Creative Destruction – Page 17

Greenspan’s Epiphany: As Entitlements Rise, Savings Fall

Source of book image: http://s.wsj.net/public/resources/images/BN-AB661_bkrvgr_GV_20131021130523.jpg

(p. C11) In his new book “The Map and the Territory,” to be released on Tuesday, Mr. Greenspan, 87, goes on a hunt for what has gone wrong in American politics and in the U.S. economy.
. . .
Mr. Greenspan’s biggest revelation came one day about a year ago when he was playing with gross domestic savings numbers. What he found, to his surprise and initial skepticism, was that an increase in entitlements has closely corresponded to a decline in the country’s savings. “We had this extraordinary increase in benefits, with each party trying to outbid the other,” he says. “That practice has been eroding the country’s flow of savings that’s so critical in financing our capital investment.” The decline in savings has been partly offset by borrowing from abroad, which brings us to our current foreign debt: “$5 trillion and counting,” he says.
. . .
Studying the minutiae of the events leading to the financial crisis brought to mind some lessons from his famous friendship, from the 1950s on, with the late Objectivist philosopher Ayn Rand.
. . .
Mr. Greenspan then believed in analysis based mainly on hard science and empirical facts. Rand told him that unless he considered human nature and its irrational side, he would “miss a very large part of how human beings behaved.” At the time they weren’t discussing economics, but today he realizes the full impact of emotions and instincts on markets. He also has come to admire psychologist and Princeton University professor emeritus Daniel Kahneman’s work applying psychological insights to economic theory, for which he won a Nobel Prize in 2002.
. . .
With his new book, Mr. Greenspan hopes to provide politicians and the public with a road map to avoid making the same mistakes again. His suggestions include reducing entitlements, embracing “creative destruction” by letting facilities with cutting-edge technology displace those with low productivity, and fixing the political system by encouraging bipartisanship.

For the full interview/review, see:
ALEXANDRA WOLFE, interviewer/reviewer. “WEEKEND CONFIDENTIAL; Alan Greenspan.” The Wall Street Journal (Sat., Oct. 19, 2013): C11.
(Note: ellipses added.)
(Note: the online version of the interview/review has the date Oct. 18, 2013, and has the title “WEEKEND CONFIDENTIAL; Alan Greenspan: What Went Wrong; The former Fed chairman on where the economy went wrong, where he went wrong–and Ayn Rand.”)

The book discussed is:
Greenspan, Alan. The Map and the Territory: Risk, Human Nature, and the Future of Forecasting. New York: Penguin Press, 2013.

After 25 Years of Government Harassment, A&P Was Finally Allowed to Lower Prices for Consumers

The two main types of creative destruction are: 1.) new products and 2.) process innovations. Much has been written about the new product type; much less about the process innovation type. Marc Levinson has written two very useful books on process innovations that are important exceptions. The first is The Box and the second is The Great A&P.

(p. A13) A prosecutor in Franklin Roosevelt’s administration called it a “giant blood sucker.” A federal judge in Woodrow Wilson’s day deemed it a “monopolist,” and another, during Harry Truman’s presidency, convicted it of violating antitrust law. The federal government investigated it almost continuously for a quarter-century, and more than half the states tried to tax it out of business. For its strategy of selling groceries cheaply, the Great Atlantic & Pacific Tea Company paid a very heavy price.
. . .
A&P was Wal-Mart long before there was Wal-Mart. Founded around the start of the Civil War, it upset the tradition-encrusted tea trade by selling teas at discount prices by mail and developing the first brand-name tea. A few years later, its tea shops began to stock spices, baking powder and canned goods, making A&P one of the first chain grocers.
Then, in 1912, John A. Hartford, one of the two brothers who had taken over the company from their father, had one of those inspirations that change the course of business. He proposed that the company test a bare-bones format at a tiny store in Jersey City, offering short hours, limited selection and no home delivery, and that it use the cost savings to lower prices. The A&P Economy Store was an instant success. The Great A&P was soon opening one and then two and then three stores per day. By 1920, it had become the largest retailer in the world.
. . .
While shoppers flocked to A&P’s 16,000 stores, small grocers and grocery wholesalers didn’t share their enthusiasm. The anti-chain-store movement dates back at least to 1913, when the American Fair-Trade League pushed for laws against retail price-cutting.
. . .
Thanks in good part to the Hartfords’ tenacity, the restraints on discount retailing began to fade away in the 1950s. Chain-store taxes were gradually repealed, and state laws limiting price competition to protect mom and pop were taken off the books. By 1962, when Wal-Mart, Target, Kmart, and other modern discount formats were born, the pendulum had swung in consumers’ favor.

