Schumpeter – Page 9 – artdiamondblog.com

“How the West Grew Rich” is an Elegant and Wonderful Book

Source of book image:
http://images.barnesandnoble.com/images/22600000/22606300.jpg

For many years I have wanted to carefully read Rosenberg and Birdzell’s How the West Grew Rich. I am glad I have finally done it, and wish I had done it sooner. It is a tour de force of careful scholarly synthesis of a wide range of issues related to a fundamental question with many implications for policy.
The authors operate within a broadly Schumpeterian perspective, in that they see innovation as the key driver of human progress. One underlying theme is that societies that give more play to experimentation in institutions, are more likely to allow, encourage, and widely adopt, innovations.
Although written over two decades ago, the book only rarely seems dated. (The only instance I can think of is the occasional attention that the authors give to Marxist claims, that are seldom taken as seriously now as they sometimes still were in 1986.)
The writing style is not easy to read, but is rewarding. They write with elegance, and subtlety, and dry wit.

The reference to the book:
Rosenberg, Nathan, and L.E. Birdzell, Jr. How the West Grew Rich: The Economic Transformation of the Industrial World. New York: Basic Books, 1986.

Schumpeterians Lead Ranking of Business Gurus

Source of graphic: online version of the WSJ article quoted and cited below.

The top two business gurus in the WSJ‘s latest ranking, have each written major books that make substantial use of Schumpeter’s concept of creative destruction. (The Hamel book is Leading the Revolution, and the Thomas Friedman book is The Lexus and the Olive Tree.)
Others among the top 20 gurus who have written favorably of the process of creative destruction, include Clayton Christensen, Jack Welch, and Tom Peters.

(p. B1) The guru game is changing.
Psychologists, journalists and celebrity chief executives crowd the top of a ranking of influential business thinkers compiled for The Wall Street Journal. The results, based on Google hits, media mentions and academic citations, ranked author and consultant Gary Hamel No. 1.
But Dr. Hamel is the only traditional business guru in the top five, which includes two journalists, Thomas Friedman and Malcolm Gladwell, and a former CEO, Bill Gates. Mr. Gladwell is among three thinkers in the top eight who focus on psychology. His 2005 book “Blink: The Power of Thinking Without Thinking” examined the role of snap judgments in decision-making. Howard Gardner, a professor of education at Harvard best known for the theory of “multiple intelligences,” is No. 5, while Daniel Goleman, a psychologist who has written about “emotional intelligence,” ranks eighth.
Thomas H. Davenport, a management professor at Babson College, compiled the ranking, employing the same methodology he used in a 2003 book, “What’s the Big Idea?” Several well-known business gurus fell lower in the updated list, including Michael Porter and Tom Peters, who topped the 2003 ranking and dropped to Nos. 14 and 18, respectively. Harvard’s Prof. Porter noted that his last book was on health care rather than general management, and that “I feel like my recent work continues to have an impact in my various fields.”
Dr. Davenport says the changes show that time-strapped managers are hungry for easily digestible advice wherever they can find it. Today, the most pressing themes include globalization, motivation and innovation. Traditional business gurus writing “weighty tomes” are in decline, he says.

For the full story, see:
ERIN WHITE. “New Breed of Business Gurus Rises; Psychologists, CEOs Climb in Influence, Draw Hits, Big Fees.” Wall Street Journal (Mon., May 5, 2008): B1.

Source of table:
ERIN WHITE. “What Influential Business Thinkers Focus On; Top Gurus Ponder Manager’s Worries, New Approaches.” Wall Street Journal (Mon., May 5, 2008): B6.
(Note: the online version of the article has the title: “Quest for Innovation, Motivation Inspires the Gurus; Leading Thinkers Apply Varied Skills For Global Solutions.”)

