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.)

Federal Government Spending Soars

SpendingFederalGraph2010-02-28.gif

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

(p. A17) This has been an unforgettable year in the history of American spending.

It began with an eye-popping $800 billion stimulus bill that came from nowhere and went to nowhere. Done with that, the Washington Democrats turned to President Obama’s health-care reform, which looked big at first, but turned out to be bigger. A well-publicized June estimate of the Senate bill’s cost by the Congressional Budget Office put the 10-year price tag at $1.6 trillion. So $800 billion, then a trillion.
Dollar signs rocketed into the sky all year: hundreds of billions on various TARP salvage projects, much drawn from some magic stash held by the Federal Reserve. The Obama cap-and-trade bill was going to use an auction to siphon $3.3 trillion from various states to Washington over 40 years. Oh, almost forgot–an FY 2011 $3.8 trillion budget.

For the full commentary, see:

DANIEL HENNINGER. “It’s the Spending, America .” The Wall Street Journal (Thurs., February 18, 2010): A17.

Determination, Not Education, Is Key to Success at McDonald’s

(p. 189) McDonald’s is a real melting pot.

The key element in these individual success stories and of McDonald’s itself, is not knack or education, it’s determination. This is expressed very well in my favorite homily:

“Nothing in the world can take the place of persistence. Talent will not; nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb. Education alone will not; the world is full of educated derelicts. Persistence and determination alone are omnipotent.”

Source:
Kroc, Ray. Grinding It Out: The Making of McDonald’s. Chicago: Henry Regnary Company, 1977.

“Silicon Valley’s Economy is Sputtering”

SiliconValleyEmptyOfficeBuilding2010-02-28.jpg “An unoccupied office building in San Jose, Calif., in December. Many tech firms are hiring engineers abroad to do their work.” Source of caption and photo: online version of the NYT article quoted and cited below.

(p. B3) SAN FRANCISCO — Silicon Valley’s economy is sputtering and risks permanently stalling, according to an annual report by a group of researchers in the region.

Part of the toll on Silicon Valley has resulted from the recession. The region, the center of the global technology industry, lost 90,000 jobs from the second quarter of 2008 to the second quarter of 2009. Unemployment is higher than national levels and the worst in the region since 2005, when technology companies were still recovering from the dot-com implosion.
The drop in the number of midlevel jobs — the engineers who drive much of the Valley’s growth — has been sharpest. And when companies do hire, they are cautiously hiring independent contractors instead of regular employees, and are hiring abroad, according to the “2010 Index of Silicon Valley” report, which was produced by the Joint Venture: Silicon Valley Network and the Silicon Valley Community Foundation, two local nonprofit groups.
Other economic indicators are also gloomy, the report found.
“We show no evidence that the recovery has arrived,” said Russell Hancock, chief executive of Joint Venture.

For the full story, see:
CLAIRE CAIN MILLER. “Report Warns Silicon Valley Could Lose Its Edge.” The New York Times (Thurs., February 11, 2010): B3.
Note: The online version of the article is dated February 10, 2010, and has the title “Report Warns Silicon Valley Could Lose Its Edge.”)

Arnold on Ben Nelson’s Cornhusker Kickback: “He Got the Corn; We Got the Husk”

(p. A16) Senator Ben Nelson, Democrat of Nebraska, has been under fire in recent days for winning some plum provisions for his home state in exchange for voting for his party’s big health care legislation.
. . .
In perhaps the most pointed criticism yet, Gov. Arnold Schwarzenegger of California, in his State of the State address on Wednesday, said: “California’s Congressional delegation should either vote against this bill that is a disaster for California or get in there and fight for the same sweetheart deal Senator Nelson of Nebraska got for the Cornhusker State. He got the corn; we got the husk.”

For the full story, see:
DAVID M. HERSZENHORN. “Prescriptions; Making Sense of the Health Care Debate; Spreading the Golden Corn.” The New York Times (Fri., January 8, 2010): A16.
(Note: the online version of the story had the very different title: “Prescriptions; Making Sense of the Health Care Debate; Nelson to Fight for All States” and had the date January 7, 2010.”)
(Note: ellipsis added.)

Doubts on Sainthood for U.N.’s Global Warming Nobel Prize Winning Pachauri

GorePachauriNobelPrizes2010-02-28.jpg “Rajendra K. Pachauri, right, the United Nations climate panel’s leader, at a Nobel Peace Prize ceremony with Al Gore in 2007.” Source of caption and photo: online version of the NYT article quoted and cited below.

