artdiamondblog.com – Page 455 – Art Diamond's web log

Rosen’s Superstars Versus the Long Tail

One of Sherwin Rosen’s most important articles is "The Economics of Superstars" in which he argues that if a superstar’s performance is even slightly better than the next best performer’s, if the performance can be cheaply reproduced (as with radio, CDs, etc.) then a small premium multiplied thousands of times, might result in huge differences in earnings.

This argument works, so long as most of us are interested in the same sort of performance, and are willing to pay some small premium for the best performer of it. But what if we care as much about the content of the performance as the quality of the performance? (In other words, we care as much about what is done, as we care about how well it is done.)

The new book The Long Tail can be taken to imply that there are many niches, and that the days of the "superstar" are over (or at least that in the future, the compensation of the superstars will not be quite so super). If this argument works, and I think it does, then it implies that the new technologies will serve consumers by better matching consumer preferences with the services provided, and also implies that a more diverse group of suppliers (performers) will be able to sustain themselves.

More speculatively, it seems as though it might imply greater equality in the labor market. If this last is true, it goes against most accounts of the effects of recent high technology on the labor market.

The reference to the Rosen article is:

Rosen, Sherwin. "The Economics of Superstars." American Economic Review 71, no. 5 (Dec. 1981): 845-58.

The reference to The Long Tail is:

Anderson, Chris. The Long Tail. New York: Hyperion, 2006.

Antitrust Cases Can Hurt (Even Those that Get Dropped)

The antitrust lawsuit against IBM was dropped, and that against Microsoft result in the imposition of only minor legal remedies. So some may conclude that IBM and Microsoft bore little ill effects from the suits. But such suits can reduce morale, result in loss of talent, and restrain the efficiency, innovativeness and competitiveness of the prosecuted companies.

In the case of IBM, Lou Gerstner has made some strong, and plausible, comments on the deleterious effects of U.S. antitrust action:

(p. 118) The other critical factor—one that is sometimes overlooked—is the impact of the antitrust suit filed against IBM by the United States Department of Justice on January 31, 1969, the final day of the Lyndon B. Johnson administration. The suit was ultimately dropped and classified "without merit" during Ronald Reagan’s presidency, but for thirteen years IBM lived under the specter of a federally mandated breakup. One has to imagine that years of that form of scrutiny changes business behavior in very real ways.

Just consider the effect on vocabulary—an important element of any culture, including corporate culture. While IBM was subject to the suit, terms like "market," "marketplace," "market share," "competitor," "competition," "dominate," "lead," "win," and "beat" were systematically excised from written materials and banned at internal meetings." Imagine the dampening effect on a workforce that can’t even talk about selecting a market or taking share from a competitor. After a while, it goes beyond what is said to what is thought.

The reference to the book, is:

Gerstner, Louis V., Jr. Who Says Elephants Can’t Dance? Leading a Great Enterprise through Dramatic Change. New York: HarperCollins, 2002.

The Unsung Heroes in “The Path to 9/11”

Still from the "Path to 9/11" mini-series, showing damage to the underground garage from the WTC bombing on February 26, 1993. Source of photo: http://www.imdb.com/gallery/ss/0473404/Ss/0473404/103291.jpg?path=gallery&path_key=0473404

The "sung" heroes of "The Path to 9/11" would include the Afghan militia leader Massoud (below) who warned, and tried to help, the U.S. in the early efforts against Osama bin Laden.

But the unsung heroes matter too. There are two scenes in the series that keep coming back into my mind.

The first is of the investigation of the crumbling garage after the bombing of the World Trade Center in 1993. An alarm goes off warning that all should leave because of the possible collapse of the garage. There is a directive to leave all evidence in place. But one worker, warned he may lose his job, grabs a key piece of evidence, to keep it from getting buried.

The second is an airport screener who, with strong circumstantial reasons, but no strong direct evidence, stops a terrorist from entering the U.S., even though a co-worker warns him of the personal consequences for his career.

When the stakes were high, these were two men who did the right thing, even though the personal costs to them were potentially high. I do not know their names, though their names deserve to be remembered.

Their actions contrast with those of many of the higher placed officials in the story.