For the full commentary, see:
MARC LEVINSON. “When Creative Destruction Visited the Mom-and-Pops; The A&P grocery company may be nearing its sell-by date, but a century ago it was a fresh, revolutionary business.” The Wall Street Journal (Sat., Oct. 12, 2013): A13.
(Note: ellipses added.)
(Note: the online version of the commentary has the date Oct. 11, 2013, and had the title “Marc Levinson: When Creative Destruction Visited the Mom-and-Pops; The A&P grocery company may be nearing its sell-by date, but a century ago it was a fresh, revolutionary business.”)

Levinson’s book on A&P is:
Levinson, Marc. The Great A&P and the Struggle for Small Business in America. New York: Hill and Wang, 2011.

Silicon Valley Is Open to Creative Destruction, But Tired of Taxes

(p. A15) Rancho Palos Verdes, Calif.
When the howls of creative destruction blew through the auto and steel industries, their executives lobbied Washington for bailouts and tariffs. For now, Silicon Valley remains optimistic enough that its executives don’t mind having their own businesses creatively destroyed by newer technologies and smarter innovations. That’s an encouraging lesson from this newspaper’s recent All Things Digital conference, which each year attracts hundreds of technology leaders and investors.
. . .
In a 90-minute grilling by the Journal’s Walt Mossberg and Kara Swisher, Apple Chief Executive Tim Cook assured the audience that his company has “some incredible plans that we’ve been working on for a while.”
Mr. Cook’s sunny outlook was clouded only by his dealings with Washington. He was recently the main witness at hearings called by Sen. Carl Levin, a Michigan Democrat, who accused Apple of violating tax laws. In fact, Apple’s use of foreign subsidiaries is entirely legal–and Apple is the largest taxpayer in the U.S., contributing $6 billion a year to the government’s coffers.
Mr. Cook put on a brave face about the hearings, saying, “I thought it was very important to go tell our side of the story and to view that as an opportunity instead of a pain in the [expletive].” Mr. Cook’s foul language was understandable. “Just gut the [tax] code,” he told the conference. “It’s 7,500 pages long. . . . Apple’s tax return is two feet high. It’s crazy.”
When the audience applauded, Ms. Swisher quipped, “All right, Rand Paul.” A woman shouted: “No, I’m a Democrat!” One reason the technology industry remains the center of innovation may be that many technologists of all parties view trips to Washington as a pain.

For the full commentary, see:
L. GORDON CROVITZ. “INFORMATION AGE; Techies Cheer Creative Destruction.” The Wall Street Journal (Mon., June 3, 2013): A15.
(Note: ellipsis between paragraphs added; italics in original; ellipsis, and bracketed words, within next-to-last paragraph, in original.)
(Note: the online version of the commentary has the date June 2, 2013.)

Dohrmann and Quevedo Survive Creative Destruction of Inacom

“Cosentry, an Omaha-based provider of data center storage and managed technology services, has a new CEO, Brad Hokamp, center. With him at the Cosentry data center in Papillion are company founders Kevin Dohrmann, left, and Manny Quevedo.” Source of caption and photo: online version of the Omaha World-Herald article quoted and cited below.

Innovation through creative destruction brings us the new products and processes that make our lives longer, richer and more satisfying. The major downside of creative destruction is the job loss of those working for firms that are creatively destroyed. Sometimes, in class, I use Omaha’s Inacom as a concrete example. Inacom was a value-added retailer of computer equipment. They would buy PCs from IBM, Compaq and the like, then add software and hardware, and re-sell and install for firms, at a mark-up. They were creatively destroyed by Dell’s process innovation of customizing and selling direct, at much lower prices than Inacom charged. When I arrived in Omaha, Inacom was one of a handful of Fortune 500 firms. Now Inacom is gone. But just because a firm is creatively destroyed does not imply that all those who worked for the firm are creatively destroyed. Dohrmann and Quevedo were executives at Inacom. They had the skills, knowledge, resilience and work ethic to create their own entrepreneurial startup that has thrived. Not everyone can do what Dohrmann and Quevedo did. But everyone should be able to improve their skills, knowledge, resilience, and work ethic, so that if creative destruction destroys the firm that employs them, they will still survive and possibly thrive.