Innovative New Products Often Expensive at First, But Price Soon Falls

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

(p. 14) To understand why consumption is a better guideline of economic prosperity than income, it helps to consider how our lives have changed. Nearly all American families now have refrigerators, stoves, color TVs, telephones and radios. Air-conditioners, cars, VCRs or DVD players, microwave ovens, washing machines, clothes dryers and cellphones have reached more than 80 percent of households.
As the second chart, on the spread of consumption, shows, this wasn’t always so. The conveniences we take for granted today usually began as niche products only a few wealthy families could afford. In time, ownership spread through the levels of income distribution as rising wages and falling prices made them affordable in the currency that matters most — the amount of time one had to put in at work to gain the necessary purchasing power.
At the average wage, a VCR fell from 365 hours in 1972 to a mere two hours today. A cellphone dropped from 456 hours in 1984 to four hours. A personal computer, jazzed up with thousands of times the computing power of the 1984 I.B.M., declined from 435 hours to 25 hours. Even cars are taking a smaller toll on our bank accounts: in the past decade, the work-time price of a mid-size Ford sedan declined by 6 percent.

For the full commentary, see:
W. MICHAEL COX and RICHARD ALM. “You Are What You Spend.” The New York Times Company, Week in Review section (Sun., February 10, 2008): 14.

Puzzle: Entrepreneurial Silicon Valley Donates Mainly to Democrats

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

Entrepreneurship thrives when government is small, so it puzzles me when the entrepreneurs in Silicon Valley embrace the Democrats, who generally advocate bigger government.
Of course, my Wabash professor Ben Rogge used to point out that there are always cross-currents that go in a different direction from the mainstream. And among the Democrats, there are what used to be called “new Democrats” who appreciate Schumpeter, and entrepreneurship, and dynamism.
Plus, some Democrats are more respectful of personal, lifestyle choices, and in Silicon Valley, that may be what is given the most weight.
Or, more cynically, maybe there’s a public choice explanation—that Silicon Valley donates to Democrats as a form of ‘insurance,’ in the hope that if the Democrats are elected, they will refrain from over-regulating and over-taxing Silicon Valley. (Even more cynically, compare the case of Florida’s sugar-subsidy-rich Fanjul brothers, one of whom donated huge bucks to the first Bush, while another donated huge bucks to Bill Clinton.)
(Another factor is that, alas, entrepreneurs often do not pay much attention to what conditions encourage entrepreneurship.)

(p. C4) In a flip from the primary season for the 2000 presidential election, 60 percent of the contributions so far from people in the technology field here are going to Democrats. The Democratic candidates raised $1.4 million from the industry in the first half of this year, while Republican candidates raised $890,000. That total is up from $1.2 million in the first six months of each of the last two presidential primary races.

For the full story, see:

LAURIE J. FLYNN. "In Primary, Tech’s Home Is a Magnet." The New York Times (Fri., August 24, 2007): C1 & C4.

Schumpeter in The Age of Turbulence

Source of book image: http://us.penguingroup.com/nf/Book/BookDisplay/0,,9781594201318,00.html#

Joseph Schumpeter was born on this date in 1883.

Alan Greenspan’s much-discussed memoir, is full of thoughtful discussions of Schumpeter’s central mesage of creative destruction. Here are a few lines from the first of those discussions:

(p. 48) Working with heavy industry gave me a profound appreciation of the central dynamic of capitalism. “Creative destruction” is an idea that was articulated by the Harvard economist Joseph Schumpeter in 1942. LIke many powerful ideas, his is simple: A market economy will incessantly revitalize itself from within by scrapping old and failing businesses and then reallocating resources to newer, more productive ones. I read Schumpeter in my twenties and always thought he was right, and I’ve watched the process at work through my entire career.

The reference to Greenspan’s book is:

Greenspan, Alan. The Age of Turbulence: Adventures in a New World Economic Flexibility. New York: Penguin Press, 2007.

