGEN, Sweden — It was a lousy blueberry season in 2007, said Siv Wiik, 70, one of a pair of Swedish grandmothers now credited with discovering what experts say may be one of the richest gold deposits in Europe. “That year it was too cold in the spring, so there were few berries,” she said.

Berry picking is a serious business to Mrs. Wiik (pronounced VEEK), who was born in this village of 171, and her friend, Harriet Svensson, 69. For 40 years the two, widows with children and grandchildren, have explored every patch of field and forest clearing in the region, hunting for mushrooms and wild berries — blueberries, raspberries, blackberries, cloudberries.
But the women are also amateur geologists. They never leave home for a stroll in forests or fields without their geologists’ hammers, with their 30-inch handles, and their magnifying eyepieces, dangling from ribbons around their necks.
So in that terrible August when the blueberry crop failed, they decided to poke around for minerals. They went to a place called Sorkullen, far down an unpaved logging road, where trees had recently been felled, upending the earth and exposing rock to the air. Using their hammers, they cleared soil from around the stones, digging for about six hours, deeper and deeper, until they found a rock with a dull glimmer.
. . .
A huge Swedish lumber conglomerate, S.C.A., owns the land where they found the gold, but not the mineral rights. So they proceeded to obtain the rights for a large area around the find, then entered into negotiations, alone and without lawyers, with about 20 mining companies from Sweden and abroad, finally choosing Hansa Resources, of Vancouver, Canada.
This month, Hansa began boring at the site to obtain samples to send to Vancouver for analysis. “Whether it’s gold or not, even with a high-grade ore, you cannot see it with the naked eye,” said Anders Hogrelius, project manager for the drilling. “This was a surprise, and I think it’s positive, since it shows that it’s worthwhile to go outside the traditional mining areas.”
The windfall for the women has until now been modest. Hansa paid the women about $125,000 for the mining rights, and if a second round of boring is authorized this fall, the company will pay an additional $225,000. But the women have also been given a 20 percent stake in any future mining activities, which could yield a bonanza for many years to come.
. . .
Mr. Hogrelius, the drilling project manager, said a fully operating mine would bring jobs. “We usually estimate five jobs created in services for every one in the mines,” he said. A first estimate of initial investment, he added, comes to about $15 million.

For the full story, see:
JOHN TAGLIABUE. “Overturingen Journal; Barren Berry Season Leads to Far Richer Discovery.” The New York Times (Mon., July 13, 2009): A9.
(Note: ellipses added.)

“A mine in Overturingen could provide much-needed jobs.” Source of map and caption: online version of the NYT article quoted and cited above.

Creative Destruction Is Scary, but “Inevitable and Probably Even Desirable”

(p. 5) Development is a complicated phenomenon. Decades before he popularized the phrase “creative destruction,” Joseph Schumpeter, the Austrian School economist, was honing his ideas about innovation and disruptive change in “The Theory of Economic Development.”

Disruptive change, creative destruction, is what I’m living every day. In the big cities, India’s economic development can seem so simple. Business thrives, the middle and upper classes are celebrating, and the country is moving inexorably ahead.
But around here, where a way of life is disappearing and no one knows what will take its place, where someone seems to lose for everyone who wins, it’s a lot harder to know what to make of India’s economic boom. From my vantage point, development seems both wonderful and frightening; it is both inspiring and, at times, dispiriting.
People sometimes ask me how I feel about India’s economic development. I tell them the truth. I say I don’t know. I say I feel ambivalent about the passing of a world I knew as a child, a transition that I know is inevitable and probably even desirable. But I haven’t reconciled myself to it yet.

For the full commentary, see:
AKASH KAPUR. “An Indian Says Farewell to Poverty, With Jitters.” The New York Times, Week in Review Section (Sun., August 8, 2009): 5.

Richard Langlois on Why Capitalism Needs the Entrepreneur

Source of book image: http://www.amazon.com/Dynamics-Industrial-Cpitalism-Schumpeter-Lectures/dp/0415771676/ref=sr_11_1?ie=UTF8&qid=1204828232&sr=11-1

Schumpeter is sometimes viewed as having predicted the obsolescence of the entrepreneur, although Langlois documents that Schumpeter was always of two minds on this issue.
Langlois discusses Schumpeter’s ambivalence and the broader issue of the roles of the entrepreneur and the corporation in his erudite and useful book on The Dynamics of Industrial Capitalism. He concludes that changing economic conditions will always require new industrial structures, and the entrepreneur will always be needed to get these new structures built.
(I have written a brief positive review of the book that has recently appeared online.)

Reference to Langlois’ book:
Langlois, Richard N. The Dynamics of Industrial Capitalism: Schumpeter, Chandler and the New Economy. London: Routledge, 2006.

Reference to my review of Langlois’ book:
Diamond, Arthur M., Jr. “Review of Richard N. Langlois, The Dynamics of Industrial Capitalism: Schumpeter, Chandler and the New Economy.” EH.Net Economic History Services, Aug 6 2009. URL: http://eh.net/bookreviews/library/1442

Apparently Langlois likes my review:
http://organizationsandmarkets.com/2009/08/07/another-nanosecond-of-fame/

“Richard N. Langlois.” Source of photo and caption: http://www.clas.uconn.edu/facultysnapshots/images/langlois.jpg