(p. 1D) Cosentry’s regional data center footprint has grown far from its “humble beginnings” 12 years ago of just 4,000 square feet in the old Southroads Mall in Bellevue.

“Everyone saw it as a mall that was in deterioration, and I walked in and saw the most beautiful building in Omaha,” co-founder Manny Quevedo said, (p. 3D) remembering solid walls and below-grade space for computer systems.
Investments from Omaha firms Waitt Co. and McCarthy Capital along the way helped the firm grow; it was sold in 2011 to Boston private equity firm TA Associates but still has its headquarters at 127th Street and West Dodge Road.
. . .
The company’s workforce has approximately doubled in the last five years to nearly 200, more than half of them in Nebraska, and will continue to grow gradually with the expansion as Cosentry hires more engineers and technicians, Quevedo said.
Today the company has six data centers, including two each in the Kansas City and Sioux Falls, S.D., metropolitan areas. If you use utilities or health care services or do any shopping or banking in the region, there’s a chance some of your information has been stored or processed through Cosentry’s servers.
Cosentry started with what Quevedo said was a handful of clients and grew to hundreds within its first five years.
. . .
(p. 3D) Cosentry Timeline
2001: With investment from Waitt Co., Cosentry is started by Manny Quevedo and Kevin Dohrmann, former employees of InaCom, the former Omaha Fortune 500 computer dealer that began as a division of Valmont Industries but merged with VanStar of Atlanta in 2000 and later declared bankruptcy. Cosentry creates a data center in Bellevue.
2005: Cosentry, also called IPR Inc., sold its IP Revolution division to a Kansas firm, Choice Solutions. IP Revolution sold voice and data communications services and systems. Cosentry doubles the size of its Bellevue data center and expands to the Kansas City and Sioux Falls, S.D., markets.
2008: Omaha investment firm McCarthy Capital invests in the firm. At the time, Cosentry had 95 employees.
2010: Cosentry cuts the ribbon on the $26 million Midlands Data Center in Papillion, a joint project with Alegent Health, which uses the center to store electronic medical records.
2011: Boston investment firm TA Associates buys Cosentry for an undisclosed amount from McCarthy and Waitt. The local management team continues to operate and have an ownership stake in Cosentry. The firm expands with second data centers in both the Sioux Falls and Kansas City markets.
2013: Cosentry refinances its credit facilities to provide up to $100 million to enable expansion, including the expansion of the Midlands Data Center. Today, Cosentry has nearly 200 employees and six data centers in three metropolitan areas.

For the full story, see:
Barbara Soderlin. “A Growing Tech Footprint: As Businesses’ Data Storage Needs Expand, Cosentry Adds to Its Papillion Center.” Omaha World-Herald (MONDAY, AUGUST 26, 2013): 1D & 3D.
(Note: ellipses added; bold in original print version of article.)
(Note: the online version of the article has the title “As Businesses’ Data Storage Needs Expand, Cosentry Adds to Its Papillion Center.”)

“Scott Capps of Cosentry’s Papillion data center with the cooling system that helped Cosentry earn an Energy Star certification, which is given by the Environmental Protection Agency based on energy efficiency and lower emissions. It’s the only data center in Nebraska with the certification.” Source of caption and photo: the archive online version of the Omaha World-Herald article quoted and cited above.

“Better Coffee Rockefeller’s Money Can’t Buy”

“Page Morton Black, a cabaret singer, and William Black, the founder of the Chock Full o’Nuts company, in the early 1960s.” Source of caption and photo: online version of the NYT article quoted and cited below.

(p. A17) For Gothamites of a certain vintage, it was . . . a part of life . . . — a jaunty little waltz, its lyrics connoting warmth, fiscal security and celestial reward:

Chock Full o’Nuts is that heavenly coffee,

Heavenly coffee, heavenly coffee.
Chock Full o’Nuts is that heavenly coffee,
Better coffee a millionaire’s money can’t buy.