Raghuram Rajan on the Current Economic Downturn and the Subprime Mortgage Mess

“Traders in the oil futures pit of the New York Mercantile Exchange on Tuesday” (January 22. 2008). Source of caption and photo: online version of the NYT commentary quoted and cited below.

Raghuram Rajan is mentioned in the article quoted below. I first ran across him as the co-author of a book that was billed as applying Schumpeterian ideas of creative destruction to issues of economic growth and development.

Then, at the American Economic Association meetings in New Orleans in early January, I was on my way to a History of Economics Society reception, when I stumbled by chance into a modest reception in which Rajan was giving an informal speech on the subprime mortgage crisis.

It was such an interesting presentation, that I ended up totally missing the History of Economics Society reception. Rajan argued that the main problem was one of misguided incentives. Bonuses at top investment firms like Merrrill Lynch and JPMorgan Chase, are supposed to go to those whose investments produce high returns, with modest risks. The problem with the complicated securities based on the subprime mortgages was that they produced high returns, but the risks were actually also fairly high. The high-flying investors probably had some knowledge of this, but the public did not. In most years the investors could invest in the high return, but high risk, securities, and collect huge bonuses. But now the chickens have come home to roost.

Rajan suggested that the answer would be a change in the way in which the traders are given bonuses. Instead of handing them out annually, let them become vested only after observing the investment’s track record for several years. If the investment goes south before the bonus is vested, the trader does not get the bonus. This would provide an incentive and reward for those who accurately accessed the risk of their investments.

(p. A1) . . . , Wall Street hasn’t yet come clean. Even after last week, when JPMorgan Chase and Wells Fargo announced big losses in their consumer credit businesses, financial service firms have still probably gone public with less than half of their mortgage-related losses, according to Moody’s Economy.com. They’re not being dishonest; they just haven’t untangled all of their complex investments.

“Part of the big uncertainty,” Raghuram G. Rajan, former chief economist at the International Monetary Fund, said, “is where the bodies are buried.”

As Mr. Rajan pointed out, this situation is more severe than the crisis involving Long Term Capital Management in the late 1990s. That was a case in which a limited set of bad investments, largely at one firm, had the potential to drive down the value of other firms’ holdings in the short term. Those firms then might have stopped lending money because they no longer had the capital to do so. But their own balance sheets were largely healthy.

This time, the firms are facing real losses, which will almost certainly curtail lending, and economic growth, this year.

For the full commentary, see:

DAVID LEONHARDT. “ECONOMIC SCENE; Worries That the Good Times Were Mostly a Mirage.” The New York Times (Weds., January 23, 2008): A1 & A23.

(Note: ellipsis added.)

The Schumpeterian book co-authored by Rajan, is:

Rajan, Raghuram G., and Luigi Zingales. Saving Capitalism from the Capitalists: Unleashing the Power of Financial Markets to Create Wealth and Spread Opportunity. New York: Crown, 2003.

“Adopt the Schumpeterian Ethos of Creative Destruction”

Source of graphic: online version of the WSJ article quoted and cited below.

(p. R10) High-technology industries are tough places to do business.

Competition is constant, fierce and characterized by only temporary advantage, fueled by the ease with which software makers and other high-tech companies can copy and distribute new products and services.

Instantaneous delivery through the Internet to hundreds of millions of consumers means a company with a slightly better online marketplace or search engine, for example, can quickly dominate the market, and just as easily be dethroned by a rival with a new approach.

If this brutal competitive cycle — first described as "creative destruction" by Austrian economist Joseph Schumpeter in 1942 — makes you uncomfortable, we’ve got some bad news.

We’ve been studying competition in all U.S. industries, not just the high-tech ones, and we’ve observed a remarkable pattern: On average, the whole U.S. economy has become more "Schumpeterian" since the mid-1990s. What’s more, these changes have been greatest in the industries that buy the most software and computer hardware.

Over the past dozen years, in other words, information-technology consumption is associated with the kinds of competitive dynamics we’re accustomed to seeing in the IT-producing industries. And because every industry will become even more IT-intensive over the next decade, we expect competition to become even more Schumpeterian.