(Note: "The Path to 9/11" was broadcast on ABC for two nights in September 2006; I think 9/10 and 9/11.)

Still of Ahmed Shah Massoud, from the "Path to 9/11" mini-series. Source of photo: http://www.imdb.com/gallery/ss/0473404/Ss/0473404/5795_pre.jpg.html?hint=group

“Bet the Company”

When entrepreneurs, or innovative companies, take large risks, and succeed, we sometimes begrudge them their success. But we should remember that sometimes they took great risks, and that they could have lost everything if they had lost the ‘bets’ they made.

One of the most famous examples of ‘betting the company’ is when Tom Watson, Jr. of IBM ‘bet the company’ on the development of the expensive, but pathbreaking, system 360.

This episode is mentioned many places. One that I ran across recently is in Gerstner’s memoir of his own time at IBM. The following lines appear in Gerstner’s brief summary of some important periods in IBM’s earlier history:

Much has been written about this period and how Tom "bet the company" on a revolutionary new product line called the System/360—the original name of IBM’s wildly successful mainframe family.

To grasp what System/360 did for IBM and its effect on the computing landscape, one needs to look no further than Microsoft, its Windows operating system, and the PC revolution. System/360 was the Windows of its era—an era that IBM led for nearly three decades. (p. 114)

The reference to the Gerstner book, is:

Gerstner, Louis V., Jr. Who Says Elephants Can’t Dance? Leading a Great Enterprise through Dramatic Change. New York: HarperCollins, 2002.

Pill Mimicking Calorie Restriction Would Be Highly Cost-Effective

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

(p. D1) Recent tests show that the animals on restricted diets, including Canto and Eeyore, two other rhesus monkeys at the primate research center, are in indis-(p. D4)putably better health as they near old age than Matthias and other normally fed lab mates like Owen and Johann. The average lifespan for laboratory monkeys is 27.

The findings cast doubt on long-held scientific and cultural beliefs regarding the inevitability of the body’s decline. They also suggest that other interventions, which include new drugs, may retard aging even if the diet itself should prove ineffective in humans. One leading candidate, a newly synthesized form of resveratrol — an antioxidant present in large amounts in red wine — is already being tested in patients. It may eventually be the first of a new class of anti-aging drugs. Extrapolating from recent animal findings, Dr. Richard A. Miller, a pathologist at the University of Michigan, estimated that a pill mimicking the effects of calorie restriction might increase human life span to about 112 healthy years, with the occasional senior living until 140, though some experts view that projection as overly optimistic.

According to a report by the Rand Corporation, such a drug would be among the most cost-effective breakthroughs possible in medicine, providing Americans more healthy years at less expense (an estimated $8,800 a year) than new cancer vaccines or stroke treatments.

“The effects are global, so calorie restriction has the potential to help us identify anti-aging mechanisms throughout the body,” said Richard Weindruch, a gerontologist at the University of Wisconsin who directs research on the monkeys.

. . .

While an anti-aging pill may be the next big blockbuster, some ethicists believe that the all-out determination to extend life span is veined with arrogance. As appointments with death are postponed, says Dr. Leon R. Kass, former chairman of the President’s Council on Bioethics, human lives may become less engaging, less meaningful, even less beautiful.

“Mortality makes life matter,” Dr. Kass recently wrote. “Immortality is a kind of oblivion — like death itself.”

That man’s time on this planet is limited, and rightfully so, is a cultural belief deeply held by many. But whether an increasing life span affords greater opportunity to find meaning or distracts from the pursuit, the prospect has become too great a temptation to ignore — least of all, for scientists.

“It’s a just big waste of talent and wisdom to have people die in their 60s and 70s,” said Dr. Sinclair of Harvard.

For the full story, see:

MICHAEL MASON. "One for the Ages: A Prescription That May Extend Life." The New York Times (Tues., October 31, 2006): D1 & D4.

(Note: ellipsis added.)

Mike Linksvayer is eating a calorie restricted diet. Source of photo: online version of the NYT article cited above.