Page Morton Black, the cabaret singer whose sprightly rendition of that song in radio and television ads was indelibly engraved on New Yorkers’ brains at midcentury, died on Sunday [July 21, 2013] at her home in the Premium Point enclave of New Rochelle, N.Y. She was 97.
. . .
Mrs. Black, the widow of William Black, the founder of the Chock Full o’Nuts company, curtailed her singing career after their marriage. But her voice lived on in the jingle, which was broadcast for more than 20 years.
. . .
The jingle’s original last line, “Better coffee Rockefeller’s money can’t buy,” was changed in 1957, after John D. Rockefeller Jr. and his family complained.
. . .
Chock Full o’Nuts, now owned by Massimo Zanetti Beverage USA, has revived the jingle, in a new arrangement, for its contemporary ads. The lyrics have been adjusted for inflation, with “billionaire” replacing “millionaire” in the last line.

For the full obituary, see:
MARGALIT FOX. “Page Morton Black, 97; Sang Heavenly Jingle.” The New York Times (Tues., July 23, 2013): B3.
(Note: ellipses, and bracketed date, added; jingle italicized and indented in print version of obituary, by not online version.)
(Note: the online version of the obituary has the title “Page Morton Black, Who Sang Heavenly Jingle, Dies at 97.”)

Steel Bankruptcies Led to Better Steel Industry Processes

(p. 3) A few years ago, an industry whose history and mythology were indelible parts of the American identity was dying. The great steel mills of Pennsylvania and the Midwest had literally built this country, but the twin burdens of competition and self-inflicted wounds had brought them to the edge of extinction.
. . .
Yet steel’s savior was not the government bailouts it ardently sought but exactly what it so long tried to avoid: bankruptcy. Only when the companies failed were they successfully slimmed down and retooled into smaller but profitable ventures.
. . .
Bethlehem Steel, whose steel was used in the Hoover Dam, the Chrysler building and the George Washington Bridge, filed for bankruptcy in October 2001. It was followed by National Steel, Weirton Steel, Georgetown Steel and many others. The pain was great.
And necessary, some say. “If the steel companies had gotten all they wanted in terms of loan guarantees and import quotas, they would never have gotten better,” said Richard Fruehan, director of the Sloan Study on Competitiveness in the Steel Industry. “The bankruptcies forced their hand.”

For the full commentary, see:
DAVID STREITFELD. “THE NATION; Is Steel’s Revival a Model for Detroit?” The New York Times, Week in Review Section (Sun., November 23, 2008): 3.
(Note: ellipses added.)
(Note: the online version of the commentary is dated November 22, 2008.)

Record Companies Refused to See Efficiency of Napster Distribution System

Source of book image: online version of the WSJ review quoted and cited below.

(p. A15) . . . the central character in “Appetite for Self-Destruction” is technological change.
. . .
Record labels scrambled to negotiate with Napster and develop a legal version of the service with multiple revenue streams. The attempts all failed. In Mr. Knopper’s telling, there were unreasonable demands on all sides. But he faults music executives for “cling[ing] to the old, suddenly inefficient model of making CDs and distributing them to record stores. . . . In this world, the labels controlled — and profited from — everything.” In the new world being ushered in by Napster, he writes, control was shifting “to a snot-nosed punk and his crazy uncle.”
The labels’ inability to reach an agreement with Napster destroyed “the last chance for the record industry as we know it to stave off certain ruin,” Mr. Knopper writes in a typically overheated passage. Had a deal been consummated, he suggests, a legal version of Napster might have generated revenues of $16 billion in 2002 and saved the industry. Whether or not the author’s estimate is accurate, his larger point remains: The music industry’s big mistake was trying to protect a business model that no longer worked. Litigation would not keep music consumers offline.

For the full review, see:
JEREMY PHILIPS. “BUSINESS BOOKSHELF; Spinning Out of Control; How the record industry missed out on a chance to compete in a new digital world.” The Wall Street Journal (Weds., February 11, 2009): A15.
(Note: first two ellipses added; third ellipsis in original.)

The book under review is:
Knopper, Steve. Appetite for Self-Destruction: The Spectacular Crash of the Record Industry in the Digital Age. New York: Free Press, 2009.

