Author: Art Diamond

The French Are Not Always Wrong

Editorial page advice from the budget minister of France:

The choice of nuclear power dates back to the end of World War II.  With insufficient fossil fuel reserves, our country very early on invested in energy alternatives.  The two oil crises of the ’70s convinced us to accelerate the construction of facilities to produce safe and economically profitable nuclear energy.  That strategy paid off:  In 30 years, France’s energy independence has risen from 30% to 50%.  While turning toward nuclear energy might have seemed unusual 60 years ago, I believe that it was an especially visionary choice.  The development of nuclear energy enabled us to meet several objectives:  energy independence and security of supply, and competitive, stable energy prices.  This nuclear option is also an economic and commercial asset for our country, whose capabilities in this cutting-edge area are world-renowned.  (p. A20)

JEAN-FRANCOIS COPE. "Energy a la Francaise." The Wall Street Journal (Weds., October 5, 2005):  A20.

Just Throwing Money at R&D Does Not Work?

R&Denigma.gif
(Source: downloaded graphic from online version of WSJ see below, p. A13)

Booz Allen Hamilton Inc., a consulting firm, analyzed six years of financial results by 1,000 publicly traded companies responsible for the bulk of R&D spending globally. The firm found the companies that spent proportionately greater sums than their industry peers didn’t enjoy greater revenue gains or better profits.
The finding flies in the face of academic studies and accepted wisdom on the value of corporate research. It also comes as researchers warn that U.S. companies need to increase spending or risk falling behind rivals in China and India, which are rapidly industrializing.
Booz Allen concluded that once a minimum level of research and development spending is achieved, better oversight and culture were more significant factors in determining financial results. The study calculated the percentage of a company’s revenue spent on R&D and compared it with sales growth, gross profit, operating profit, market capitalization and total shareholder result.

McWilliams, Gary. “In R&D, Brains Beat Spending In Boosting Profit.” The Wall Street Journal
(Weds., October 11, 2005): A2 & A13.
Ah, so maybe the entrepreneur or R&D manager, can make a difference after all? (This is not a surprise, if you believe, as I do, that Clayton Christensen is on to something important.) Or, though less interesting, the results might just be due to diminishing returns to R&D.

Greenspan on Creative Destruction

This morning, Alan Greenspan delivered an excellent speech on “Economic Flexibility” at Georgetown before the National Italian American Foundation, Washington, D.C. Here is the part of the speech most directly relevant to the process of creative destruction:

Starting in the 1970s, U.S. Presidents, supported by bipartisan majorities in the Congress, responded to the growing recognition of the distortions created by regulation, by deregulating large segments of the transportation, communications, energy, and financial services industries. The stated purpose of this deregulation was to enhance competition, which had come to be seen as a significant spur to productivity growth and elevated standards of living. Assisting in the dismantling of economic restraints was the persistent, albeit slow, lowering of barriers to cross-border trade and finance.
As a consequence, the United States, then widely seen as a once-great economic power that had lost its way, gradually moved back to the forefront of what Joseph Schumpeter, the renowned Harvard professor, had called “creative destruction”–the continual scrapping of old technologies to make way for the innovative. In that paradigm, standards of living rise because depreciation and other cash flows of industries employing older, increasingly obsolescent technologies are marshaled, along with new savings, to finance the production of capital assets that almost always embody cutting-edge technologies. Workers, of necessity, migrate with the capital.
Through this process, wealth is created, incremental step by incremental step, as high levels of productivity associated with innovative technologies displace less-efficient productive capacity. The model presupposes the continuous churning of a flexible competitive economy in which the new displaces the old.
As the 1980s progressed, the success of that strategy confirmed the earlier views that a loosening of regulatory restraint on business would improve the flexibility of our economy. No specific program encompassed and coordinated initiatives to enhance flexibility, but there was a growing recognition that a market economy could best withstand and recover from shocks when provided maximum flexibility.