Gerstner Mentions “Leapfrog Competition”

After hearing a "leapfrog competition" mention in Gerstner’s book, I did a phrase search in Amazon. Apparently he uses the phrase once, as follows:

(p. 159) This doesn’t mean it wasn’t a good transaction for AT&T. It allowed AT&T to leapfrog its competitors. But for IBM it was a strategic coup.

The book is:

Gerstner, Louis V., Jr. Who Says Elephants Can’t Dance? Leading a Great Enterprise through Dramatic Change. New York: HarperCollins, 2002.

African Entrepreneur Funds Prize for African Leaders Who Resist Kleptocracy

Billionaire entrepreneur Mo Ibrahim. Source of photo: online version of the NYT article cited below.

At a news conference in London on Thursday, Mo Ibrahim, a 60-year-old Sudanese-born billionaire who made his money in the cellphone business, announced that he was offering a $5 million prize for the sub-Saharan African president who on leaving office has demonstrated the greatest commitment to democracy and good governance. The money will be spread out over 10 years.

“We must face the reality,” Mr. Ibrahim said, referring to Africa’s leadership record. “Everything starts by admitting the truth: we failed. I’m not proud at all. I’m ashamed. We really need to resolve the problem and the problem, in our view, is bad leadership and bad governance.”

. . .

Unlike many projects that aim to help famine-stricken villages or far-flung AIDS clinics, this one is supposed to focus on political leadership — and the post-independence culture of autocrats and kleptocrats that spawned such figures as Mobutu Sese Seko of Zaire or Idi Amin of Uganda.

. . .

Africa’s culture of the Big Man clinging to office was built in part, Mr. Ibrahim said, on a sense among many of its leaders that, if they relinquished power voluntarily, they would face penury and powerlessness and would no longer be the font of patronage or the tenant of what he called “the hilltop palace.”

“We want them to have a life after office,” Mr. Ibrahim said.

“Your leaders here become rich after they leave office,” he said, referring to the directorships, book deals and lecture circuit tours that accrue to Western leaders. “What life is there for our people after office? Some of our leaders cannot even afford to rent an apartment” in their own capitals, he said.

For the full story, see:

ALAN COWELL "Prize to Honor Heroes in African Democracy." The New York Times (Fri., October 27, 2006): A11.

(Note: ellipses added.)

Gerstner’s Insights on Business

Source of book image: http://ec1.images-amazon.com/images/P/0060523794.01._SS500_SCLZZZZZZZ_V1122531345_.jpg

Gerstner is known for turning around IBM, when many business experts thought it was headed down the tubes. His book is useful as a report on what happened at IBM during his time as CEO, and also has some more broadly applicable observations. I’ll mention a few of these in this and a few other postings in the next couple of weeks.

It is interesting how many successful and important business leaders and experts have spent some time associated with the McKinsey consulting group, where Gerstner started his career. One major McKinsey figure, Richard Foster, is a strong advocate and elaborator of Schumpeter’s process of creative destruction.

I wonder if perhaps some of the success of McKinsey is due to the firm’s embracing and applying Schumpeter’s ideas?

Those who oppose creative destruction emphasize the destructive effect that the process has on some workers. In fact the effects on labor are seen by many (e.g., Thomas Friedman) who are otherwise sympathetic, to be the major drawback of the process. As a result some of them (e.g., Thomas Friedman) propose paternalistic ‘safety net’ labor policies.

We usually think of government as the main implementer of such policies, but among firms, IBM’s labor policies were among the most paternalistic. This is usually viewed as one of the positives about IBM. But one of Gerstner’s insights is to suggest that some of those in the IBM work force were hurt by IBM’s paternalistic policies:

(p. 186) . . . I came to feel that the real problem was not that employees felt they were entitled. They had just become accustomed to immunity from things like recessions, price wars, and technology changes. And for the most part, they didn’t even realize that this self-contained, insulated system also worked against them. I was shocked, for instance, to discover the pay disparities—particularly in very important technical and sales professions—of IBM comployess when comapred to the competition and the industry in general. Our best people weren’t getting what they deserved.

Maybe I should mention that I don’t endorse everything in the book. For example, Gerstner seems to think that a desire to "win" is crucial to success in business. But I think the analogy between business and competitive sports is usually taken too far. Can’t one also succeed in business from a desire to innovate and to improve the world?