. . .

(p. R11) For executives, the key lesson is to treat information-technology efforts as opportunities to define and deploy new ways of working, rather than just projects to install, configure or integrate systems. Our work suggests three broad areas of focus for top managers:

– First, they need to look at how the company should be doing business differently. That means deciding what new tasks should be enabled with technology, and how widely they should be deployed.

– Second, managers need to lead the deployment of new procedures to success. People don’t like changes to their jobs dictated from outside and embedded in software. Overcoming this inertia and resistance requires skillful leadership.

– Third, managers need to foster innovation by encouraging experimentation, collaboration, dialogue and all of the other activities that generate good ideas. That means building a technology infrastructure and an accompanying set of practices that reduce the cost of creating and replicating process innovations.

Managers might not want competition in their industry to become more Schumpeterian, but they don’t have a choice. Companies are using IT to increase the speed of process innovation and replication. These companies drive the competitive dynamics of their industries, rather than reacting to them, leaving their rivals with a stark choice: Adopt the Schumpeterian ethos of creative destruction, or watch from the sidelines as others increasingly gain market share and value.

For the full story, see:

ANDREW MCAFEE and ERIK BRYNJOLFSSON. "Technology; Dog Eat Dog; Be warned: Industries that buy a lot of technology are becoming as cutthroat as those that produce technology." The Wall Street Journal (Sat., April 28, 2007): R10 & R11.

(Note: ellipsis added.)

Motorola Hurt By Failing to Leapfrog Itself

Source of graph: online version of the WSJ article cited below.

Clayton Christensen, in a series of books, has highlighted why it is difficult for a successful incumbent to prepare a successor for its own winning product. The Motorola case below is another example.

Note, though, that Motorola’s failure is not the understandable one of failing to prepare what Christensen calls a "disruptive innovation." If the story below is right, it is a case of the less understandable failure to continue to deliver with what Christensen calls "sustaining innovation."

(p. A1) A year ago, Motorola Inc. appeared headed for a third straight year of rich profits under Chief Executive Ed Zander, driven by its hit cellphone the Razr. "A lot of you are always asking what is after the Razr," Mr. Zander said in an April 2006 conference call after another quarter of 30%-plus growth. "I say more Razrs."

But behind the scenes, Motorola was working furiously to get a successor phone to market by the second half of 2006, according to people familiar with the matter. When it failed to do so, profit margins on handsets narrowed and the company swung to a loss. Key executives left. And as the stock slid, activist investor Carl Icahn built up a position and began campaigning for a board seat to address what he called Motorola’s "operational problems."

Motorola’s travails illustrate the risks for a company that rides high with a big consumer hit. Amid its success with the Razr, it fell behind on developing a phone with the next generation of technology. Missing a beat is especially hazardous in cellphones, where it can take two to three years to develop a new line.

. . .

(p. A14) As the Razr grew hot, some former designers and engineers say Motorola repeated mistakes it had made a decade earlier with another big hit, the compact flip-top phone known as the StarTAC. That phone was a huge seller, but it also was an analog phone, and its popularity blinded the company to an industry shift to digital technology. Similarly, while Motorola was selling countless Razrs, competitors were hard at work on more sophisticated products for 3G networks.

Motorola put engineers and designers who could have been working on new products on the Razr and its derivatives, some former executives say. "All resources went to feeding the beast," says a former Motorola designer. "Suddenly, you created this thing that requires a lot of energy and attention." Other former executives dispute that the focus on the Razr diverted work from other products and contend Motorola was right to ride the still-popular Razr as long as possible.

For the full story, see:

CHRISTOPHER RHOADS and LI YUAN. "DROPPED CALL; How Motorola Fell A Giant Step Behind; As It Milked Thin Phone, Rivals Sneaked Ahead On the Next Generation." The Wall Street Journal (Fri., April 27, 2007): A1 & A14.

