Books – Page 183 – artdiamondblog.com

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.

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.

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.)

Closing the Alleged ‘Digital Divide’

One version of the laptops produced by One Laptop Per Child for roughly $100 a piece. Source of image: http://www.laptop.org/OLPC_files/nigeria.jpg

Simply giving each child a laptop, won’t much improve their standard of living. (See Easterly’s The Elusive Quest for Growth.) But maybe a few of the children will obtain access to information about what is possible in the outside world, and maybe that will lead them to fight for more freedom?

But at least, if they remain poor, it will not be possible to lay the blame on some sort of ‘digital divide.’ Lay the blame, instead on government economic planning.

Note the aside buried in the article: ‘competitive advantage’ economist Michael Porter is telling the Libyans how to develop a "national economic plan"?? (Say it ain’t so, Michael!)

SAN FRANCISCO, Oct. 10 — The government of Libya reached an agreement on Tuesday with One Laptop Per Child, a nonprofit United States group developing an inexpensive, educational laptop computer, with the goal of supplying machines to all 1.2 million Libyan schoolchildren by June 2008.

The project, which is intended to supply computers broadly to children in developing nations, was conceived in 2005 by a computer researcher at the Massachusetts Institute of Technology, Nicholas Negroponte. His goal is to design a wireless-connected laptop that will cost about $100 after the machines go into mass production next year.

. . .

At the World Economic Forum in Davos, Switzerland, in January, Bill Gates, Microsoft’s chairman, suggested that the next generation of cellphones might be a better way to reach across the so-called digital divide.

Mr. Negroponte said Microsoft refused to sell its Windows software to the project at a price that would make it possible to include in his system. As a result, his laptops will come with the freely available Linux operating system, which is becoming increasingly popular in the developing world.

The idea of a laptop for every schoolchild grew out of Mr. Negroponte’s experience in giving children Internet-connected laptops in rural Cambodia. He said the first English word out of the mouths of the Cambodian students was “Google.”

Discussions between the One Laptop project and the Libyan government began as part of work being done by the Monitor Group, an international consulting firm co-founded by the economist Michael E. Porter. It is now helping the Libyans develop a national economic plan.

. . .

The first test models will be distributed to the five participating countries companies at the end of this November, according to Mr. Negroponte, and mass production is planned for June or July of 2007.

The computers come with a wireless connection, a built-in video camera, an eight-hour battery and a hand crank for recharging batteries. They will initially be priced below $150, and the price is expected to decline when they are manufactured in large numbers.

For the full story, see:

JOHN MARKOFF. "U.S. Group Reaches Deal to Provide Laptops to All Libyan Schoolchildren." The New York Times (Weds., October 11, 2006): A14.

(Note: ellipses added.)

MIT’s Nicholas Negroponte. Source of image: online version of the NYT article cited above.

Hong Kong’s Growth Was Due to Cowperthwaite’s “Positive Noninterventionism”

In Free to Choose, Milton Friedman compared Hong Kong’s free market, with India’s state control of the economy. The dynamism and growth of Hong Kong was a stark contrast to the inertia and stagnation of India. In the decades since Free to Choose, India has become more free and, alas, Hong Kong less free:

(p. A14) . . . it was sadly unsurprising to see Hong Kong’s current leader, Donald Tsang, last month declare the death of the policy on which the territory’s prosperity was built.

The really amazing phenomenon is that, for half a century, his predecessors resisted the temptation to tax and meddle. Though a colony of socialist Britain, Hong Kong followed a laissez-faire capitalist policy, thanks largely to a British civil servant, John Cowperthwaite. Assigned to handle Hong Kong’s financial affairs in 1945, he rose through the ranks to become the territory’s financial secretary from 1961-71. Cowperthwaite, who died on Jan. 21 this year, was so famously laissez-faire that he refused to collect economic statistics for fear this would only give government officials an excuse for more meddling. His successor, Sir Philip Haddon-Cave, coined the term "positive noninterventionism" to describe Cowperthwaite’s approach.

The results of his policy were remarkable. At the end of World War II, Hong Kong was a dirt-poor island with a per-capita income about one-quarter that of Britain’s. By 1997, when sovereignty was transferred to China, its per-capita income was roughly equal to that of the departing colonial power, even though Britain had experienced sizable growth over the same period. That was a striking demonstration of the productivity of freedom, of what people can do when they are left free to pursue their own interests.

For the full commentary, see:

MILTON FRIEDMAN. "Hong Kong Wrong." Wall Street Journal (Fri., October 6, 2006): A14.

(Note: ellipsis added.)

