Schumpeter – Page 5 – artdiamondblog.com

Entrepreneur’s Dresses “Would Save Mothers Endless Work”

Schumpeter would have loved the passage quoted below—it is a wonderful example for his argument that capitalism mainly benefits ordinary people of modest means.

(p. 147) Listen to how Borgenicht describes his decision to expand beyond aprons:

From my study of the market I knew that only three men were making children’s dresses in 1890. One was an East Side tailor near me, who made only to order, while the other two turned out an expensive product with which I had no desire at all to compete. I wanted to make “popular price” stuff–wash dresses, silks, and woolens. It was
my goal to produce dresses that the great mass of the people could afford, dresses that would–from the business angle–sell equally well to both large and small, city and country stores. With Regina’s help–she always had excellent taste, and judgment–I made up a line of samples. Displaying them to all my “old” customers and friends, I hammered home every point–my dresses would save mothers endless work, the materials and sewing were as good and probably better than anything that could be done at home, the price was right for quick disposal.

Source:
Gladwell, Malcolm. Outliers: The Story of Success. New York, NY: Little, Brown, and Co., 2008.

Do Recessions Sometimes Encourage Creative Destruction?

Source of image: online version of the NYT article quoted and cited below.

(p. B1) The dot-com bust earlier in the decade dragged down high-fliers like Sun Microsystems and America Online but set the stage for a new generation of Web powerhouses like Google and other innovative Internet software companies like Salesforce.com, founded on disrupting the status quo.

The recession of the early 1990s sent I.B.M., then the dominant force in technology, into a five-year tailspin. But it also propelled Microsoft and Compaq, later acquired by Hewlett-Packard, and Dell to the forefront of computing.

Indeed, Silicon Valley may be one of the few places where businesses are still aware of the ideas of Joseph Schumpeter, an Austrian economist who wrote about business cycles during the first half of the last century. He said the lifeblood of capitalism was “creative destruction.” Companies rising and falling would unleash innovation and in (p. B4) the end make the economy stronger.

Recessions “can cause people to think more about the effective use of their assets,” said Craig R. Barrett, the retiring chairman of Intel, who has seen 10 such downturns in his long career. “In the good times, you can get a bit careless or not focused as much on efficiency. In bad times, you’re forced to see if there is a technology” that will help.

So who’s up, who’s down and who’s out this time around? Microsoft’s valuable Windows franchise appears vulnerable after two decades of dominance. Revenue for the company’s Windows operating system fell for the first time in history in the last quarter of 2008. The popularity of Linux, a free operating system installed on many netbooks instead of Windows, forced Microsoft to lower the prices on its operating system to compete.

Intel’s high-power processors are also under assault: revenue tumbled by 23 percent last quarter, marking the steepest decline since 1985.

Meanwhile, more experimental but lower-cost technologies like netbooks, Internet-based software services (called cloud computing) and virtualization, which lets companies run more software on each physical server, are on the rise.

For the full story, see:

BRAD STONE and ASHLEE VANCE. “$200 Laptops Break a Business Model.” The New York Times (Mon., January 25, 2009): B1 & B4.

“Venturesome” Consumers May Help Save the Day

Bhidé makes thought-provoking comments about the role of the entrepreneurial or “venturesome” consumer in the process of innovation. The point is the mirror image on one made by Schumpeter in Capitalism, Socialism and Democracy when he emphasized that consumer resistance to innovation is one of the obstacles that entrepreneurs in earlier periods had to overcome. (The decline of such consumer resistance was one of the reasons that Schumpeter speculated that the entrepreneur might become obsolete.)
I would like to see Bhidé’s evidence on his claim that technology rapidly advanced during the Great Depression. The claim seems at odds with Amity Shlaes’ claim that New Deal policies often discouraged entrepreneurship.

(p. A15) Consumers get no respect — we value thrift and deplore the spending that supposedly undermines the investment necessary for our long-run prosperity. In fact, the venturesomeness of consumers has nourished unimaginable advances in our standard of living and created invaluable human capital that is often ignored.
Economists regard the innovations that sustain long-run prosperity as a gift to consumers. Stanford University and Hoover Institution economist Paul Romer wrote in the “Concise Encyclopedia of Economics” in 2007: “In 1985, I paid a thousand dollars per million transistors for memory in my computer. In 2005, I paid less than ten dollars per million, and yet I did nothing to deserve or help pay for this windfall.”
In fact, Mr. Romer and innumerable consumers of transistor-based products such as personal computers have played a critical, “venturesome” role in generating their windfalls.
. . .
History suggests that Americans don’t shirk from venturesome consumption in hard times. The personal computer took off in the dark days of the early 1980s. I paid more than a fourth of my annual income to buy an IBM XT then — as did millions of others. Similarly, in spite of the Great Depression, the rapid increase in the use of new technologies made the 1930s a period of exceptional productivity growth. Today, sales of Apple’s iPhone continue to expand at double-digit rates. Low-income groups (in the $25,000 to $49,999 income segment) are showing the most rapid growth, with resourceful buyers using the latest models as their primary device for accessing the Internet.
Recessions will come and go, but unless we completely mess things up, we can count on our venturesome consumers to keep prosperity on its long, upward arc.