(p. A1) Just over two years ago, Rajendra K. Pachauri seemed destined for a scientist’s version of sainthood: A vegetarian economist-engineer who leads the United Nations’ climate change panel, he accepted the 2007 Nobel Peace Prize on behalf of the panel, sharing the honor with former Vice President Al Gore.

Critics, writing in Britain’s Sunday Telegraph and elsewhere, have accused Dr. Pachauri of profiting from his work as an adviser to businesses, including Deutsche Bank and Pegasus Capital Advisors, a New York investment firm — a claim he denies.
They have also unearthed and publicized problems with the intergovernmental panel’s landmark 2007 report on climate change, which concluded that the planet was warming and that humans were likely to blame.
The report, they contend, misrepresents the state of scientific knowledge about diverse topics — including the rate of melting of Himalayan glaciers and the rise in severe storms — in a way that exaggerates the evidence for climate change.
But Dr. Pachauri and the Intergovernmental Panel on Climate Change are now under intense scrutiny, facing accusations of scientific sloppiness and potential financial conflicts of interest from climate skeptics, right-leaning politicians and even some mainstream scientists. Senator John Barrasso, a Wyoming Republican, called for Dr. Pachauri’s resignation last week.
Critics, writing in Britain’s Sunday Telegraph and elsewhere, have accused Dr. Pachauri of profiting from his work as an adviser to businesses, including Deutsche Bank and Pegasus Capital Advisors, a New York investment firm — a claim he denies.
They have also unearthed and publicized problems with the intergovernmental panel’s landmark 2007 report on climate change, which concluded that the planet was warming and that humans were likely to blame.
The report, they contend, misrepresents the state of scientific knowledge about diverse topics — including the rate of melting of Himalayan glaciers and the rise in severe storms — in a way that exaggerates the evidence for climate change.

For the full story, see:
ELISABETH ROSENTHAL. “U.N. Climate Panel and Its Chief Face a Siege on Their Credibility.” The New York Times (Tues., February 9, 2010): A1 & A9.
(Note: ellipses added.)
(Note: The online version of the article is dated February 8, 2010, and has the title “Skeptics Find Fault With U.N. Climate Panel.”)

Many of McDonald’s Best New Products, Started With Franchise Operators

(p. 163) Some of my detractors, and I’ve acquired a few over the years, say that my penchant for experimenting with new menu items is a foolish indulgence. They contend that it stems from my never having outgrown my drummer’s desire to have something new to sell. “McDonald’s is in the hamburger business,” they say. “How can Kroc even consider serving chicken?” Or, “Why change a winning combination?”

Of course, it’s not difficult to demonstrate how much our menu has changed over the years, and nobody could argue wish the success of additions such as the Filet-O-Fish, the Big Mac, Hot Apple Pie, and Egg McMuffin. The most interesting thing to me about these items is that each evolved from an idea of one of our operators. So the company has benefited from the ingenuity of its small businessmen while they were being helped by the system’s image and our cooperative advertising muscle. This, to my way of thinking, is the perfect example of capitalism in action. Competition was the catalyst for each of the new items. Lou Groen came up with Filet-O-Fish to help him in his battle against the Big Boy chain in the Catholic parishes of Cincinnati. The Big Mac resulted from our need for a larger sandwich to compete against Burger King and a variety of specialty shop concoctions. The idea (p. 164) for Big Mac was originated by Jim Delligatti in Pittsburgh.
Harold Rosen, our operator in Enfield Connecticut, invented our special St. Patrick’s Day drink, The Shamrock Shake. “It takes a guy with a name like Rosen to think up an Irish drink,” Harold told me. He wasn’t kidding. “You may be right,” I said. “It takes a guy with a name like Kroc to come up with a Hawaiian sandwich . . . Hulaburger.” He didn’t say anything. He didn’t know whether I was kidding or not. Operators aren’t the only ones who come up with creative ideas for our menu. My old friend Dave Wallerstein, who was head of the Balaban & Katz movie chain and has a great flair for merchandising–he’s the man who put the original snack bars in Disneyland for Walt Disney–is an outside director of McDonald’s, and he’s the one who came up with the idea for our large size order of french fries. He said he loved the fries, but the small bag wasn’t enough and he didn’t want to buy two. So we kicked it around and he finally talked us into testing the larger size in a store near his home in Chicago. They have a window in that store that they now call “The Wallerstein Window,” because every time the manager or a crew person would look up, there would be Dave peering in to see how the large size fries were selling. He needn’t have worried. The large order took off like a rocket, and it’s now one of our best-selling items. Dave really puts his heart into his job as a director, now that he’s retired and has plenty of time. There’s nothing he likes more than traveling with me to check out stores.
Our Hot Apple Pie came after a long search for a McDonald’s kind of dessert. I felt we had to have a dessert to round out our menu. But finding a dessert item that would fit readily into our production system and gain wide acceptance was a problem. I thought I had the answer in a strawberry shortcake. But it sold well for only a short time and then slowed to nothing. I had high hopes for pound cake, too, but it lacked glamor. We needed something we could romance in advertising. I was ready to give up when Litton Cochran suggested we try fried pie, which he said is an old southern favorite. The rest, of course, is fast-food history. Hot Apple Pie, and later Hot Cherry Pie, has that special quality, that classiness in a finger food, that made it perfect for McDonald’s. The pies added significantly to our sales and (p. 165) revenues. They also created a whole new industry for producing the filled, frozen shells and supplying them to our stores.
During the Christmas holidays in 1972, I happened to be visiting in Santa Barbara, and I got a call from Herb Peterson, our operator there, who said he had something to show me. He wouldn’t give me a clue as to what it was. He didn’t want me to reject it out of hand, which I might have done, because it was a crazy idea–a breakfast sandwich. It consisted of an egg that had been formed in a Teflon circle, with the yolk broken, and was dressed with a slice of cheese and a slice of grilled Canadian bacon. This was served open-face on a toasted and buttered English muffin. I boggled a bit at the presentation. But then I tasted it, and I was sold. Wow! I wanted to put this item into all of our stores immediately. Realistically, of course, that was impossible. It took us nearly three years to get the egg sandwich fully integrated into our system. Fred Turner’s wife, Patty, came up with the name that helped make it an immediate hit–Egg McMuffin.