Mellon Allowed Great Innovation By Restraining Intrusive Government

(p. W4) Though scarcely known today, Andrew W. Mellon was a colossus in late 19th-century and early 20th-century America. He would come to play a major role in the management of the American economy, but first he built one of the country’s great fortunes, one that would rank him today with Bill Gates and Warren Buffett. He is now the subject of a comprehensive, if slightly grudging, biography by David Cannadine, the distinguished British historian.

Mellon is not associated with any single industry, in the way that Andrew Carnegie and John D. Rockefeller are. He was a venture and equity-fund capitalist, one of the first to function on a major scale. He and his younger brother, Dick, took over their father’s Pittsburgh-based investment and coal-mining business and expanded it into many fields, including copper, oil, petrochemicals and aluminum (Alcoa).

No banker was as gimlet-eyed; Mr. Cannadine shows Mellon shrewdly and coldly calculating every investment prospect. Yet few venture capitalists were as daring. In the 1890s, when Rockefeller was ruthlessly monopolizing the petroleum industry, Mellon didn’t flinch from setting up a competing refinery. When Mellon finally sold out to Rockefeller, he did so at a considerable profit. Several years later he came back to oil and eventually built Gulf into an industry giant.

Original Supply-Sider

But Mellon was more than an entrepreneurial industrialist. In his mid-60s he became a famous — and infamous — public servant, performing as Treasury secretary under three presidents, from 1921 to 1932. He was the original supply-sider, pushing tax cuts under Presidents Harding and Coolidge. He argued that the high tax rates left over from World War I were depressing economic activity; that lower rates would turn the economy around; that high-income earners would end up paying more and that low-income earners would be removed from the tax roles entirely.

His program was a fantastic success. The top rate was cut to 25% from 77%. The rich did indeed pay more, while low- and middle-income earners saw their tax bills shrink to nothing or next to nothing. The economy boomed. The U.S. outstripped more heavily taxed nations, such as Britain and France. Mellon also pushed painstakingly for the creation of an international monetary system to replace the one shattered by World War I. The big challenge was huge Allied war debts to the U.S. and onerous German reparations. Mellon negotiated the easiest terms that were politically possible so that trade and economies could revive.

We sometimes forget just how dynamic the 1920s were in America. The automobile became a commonplace item for working Americans; labor-saving devices, such as the washing machine, grew ever more common as well; movies and radio provided mass entertainment as never before (an experimental television broadcast was carried out in 1927); and stock ownership widened to include more members of the middle class.

It was a time of great innovation and inventiveness, and in a sense Mellon presided over it all by allowing it to happen without intrusive government policies.

For the full review, see:

STEVE FORBES. "BOOKS; The Man Who Made the Twenties Roar." The Wall Street Journal (Fri., October 6, 2006): W4.

Reference for the book:

David Cannadine. MELLON. Knopf, 2006. 779 pages, $35

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

Italy Suffers from a “Growing Spirit of Cynicism and Escapism”

Source of book image: http://ec3.images-amazon.com/images/P/0767914392.01._SS500_SCLZZZZZZZ_V57219494_.jpg

As anyone can attest who has lived in Italy even briefly, its domestic life can be gracious and sweet. The question is whether this way of life can survive the many urgent challenges enumerated by Mr. Severgnini: an abysmal fertility rate, crushing pension obligations, marginal economic growth, a sclerotic legal system, the flight abroad of the most creative young minds, and a growing spirit of cynicism and escapism.

For the full review, see:

FRANCIS X. ROCCA. "BOOKS; An Italian Challenge; Keeping la dolce vita as modernity spreads." The Wall Street Journal (Sat., September 9, 2006): P8.

The reference to the book:

Beppe Severgnini. La Bella Figura. Broadway, 2006. 217 pages, $23.95.

In the Prague of Rudolf II, “Anything Seemed Possible”

Source of book image: http://ec3.images-amazon.com/images/P/0802715516.01._SS500_SCLZZZZZZZ_V61383943_.jpg

Ambassadors, nobles and church magnates routinely visited Prague Castle during Rudolf’s reign (1576-1612); so did astronomers and astrologists, alchemists, philosophers, charlatans and anyone else with something marvelous to relate. Bureaucratic busybodies might wait months for an audience with the emperor, but his doors flew open for those with esoteric knowledge.

. . .

Prague Castle was the perfect emblem of Rudolf’s scattered interests. It contained one of the greatest painting collections in Europe — including works by Durer, Arcimboldo, Titian and Veronese. Its inventory also included Egyptian mummies, stuffed exotic birds, unicorn horns, whale teeth, bezoars (gall stones taken from the stomach of animals, thought to be antidotes to poison), the nails of Noah’s ark and one dried and preserved dragon.