(Note: ellipsis added.)

The most complete source of Christensen’s theory and examples is:

Christensen, Clayton M., and Michael E. Raynor. The Innovator’s Solution: Creating and Sustaining Successful Growth. Boston, MA: Harvard Business School Press, 2003.

Motorola CEO. Source of image: online version of the WSJ article cited above.

Process Innovations Are Neglected, But Important

In discussing the process of creative destruction, Schumpeter mentioned both product and process innovations. By far the greater attention has been given to product innovations. But maybe process innovations deserve more attention than they have received:

Snazzy products are the stuff of legends, romanticized by “early adopters” and skewered by neo-Luddites. Yet while these products bring glory to companies, novel processes are often more important in keeping the cash registers ringing.

. . .

Consider the question of Google’s greatest business secret. Is it the algorithms behind its search tools? Or is it the way it organizes vast clusters of computers around the globe to answer queries so quickly? Perhaps predictably, Google won’t disclose the number of computers deployed in its vast information network (though outsiders speculate that the network has at least 450,000 computers).

I believe that the physical network is Google’s “secret sauce,” its premier competitive advantage. While a brilliant lone wolf can conceive of a dazzling algorithm, only a superwealthy and well-managed organization can run what is arguably the most valuable computer network on the planet. Without the computer network, Google is nothing.

Eric E. Schmidt, Google’s chief executive, appears to agree. Last year he declared, “We believe we get tremendous competitive advantage by essentially building our own infrastructures.”

Process innovations like Google’s computer network are often invisible to the public, and impossible to duplicate by rivals. Yet successful companies realize that maintaining competitive advantage depends heavily on sustaining process innovations.

For the full commentary, see:

G. PASCAL ZACHARY. "PING; The Unsung Heroes Who Move Products Forward." The New York Times, SundayBusiness Section (Sun., September 30, 2007): 3.

(Note: ellipsis added.)

Latin America Discourages Entrepreneurs

Source of table: online version of the WSJ article cited below.

(p. A18) Economist Joseph Schumpeter (1883-1950) may be best known for his innovative work showing the link between entrepreneurial discovery and economic progress.

But as Carl Schramm, president of the Kauffman Foundation of Entrepreneurship has pointed out, Schumpeter’s insights about risk-takers didn’t make him an optimist.

In a speech last year to European finance ministers in Vienna, Mr. Schramm explained Schumpeter’s fears: He "worried that entrepreneurial capitalism would not flourish because the bureaucracies of modern government and big corporations would dampen innovation — the process of ‘creative destruction’ would be too ungovernable for a modern, Keynesian-regulated economy to tolerate." As a result, Mr. Schramm said, Schumpeter thought that "the importance of entrepreneurs would fade over time as capitalism sought predictability from governments who would plan economic activity as well as order social benefits."

Mr. Schramm’s comments caught my attention because they so accurately describe Latin America. There the entrepreneur has been all but run out of town by the bureaucracies that Schumpeter feared. Growth has suffered accordingly.

The World Bank’s annual "Doing Business" survey, released last week, demonstrates the point. The 2008 survey, which evaluates the regulatory climate for entrepreneurs in 178 countries, finds that Latin America and the Caribbean was the slowest reforming region this year and that it "is falling further behind other regions in the pace" of reform.

. . .

The most important lesson for Latin America from the World Bank’s report is that its competitors around the world are working to unleash entrepreneurial spirits, and doing nothing is not an option. As Mr. Schramm told his Vienna audience, "Schumpeter saw what a century of evidence would prove: Socialism has not sustained economic growth." Now, if only more Latin American policy makers would catch on.

For the full commentary, see:

MARY ANASTASIA O’GRADY. "THE AMERICAS; No Room for Entrepreneurs." The Wall Street Journal (Mon., October 8, 2007): A18.

(Note: ellipsis added.)