Source:
Kroc, Ray. Grinding It Out: The Making of McDonald’s. Chicago: Henry Regnary Company, 1977.
(Note: ellipsis and italics in original.)

Light in “Meet Me in St. Louis”

MeetMeInSaintLouisLights2010-02-07.jpgSource of photo: http://www.thejudyroom.com/louis/pictures/mmisldvd%23674.html

As Brad DeLong has noted, we take for granted the spectacular technological advances of the last 200, and especially, the last 100 years. One of the more notable of these, the spread of electricity that allowed electric illumination, occurred around the year 1900.
We forget how electric illumination made cities safer, and increased our freedom to choose the timing of work and leisure activities.
The awe inspired by electric lights also usually has been forgotten, but is occasionally recalled. One good source is a segment of a documentary produced by UNO television in 1998, to mark the centennial of Omaha’s long-forgotten Trans-Mississippi Exposition.
I recently ran across another in viewing the closing scenes of the Judy Garland classic “Meet Me in St. Louis.” In the final scene, the family finally makes it to the St. Louis Fair, and observes the display of electric lights.

For DeLong’s comment, peruse the early pages of his marvelous draft:
DeLong, J. Bradford. “Cornucopia: The Pace of Economic Growth in the Twentieth Century.” NBER Working Paper w7602, March 2000.

The UNO documentary had the unfortunate title “Westward the Empire: Omaha’s World Fair of 1898.”

MeetMeInSaintLouisViewingLights2010-02-07.jpgSource of photo: http://www.thejudyroom.com/louis/pictures/judytomlarge.html

Thousands Waited Hours in Subzero Cold Trying to Enter Global Warming Conference (“This Is What UN Efficiency Looks Like”)

(p. A10) As dozens of developing countries threatened to walk out of the Copenhagen climate-change summit, thousands of NGOs, journalists, lawyers, activists were still trying to get in.

The thousands queued from the early morning into the afternoon on Monday to register for the summit but found themselves in a line that barely budged for most of the day. Only those who already had accreditation — obtained during the first week of the summit or over the weekend — were let in; the rest braved subzero temperatures for some glimpse of a breakthrough.
Would-be attendees chanted “Let us in!” to Danish policemen ringing the Bella Center.
United Nations officials announced at one point that the process of accreditation would stop at 6 p.m. today, prompting boos and catcalls and cries of “shame” from those in line. One sign declared: “This is what UN efficiency looks like.”

For the full story, see:
Guy Chazan. “Copenhagen Dispatches; Some Walk Out of Gathering, But Many More Want In.” The Wall Street Jounal (Tues., December 15, 2009): A10.
(Note: the online version of the commentary had the title “Thousands Line Up for Climate Conference” and the date December 14, 2009.)