Unemployment Increases Risk of Heart Attack

As a defender of the process of innovation through creative destruction, I try to be alert to evidence on creative destruction’s benefits and costs. The highest cost is usually viewed as technological unemployment. The evidence below will have to be examined and, if sound, added to the costs.

(p. D6) Unemployment increases the risk of heart attack, a new study reports, and repeated job loss raises the odds still more.
. . .
After adjusting for well-established heart attack risks — age, sex, smoking, income, hypertension, cholesterol screening, exercise, depression, diabetes and others — the researchers found that being unemployed also increased the risk of a heart attack, by an average of 35 percent.

For the full story, see:
NICHOLAS BAKALAR. “Job Loss Raises Threat of Heart Attack.” The New York Times (Tues., November 27, 2012): D6.
(Note: ellipsis added.)
(Note: the online version of the story has the date November 26, 2012.)

The Dupre article mentioned above, is:
Dupre, Matthew E., Linda K. George, Guangya Liu, and Eric D. Peterson. “The Cumulative Effect of Unemployment on Risks for Acute Myocardial Infarction.” Archives of Internal Medicine 172, no. 22 (Dec. 10, 2012): 1731-37.
(Note: the Archives of Internal Medicine has been re-named JAMA Internal Medicine.)

Business Cycles May Arise from “the Summation of Random Causes,” Rather than from Creative Destruction

The Slutsky result summarized below would seem to imply that you can explain business cycles without fingering creative destruction as the culprit, as Schumpeter had seemed to do. The costs of creative destruction are thus reduced, and the case for creative destruction strengthened.

(p. 232) Phil Davies and Joe Mahon investigate “The Meaning of Slutsky.” “A middleaged professor working at a Moscow think tank, [Eugen] Slutsky was virtually unknown to economists in Europe and the United States when he published his landmark paper on cyclical phenomena in 1927. In a bold statistical experiment, Slutsky demonstrated that random numbers subjected to statistical calculations similar to those used to reveal trends in economic time-series formed wavelike patterns indistinguishable from business cycles. The implication was that a similar stochastic process–‘the summation of random causes,’ as Slutsky described it–might be at work in the actual economy, causing prosperity to ebb and flow without the agency of sunspots, meteorological patterns or other cyclical forces. ‘That was a hell of an idea,’ said Robert Lucas, a University of Chicago economist who pioneered modern business cycle theory, in an interview. ‘It was just a huge jump from what anyone had done.’

Source:
Taylor, Timothy. “Recommendations for Further Reading.” Journal of Economic Perspectives 24, no. 2 (Spring 2010): 227-34.
(Note: bracketed name in original.)

The published version of the article summarized by Taylor is:
Davies, Phil, and Joe Mahon. “The Meaning of Slutsky.” The Region (Dec. 2009): 13-17, 42-46.

Personal DNA Data, Smart Phones, and the Social Network Can Democratize Medicine

(p. 236) With the personal montage of your DNA, your cell phone, your social network—aggregated with your lifelong health information and physiological and anatomic data—you are positioned to reboot the future of medicine. Who could possibly be more interested and more vested in your data? For the first time, the medical world is getting democratized. Think of the priests before the Gutenberg printing press. Now, nearly six hundred years later, think of physicians and the creative destruction of medicine.

Source:
Topol, Eric. The Creative Destruction of Medicine: How the Digital Revolution Will Create Better Health Care. New York: Basic Books, 2012.

Progress Will Slow If Consumers Wait for Doctors to Creatively Destroy Medicine

(p. 195) . . . it remains unclear whether there is adequate plasticity of a plurality of physicians to embrace the digital world and acknowledge that the era of paternalism is passé. My sense is that young physicians who are digital natives will be likely to assimilate but that it will be quite difficult for the vast majority who are in practice and inculcated with an older idea of how medical care should be rendered. Eventually there will be enough digital native physicians to take charge, but that will take decades to be accomplished. In the meantime, consumers are fully capable of leading the movement and contributing to medicine’s creative destruction. And so they must.

Source:
Topol, Eric. The Creative Destruction of Medicine: How the Digital Revolution Will Create Better Health Care. New York: Basic Books, 2012.
(Note: ellipsis added.)