The full speech is available at the Federal Reserve web site at: http://www.federalreserve.gov/boarddocs/speeches/2005/20051012/default.htm

“The Positive Side of Global Warming”


The New York Times devoted more than two full pages to the advantages of the melting of the Arctic ice cap. Here is a short excerpt:

(p. A1) By Mr. Broe’s calculations, Churchill could bring in as much as $100 million a year as a port on Arctic shipping lanes shorter by thousands of miles than routes to the south, and traffic would only increase as the retreat of ice in the region clears the way for a longer shipping season.
With major companies and nations large and small adopting similar logic, the Arctic is undergoing nothing less than a great rush for virgin territory and natural resources worth hundreds of billions of dollars. Even before the polar ice began shrinking more each summer, countries were pushing into the frigid Barents Sea, lured by undersea oil and gas fields and emboldened by advances in technology. But now, as thinning ice stands to simplify construction of drilling rigs, exploration is likely to move even farther north.
Last year, scientists found tantalizing hints of oil in seabed samples just 200 miles from the North Pole. All told, one quarter of the world’s undiscovered oil and gas resources lies in the Arctic, according to the United States Geological Survey.
The polar thaw is also starting to unlock other treasures: lucrative shipping routes, perhaps even the storied Northwest Passage; new cruise ship destinations; and important commercial fisheries.
“It’s the positive side of global warming, if there is a positive side,” said Ron Lemieux, the transportation minister of Manitoba, whose provincial government is investing millions in Churchill.



For the full story, see:
CLIFFORD KRAUSS, STEVEN LEE MYERS, ANDREW C. REVKIN and SIMON ROMERO. “As Polar Ice Turns to Water, Dreams of Treasure Abound.” The New York Times (Mon., October 10, 2005): A1, A10-A11.

Early Detection Does Not Always Lengthen Life

Unfortunately some cancer tests do a lot more good for doctors’ revenues than they do for patients’ longevity:

“The improvement in long-term mortality may be due to the higher proportion of small or slow-growing tumors being detected, which means you start counting earlier,” says Dr. Jaffe. That’s why longer survival, measured from the time of diagnosis, is a misleading measure of progress against cancer, and no substitute for reductions in mortality.
The more scientists study cancers, the more indolent ones they discover. Researchers in Japan, for instance, find that CT scans detect almost as many lung lesions in nonsmokers as in smokers. But since nonsmokers have a mortality rate from lung cancer less than 10% that of smokers, the vast majority of what CT scans picked up would never have progressed to anything life-threatening. And a Mayo Clinic study found that although X-rays detect lung cancers at earlier stages, and lead to more five-year survivors, early detection does not lower death rates.
For colon cancer, the fecal occult blood test “does decrease your risk of dying of this cancer,” says Dr. Kramer. “But for colonoscopy and sigmoidoscopy, which appeal to our intuition [about early detection], the evidence is not great.” They pick up polyps earlier, but not all polyps become cancers, “and we don’t know what proportion would lead to death.”
The Pap test for cervical cancer has saved lives, but many of the abnormal cells it finds wouldn’t go on to become cancer. Most women with low-grade or even high-grade lesions would have been fine anyway. Similarly, the PSA test for prostate cancer picks up tumors that are biologically nonaggressive.
The discovery that many tumors are innocuous casts doubt on the value of new screening tests. “You may fool yourself into thinking a test is twice as sensitive,” says Dr. Kramer, “but the only extra cancers it picks up are those that wouldn’t have harmed the patient.

SHARON BEGLEY. “Early Cancer Detection Doesn’t Always Give Patient an Advantage.” The Wall Street Journal (August 26, 2005): B1.

A “Bridge” Technology Between Gas and Hydrogen?

MazdaPremacyConceptCar.jpg
Premacy gasoline-electric-hydrogen concept car. Photo source: WSJ, see below.

One of the difficulties in major changes in technology is how to handle the transition. Technologies that reduce the cost of the transition (I call them “bridge technologies”) can be important. Here is a potential example.

(p. D5) . . . with the Premacy concept, Mazda is attempting to combine this electric-motor engine with a combustion engine that is itself a kind of hybrid engine — one that can burn either gasoline or hydrogen, whichever the driver chooses. The company already has spent years developing such dual-fuel combustion engines and says they are now ready for the mass market. Mazda is expected to announce at the Tokyo Motor Show, which opens Oct. 22, that it will begin leasing a version of the RX-8 sports car in Japan with a combustion engine that burns hydrogen as well as gasoline.