For the full commentary, see:
Amar Bhidé. “Consumers Can Still Spot Value in a Crisis.” Wall Street Journal (Thurs., MARCH 11, 2009): A15.
(Note: ellipsis added.)

Larry Moss Made a Difference

Laurence S. Moss

Source of photo: http://www3.babson.edu/academics/faculty/lmoss.cfm

On Sunday (3/8/09) I learned that Larry Moss passed away on February 24, 2009.
Larry was full of the joy of life. He was intense. He was an amateur magician, and a wit, and an energetic conversationalist. I used to run into him once a year at the History of Economics Society meetings, and always enjoyed our conversations.
He was a neo-Austrian, though not “pure” enough for some of the ultra-Rothbardians. I first met him at a long-weekend seminar in Austrian economics when I was a graduate student, and he was a presenter.
I remember that he and I thought that the dialogue would be richer, and the neo-Austrian position ultimately strengthened, if its defenders understood better some of the alternative positions. So we announced a kind of rump session during one of the free-time periods. During this session, Larry gave the attendees a brief summary of what Walras had been up to, and I summarized Becker’s paper on the robustness of the law of demand to various forms of irrational and habitual behavior.
If memory serves, we suffered some mild heckling, and Larry was more severely criticized for disloyalty to the cause. (I cannot prove it, but I believe he paid a price for that in terms of invitations to future similar gatherings.)
I did not follow Larry’s research systematically, but know that he wrote the definitive account of Mountifort Longfield’s economics. He also had a nice, early paper in the JEL on the uses of film in teaching economics.
He took Schumpeter seriously, and wrote the script for the wonderful Schumpeter tapes in the Knowledge Products series on great economists that Kirnzer edited.
A couple of year’s ago, I invited Larry to participate in the Schumpeter session that I organized at George Mason’s Summer Institute for the Preservation of the History of Economic Thought. He initially agreed, but then had to withdraw because of his health.
More recently, I submitted one of my more idiosyncratic efforts (on the career consequences of writing on polywater) to the journal that Larry edited. I received excellent comments, and the editorial process was handled with grace and efficiency.
Larry was one of the “good guys” in many different ways, and the world is worse for his passing.

Here are a couple of Larry’s more obscure writings, that I have found useful:
Moss, Laurence S. “Film and the Transmission of Economic Knowledge: A Report.” Journal of Economic Literature 17, no. 3 (1979): 1005-19.
Moss, Laurence S. “Review: Robert Loring Allen’s Biography of Joseph A. Schumpeter.” American Journal of Economics and Sociology 52, no. 1 (1993): 107-18.

The reference to Larry’s Schumpeter tapes is:
Moss, Laurence S. Joseph Schumpeter & Dynamic Economic Change: Capitalism as “Creative Destruction”. Nashville, TN: Knowledge Products, Inc., 1988. audio.

A Toast to Schumpeter on His Birthday (February 8, 1883)

Source: scan (and crop) of the cover of the May 23, 1983 issue of Forbes .

In the May 23, 1983 issue of Forbes there appeared a now-famous essay by the late and great management guru Peter Drucker in which he pointed out that 1983 was the centennial of the birth of both John Maynard Keynes and Joseph A. Schumpeter. He noted that in the decades since the great economists’ passing, the academic and policy worlds worshiped at the feet of Keynes, and all but ignored Schumpeter (hence the many candles in front of the Keynes portrait on the cover, and the single, small candle in front of the Schumpeter portrait).

But Drucker argued that the world had gotten it wrong. Schumpeter was more important because he had understood a crucial truth: the process of creative destruction is indeed the essential fact about capitalism.

The reference for the original Drucker essay is:
Drucker, Peter F. “Modern Prophets: Schumpeter or Keynes?” Forbes, May 23, 1983, 124-28.

The reference to the reprint of the Drucker essay is:
Drucker, Peter F. “Modern Prophets: Schumpeter or Keynes?” In The Frontiers of Management New York: Penguin Putnam, Inc., 1999, 104-15.

A typo-laden version of the essay has been posted on the web at:
http://www.peterdrucker.at/en/texts/proph_01.html

(Note: I thank Aaron Brown for alerting me to the neat cover that appears at the top of this entry).

Inventors Move from Declining Industries to New, Expanding Industries

Petra Moser’s comments (see below) about inventors applying similar ideas to different industries seem complementary to Burke’s emphasis on the importance of serendipitous “connections.” An inventor exposing herself to many industries’ problems and products, would be more likely to see additional applications for inventions originally developed for another industry.

(p. 3) By some logic, there is no earthly reason why bicycles should still exist.