If a visitor to the castle wandered into its library, he might well come across such dodgy works as "Arcana arcanissima," "De Alchemiae difficultatibus" and "Mysterium cosmographicum," many dedicated to the monarch by their grateful authors. Yet if the visitor climbed to the top of the castle’s so-called Bishop’s Tower on a starry night, he might encounter the great astronomers Tycho Brahe and Johannes Kepler charting the sky. Clearly, it was a magical moment in the history of Western civilization, when anything seemed possible. Mr. Marshall brings it all wonderfully to life.

For the full review, see:

STUART FERGUSON. "BOOKS; Sense and Sorcery in Prague; Ready for the Renaissance; but not quite prepared to give up the unicorn." The Wall Street Journal (Sat., September 9, 2006): P9.

(Note: ellipsis added.)

The book reference is:

Peter Marshall. The Magic Circle of Rudolf II. Walker, 2006. 276 pages, $24.95.

Equatorial Guinea’s Kleptocracy: More on Why Africa is Poor

Nicholas D. Kristof. Source of image: online verison of the NYT commentary cited below.

The founding president of this country was a witch doctor who murdered tens of thousands, put enemies’ heads on pikes, denounced education and spread land mines on the road out of his country to prevent people from fleeing. This was then so vile a place that an American diplomat stabbed another to death here in 1971 and claimed in his trial that he had been driven insane partly by the screams of all the people being tortured.

When the president was finally ousted in 1979, he ran off into the bush with $60 million packed in suitcases. But he was pursued, and in a shootout, the nation’s entire foreign exchange reserves burned up.

. . .

Equatorial Guinea traditionally has been Africa’s poster boy for bad governance. Even after the old witch doctor was ousted, the kleptocracy continued under Teodoro Obiang, the current president. A new book about the country, “The Wonga Coup,” notes that in 2004 President Obiang bought a Boeing 737, one of six personal planes, for $55 million, and outfitted it with a king-sized bed and gold-plated fittings in the extra-large bathroom.

Schools and clinics are needy, but Forbes lists President Obiang as the world’s eighth richest ruler, with a net worth of $600 million. Just last year, “The Wonga Coup” says, the president’s son spent the equivalent of a third of his country’s entire education budget on a vacation home in South Africa and three cars — two Bentleys and a Lamborghini.

For the full commentary, see:

NICHOLAS D. KRISTOF. "Optimism and Africa." The New York Times (Tues., October 3, 2006): A27.

(Note: ellipsis added.)

The book mentioned in the commentary is:

Roberts, Adam. The Wonga Coup: Guns, Thugs and a Ruthless Determination to Create Mayhem in an Oil-Rich Corner of Africa. PublicAffairs, 2006.

Source of book image: http://images.amazon.com/images/P/1586483714.01._SS500_SCLZZZZZZZ_V65100719_.jpg

In Egypt: The Authorities Versus the Entrepreneur

Cairo entrepreneur serves good food to willing customers. Source of image: online version of the NYT article quoted and cited below.

In The Other Path, Hernando de Soto wrote about how governments in much of the world make it nearly impossible for the poor to legally get a start as entrepreneurs. Here is a perfect example of de Soto’s point:

CAIRO, Oct. 2 — With his cart tucked beneath a highway overpass, just beside the railroad tracks and behind a parked taxi, Farouk Salem darted his eyes back and forth nervously as he awaited customers.

On most days, except during Ramadan, the sun has barely risen and worshipers are shuffling out of the nearby mosque after morning prayers as the first customers make their way to Mr. Salem. A few quick flicks of a ladle, the shaking of a bottle or two, and breakfast is ready.

Mr. Salem sells ful, the fava bean stew that is a staple of Egyptian cuisine, as a cheap, hearty breakfast for just 20 cents. But he is an unlicensed street vendor, one of the many hundreds of thousands of Egyptians who make their living in what economists here describe as Egypt’s informal work force: selling, delivering, cooking, cleaning, serving, ferrying, shoeshining, anything that will provide income.

Dr. Rashad Abdou, a professor of economics at Cairo University, estimated that the informal sector might account for as much as 60 percent of Egypt’s economy.

“As long as I keep a low profile, they don’t bother me,” Mr. Salem said on a recent day, as his brother worked behind the parked metal cart, dishing out bowls of ful. The police have forced him to move many times and have even confiscated his cart. But it is hard to keep a really low profile when the food is good and the prices are cheap.

As the sun began to heat up the morning air, customers showed up in a steady stream, some still in their pajamas.

“It’s good,” said Muhammad Abbadi. “It’s clean. And the most important thing is it’s cheap. We are poor. You see how poor we are in Egypt.”

. . .

“If the authorities want to chase me away, they will do it,” he says, his face tight and nervous. “If they want to put me in prison, they can. If they want to take my cart away, they can.”

He walked over to get some more bread as Muhammad kept ladling.