Hydrogen is normally seen as an alternative energy source for use in cars powered by fuel cells, in which the chemical reaction between hydrogen and oxygen is used to generate electricity. Fuel-cell technology is attractive because it releases no harmful emissions, and Japan has roughly 15 government-run hydrogen stations to encourage the use of alternative fuels. More are expected.
But fuel-cell technology is also extremely expensive. Because of this, most industry experts think commercial use of fuel-cell cars is years, if not decades, away. That is why Mazda has been developing engines that burn hydrogen much like gasoline. Burning hydrogen, according to Mazda, is much more practical.

For the full story, see:

JATHON SAPSFORD. “Mazda Concept Car Will Run on Three Fuels.” THE WALL STREET JOURNAL (Weds., October 5, 2005): D5.
(Note: ellipsis added.)

If Only Caroline Had Read Schumpeter

Innovation is sometimes slowed because innovators do not know that creative destruction will replace old jobs with equally good, or better, new jobs:

In 1834 Walter Hunt of New York City made such a leap in lateral thinking. In his little machine shop down a narrow alley in Abingdon Square, he devised a machine for stitching cloth with two threads from two separate sources, one a needle on a vibrating arm and the other a transverse shuttle fed by an unwinding bobbin.
. . .
Hunt, an altruistic Quaker, never pursued his invention because his 15-year-old daughter, Caroline, recoiled from the thought that it would put seamstresses out of work. (p. 87)

Source:
Evans, Harold. They Made America: Two Centuries of Innovators from the Steam Engine to the Search Engine. New York: Little, Brown and Co., 2004.
(Note: ellipsis added.)

Sewing Machine Benefitted Laborers

Speaking of the invention of a practical, affordable sewing machine:

It was a democratizing influence. James Parton was exaggerating only a little when he wrote in the Atlantic Monthly in 1867 that it was “one of the means by which the industrious laborer is as well clad as any millionaire.” (p. 84)

Evans, Harold. They Made America: Two Centuries of Innovators from the Steam Engine to the Search Engine. New York: Little, Brown and Co., 2004.

When People Change


(p. 462) People don’t change when you tell them they should. They change when they tell themselves they must. Or as Johns Hopkins foreign affairs professor Michael Mandelbaum puts it, “People don’t change when you tell them there is a better option. They change when they conclude that they have no other option.”



Source:
Friedman, Thomas L. The World Is Flat: A Brief History of the Twenty-First Century. New York: Farrar, Straus and Giroux, 2005.


Thomas Friedman’s claim here is plausible, but I find it surprising, given his strong push for a worker safety net when the worker loses a job to creative destruction. The safety net Friedman proposes, in this book anyway, is one that does incorporate some incentives to find a job, but sounds like it could be ‘gamed’ to delay the tough decisions that might need to be made. Hayek had some useful observations on this issue way back in his Road to Serfdom.

Yes to Growth, No to Change

Apparently a perq of being a columnist for the New York Times, is that you get access to pretty high quality economics tutors. Tom Friedman tells us:

My economics tutor Paul Romer is fond of saying, “Everyone wants economic growth, but nobody wants change.” Unfortunately, you cannot have one without the other, especially when the playing field shifts as dramatically as it has since the year 2000. (p. 339)

Friedman, Thomas L. The World Is Flat: A Brief History of the Twenty-First Century. New York: Farrar, Straus and Giroux, 2005.

Comparing Monopoly and Competition


(Source: p. 368, see below)

Comparisons between monopoly and competition, . . ., must be made gingerly. One is liable to fall into nonsense of the sort “If my grandmother had wheels she would be a tram.” (p. 366)

McCloskey, Donald N. The Applied Theory of Price. 2nd ed. New York: Macmillan Publishing Company, 1985.
The usual assumption in price theory texts is that the cost structure would be the same for an industry whether it was competitive or monopolized. The graph above, from McCloskey, is the only one I am aware of that tries to represent the realistic possibility that costs may be significantly lower in monopoly. Usually we think of new goods resulting from creative destruction, but Schumpeter also emphasized new processes, and the new processes presumably would often reduce costs.