They are a quaint, 19th-century invention, originally designed to get someone from point A to point B. Today there are much faster, far less labor-intensive modes of transportation. And yet hopeful children still beg for them for Christmas, healthful adults still ride them to work, and daring teenagers still vault them down courthouse steps. The bicycle industry has faced its share of disruptive technologies, and it has repeatedly risen from the ashes.
. . .
“Much of the history of the ‘American system of manufacturing’ is the story of inventors moving from a declining industry to a new expanding industry,” says Petra Moser, an economic historian at Stanford who studies innovation. “Inventors take their skills with them.”
Gun makers learned to make revolvers with interchangeable parts in the mid-19th century, Ms. Moser says. Then those companies (and some former employees, striking out on their own) applied those techniques to sewing machines when demand for guns slackened. Later, sewing machine manufacturers began making woodworking machinery, bicycles, cars and finally trucks.
. . .
Meanwhile, we’ve already seen some of the “destruction” half of Joseph Schumpeter’s famous “creative destruction” paradigm, with many newspapers cutting staff and other production costs. Unfortunately for newspapers, historians say, the survivors in previous industries facing major technological challenges were usually individual companies that adapted, rather than an entire industry. So a bigger shakeout may yet come.
But perhaps the destruction will lead to more creativity. Perhaps the people we now know as journalists — or, for that matter, autoworkers — will find ways to innovate elsewhere, just as, over a century ago, gun makers laid down their weapons and broke out the needle and thread. That is, after all, the American creative legacy: making innovation seem as easy as, well, riding a bike.

For the full commentary, see:
CATHERINE RAMPELL. “Ideas & Trends; How Industries Survive Change. If They Do.” The New York Times, Week in Review Section (Sun., November 15, 2008): 3.
(Note: ellipses added.)

Capitalism’s Defenseless Fortress

Photograph by Art Diamond.

(p. 143) . . . capitalism creates a critical frame of mind which, after having destroyed the moral authority of so many other institutions, in the end turns against its own; the bourgeois finds to his amazement that the rationalist attitude does not stop at the credentials of kings and popes but goes on to attack private property and the whole scheme of bourgeois values.

The bourgeois fortress thus becomes politically defenseless. Defenseless fortresses invite aggression especially if there is rich booty in them. Aggressors will work themselves up into a state of rationalizing hostility—aggressors always do.

Source:
Schumpeter, Joseph A. Capitalism, Socialism and Democracy. 3rd ed. New York: Harper and Row, 1950.

Photograph by Art Diamond.

Companies “Once as Strong as Dinosaurs But Now Just as Extinct”

From McCraw’s discussion of Schumpeter’s legacy:

(p. 496) No country, regardless of how long it has been prosperous, can take permanent affluence for granted. Nor can any company assume its continued existence—as names such as Digital Equipment, Pan American Airways, Pullman, Douglas Aircraft, and the Pennsylvania Railroad remind us. Each of these companies once epitomized the cutting edge not only of its own industry but of American business as a whole. And all are now in the dustbin of history, along with hundreds of thousands of other businesses of all sizes—once as strong as dinosaurs but now just as extinct.

Source:
McCraw, Thomas K. Prophet of Innovation: Joseph Schumpeter and Creative Destruction. Cambridge, Mass.: Belknap Press, 2007.

“Three Generations from Overalls to Overalls”

(p. 156) Because it proceeds by competitively destroying old businesses and hence the existences dependent upon them, there always corresponds to it a process of decline, of loss of caste, of elimination. This fate also threatens the entrepreneur whose powers are declining, or his heirs who have inherited his wealth without his ability. This is not only because all individual profits dry up, the competitive mechanism tolerating no permanent surplus values, but rather annihilating them by means of just this stimulus of the striving for profits which is the mechanism’s driving force; but also because in the normal case things so happen that entrepreneurial success embodies itself in the ownership of a business; and this business is usually carried on further by the heirs on what soon become traditional lines until new entrepreneurs supplant it. An American adage expresses it: three generations from overalls to overalls. And so it may be. Exceptions are rare, and are more than compensated for by cases in which the descent is still faster. Because there are always entrepreneurs and relatives and heirs of entrepreneurs, public opinion and also the phraseology of the social struggle readily overlook these facts. They constitute “the rich” a class of inheritors who are removed from life’s battle. In fact, the upper strata of society are like hotels which are indeed always full of people, but people who are forever changing.

Source:
Schumpeter, Joseph A. The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle. Translated by Redvers Opie. translation of 2nd German edition that appeared in 1926; translation first published by Harvard in 1934 ed. London: Oxford University Press, 1961.

A Schumpeterian Policy Program Promotes Innovation and Creative Destruction

McCraw on the nature of “a Schumpeterian program” :

(p. 169) Yet it is not difficult to identify a Schumpeterian program—at whatever level of analysis one chooses: the individual entrepreneur, the business firm, the industry, or even the country. At all levels, Schumpeter’s litmus test is whether the players are pursuing innovation and bringing about creative destruction. If they are, then the program is Schumpeterian.

Source:
McCraw, Thomas K. Prophet of Innovation: Joseph Schumpeter and Creative Destruction. Cambridge, Mass.: Belknap Press, 2007.