The reference on the book is:

Gerstner, Louis V., Jr. Who Says Elephants Can’t Dance? Leading a Great Enterprise through Dramatic Change. New York: HarperCollins, 2002.

(Note: in the quote, the ellipsis was added, but the italics was in the original.)

Medical Cures Going First to the Dogs

One of the dogs cured of melanoma by a new vaccine. Source of photo: screen capture from NBC news report.

Melanoma has taken many human lives, including my father’s on April 15, 2000. Government licensing and regulations reduce competition in medicine and slow the pace of medical innovation. Animal health care is less regulated. Is it an accident that dogs are being cured for melanoma before humans?

Vet Philip Bergman remembers the first time he tried the vaccine in a dog.

"That was a dog that thankfully underwent complete disappearance of his tumor," says Bergman. "It was remarkable, obviously, to us."

Since then, more than 100 dogs have been treated, including Lawana Hart’s Lucky, who last June appeared to have only a few months to live.

For the full report, see:

Robert Bazell. "Treatment for canines with cancer raises hopes; Researchers encouraged by melanoma vaccine’s success on dogs." NBC Evening News Report; online print version updated: 6:36 p.m. CT Oct 26, 2006.

For the video version, go to:

http://video.msn.com/v/us/msnbc.htm?g=d7f603e0-86bb-44db-bad0-524ec79b02c8&f=00&fg=copy

More Good Done With Standard Oil Money: Henry Flagler

The Flagler Memorial obelisk was erected in on a man-made island in 1920, when Miamians still remembered the accomplishments of Henry Flagler. Source of image: http://www.miamibeachfl.gov/newcity/depts/arce/art_public/rw_flagler_monument.asp

The Standard Oil "monopoly" is often lambasted as a sorry episode in our economic history. And yet a strong case can be made that the Standard Oil wealth was created mainly by efficiently providing consumers with a commodity they valued. In addition, mention is often made of the Rockefeller philanthropic activities. Less known, is that others who became rich from Standard Oil, also engaged in productive entrepreneurship, and philanthropy, with their wealth. One of these was Henry Flagler.

In a region that prizes showy monuments to wealth, the lone monument to the man who made it all possible has languished in isolation for decades.

A soaring concrete obelisk dedicated to Henry Flagler, the oil tycoon who hastened South Florida’s development by building a railroad all the way to Key West, it sits on a tiny man-made island in Biscayne Bay, reachable only by boat or, more typically, Jet Ski. Almost everyone here has glimpsed the Flagler Memorial, but few know what it is called, why it exists or how battered it looks up close.

”I’m telling you, it’s a beautiful work of art,” said Paul Orofino, a board member of the Environmental Coalition of Miami Beach, a nonprofit group that occasionally tidies up Monument Island, the memorial’s scruffy, overgrown home. ”It’s a tragedy that nobody pays attention to this thing.”

It is not the kind of South Florida tribute one might expect for Flagler, who extended his railroad from St. Augustine to West Palm Beach in 1894, Miami in 1896 and Key West — a segment that lasted only 23 years until a hurricane demolished it — in 1912.

Flagler was the state’s original megadeveloper, after all, creating its tourism industry by turning swampy pioneer settlements into the world’s grandest resorts. He was also, perhaps, its first huckster, advertising the nascent Miami as ”the most pleasant place south of Bar Harbor to spend the summer.”

His over-the-top winter home in Palm Beach, awash in gold, is now a museum, but most of its visitors come from out of state, said John Blades, the museum’s executive director. Mr. Blades has tried to get a statue of Flagler erected in Palm Beach, which owes its sumptuous existence to the man, but has so far failed.

”Flagler,” Mr. Blades said, ”is probably the most unappreciated titan of the Gilded Age.”

For the rest of the story of the impressive, but deteriorating, Flagler Memorial in Miami, see:

ABBY GOODNOUGH. "South Florida Journal; Unappreciated, With Memorials to Match." The New York Times (Fri., October 7, 2005): A12.

(Note: the hurricane destroyed the Key West link of the railroad in 1935.)

Henry Flagler. Source of image: http://flaglermuseum.us/html/flagler_biography.html