Creative Destruction – Page 23

Light in “Meet Me in St. Louis”

Source 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.”

Source of photo: http://www.thejudyroom.com/louis/pictures/judytomlarge.html

Establishments Assume New Methods Are Unsound Methods

(p. 188) For the next two years, Conway coordinated her efforts under Sutherland at PARC with Mead’s ongoing work at Caltech. But she was frustrated with the pace of progress. There was no shortage of innovative design ideas; computerized design tools had advanced dramatically since Mead’s first efforts several years before. Yet the industry as a whole continued in the old rut. As Conway put it later, the problem was “How can you take methods that are new, methods that are not in common use and therefore perhaps considered unsound methods, and turn them into sound methods?” [Conway’s italics].

She saw the challenge in the terms described in Thomas Kuhn’s popular book The Structure of Scientific Revolutions. it was the problem that took Boltzmann to his grave. It was the problem of innovation depicted by economist Joseph Schumpeter in his essays on entrepreneurship: new systems lay waste to the systems of the past. Creativity is a solution for the creator and the new ventures he launches. But it wreaks dissolution–“creative destruction,” in Schumpeter’s words– for the defenders of old methods. In fact, no matter how persuasive the advocates of change, it is very rare that an entrenched establishment will reform its ways. Establishments die or retire or fall in revolution; they only rarely transform themselves.

Source:

Gilder, George. Microcosm: The Quantum Revolution in Economics and Technology. Paperback ed. New York: Touchstone, 1990.
(Note: italics in original.)

Doctorow’s “Makers” Novel Paints Unrealistically Bleak View of Life with Creative Destruction

Source of book image: http://www.globalnerdy.com/wordpress/wp-content/uploads/2009/11/makers.jpg

Awhile back I mentioned a science fiction book that made use of the process of creative destruction. Here’s a discussion of another one—called Makers, it apparently adopts the unlikely premise that a world of creative destruction would have a 20% unemployment rate. (I say “unlikely” because the evidence is that in a world of creative destruction, as many new jobs are created as old ones are destroyed.)

(p. A19) Consider the world of “Makers,” the latest by best-selling writer Cory Doctorow. This novel is set in a not-too distant future, when the creative destruction of technological change has created an economy so efficient, with profit margins so thin, that traditional companies can hardly stay in business.

The inventor-heroes of “Makers” take technology to its conclusion: They figure out a way to use three-dimensional printers to produce copies of machines and most anything else at close to no cost. This sparks “New Work,” with geeky investment bankers scouring the country to fund promising artisans who use the technology to build things cheaply. The heroes also run a series of entertainment rides across the country in abandoned Wal-Marts, until Disney unleashes its lawyers on them.
Mr. Doctorow, a Canadian living in London, has a keen eye for the pressures on contemporary business. In the novel, an M.B.A. brought in to work with the inventors explains, “The system makes it hard to sell anything above the marginal cost of goods, unless you have a really innovative idea, which can’t stay innovative for long, so you need continuous invention and reinvention, too.”
. . .
In the world of “Makers,” and perhaps in our own world, “we’re approaching a kind of pure and perfect state now, with competition and invention getting easier and easier–it’s producing a kind of superabundance.”
Mr. Doctorow paints a bleak picture of the process of getting there, even if many of us take a more benign view of increasingly efficient capitalism. “Makers” features widespread unemployment, with 20% of workers relocating to look for jobs. Even with scientific advances–obesity is solved, for example–life is brutal. There are squatter neighborhoods alongside abandoned strip malls.

For the full story, see:

L. GORDON CROVITZ. “Technology Is Stranger Than Fiction; Best-selling writer Cory Doctorow on change and its discontents.” The Wall Street Journal (Mon., NOVEMBER 23, 2009): A19.
(Note: ellipsis added.)

John Mackey: “I Believe in the Dynamic Creativity of Capitalism”

Whole Foods CEO John Mackey. Source of the caricature: online version of the WSJ interview quoted and cited below.

(p. A11) “I honestly don’t know why the article became such a lightning rod,” says John Mackey, CEO and founder of Whole Foods Market Inc., as he tries to explain the firestorm caused by his August op-ed on these pages opposing government-run health care.
. . .
. . . his now famous op-ed incited a boycott of Whole Foods by some of his left-wing customers. His piece advised that “the last thing our country needs is a massive new health-care entitlement that will create hundreds of billions of dollars of new unfunded deficits and move us closer to a complete government takeover of our health-care system.” Free-market groups retaliated with a “buy-cott,” encouraging people to purchase more groceries at Whole Foods.
. . .
What Mr. Mackey is proposing is more or less what he has already implemented at his company–a plan that would allow more health savings accounts (HSAs), more low-premium, high-deductible plans, more incentives for wellness, and medical malpractice reform. None of these initiatives are in any of the Democratic bills winding their way through Congress. In fact, the Democrats want to kill HSAs and high-deductible plans and mandate coverage options that would inflate health insurance costs.
. . .
Mr. Mackey’s latest crusade involves traveling to college campuses across the country, trying to persuade young people that business, profits and capitalism aren’t forces of evil. He calls his concept “conscious capitalism.”
What is that? “It means that business has the potential to have a deeper purpose. I mean, Whole Foods has a deeper purpose,” he says, now sounding very much like a philosopher. “Most of the companies I most admire in the world I think have a deeper purpose.” He continues, “I’ve met a lot of successful entrepreneurs. They all started their businesses not to maximize shareholder value or money but because they were pursuing a dream.”
Mr. Mackey tells me he is trying to save capitalism: “I think that business has a noble purpose. It’s not that there’s anything wrong with making money. It’s one of the important things that business contributes to society. But it’s not the sole reason that businesses exist.”
What does he mean by a “noble purpose”? “It means that just like every other profession, business serves society. They produce goods and services that make people’s lives better. Doctors heal the sick. Teachers educate people. Architects design buildings. Lawyers promote justice. Whole Foods puts food on people’s tables and we improve people’s health.”
Then he adds: “And we provide jobs. And we provide capital through profits that spur improvements in the world.
. . .
“I don’t think anybody’s too big to fail,” he says. “If a business fails, what happens is, there are still assets, and those assets get reorganized. Either new management comes in or it’s sold off to another business or it’s bid on and the good assets are retained and the bad assets are eliminated. I believe in the dynamic creativity of capitalism, and it’s self-correcting, if you just allow it to self-correct.”
That’s something Washington won’t let happen these days, which helps explain why Mr. Mackey felt compelled to write that the Whole Foods health-insurance program is smarter and cheaper than the latest government proposals.

For the full interview, see:
STEPHEN MOORE. “The Conscience of a Capitalist; The Whole Foods founder talks about his Journal health-care op-ed that spawned a boycott, how he deals with unions, and why he thinks CEOs are overpaid.” The Wall Street Journal (Sat., OCTOBER 3, 2009): A11.
(Note: ellipses added.)

The Economist Starts a Column Named “Schumpeter”

Source of Schumpeter stairway to innovation graphic (my name for it): http://media.economist.com/images/20090919/D3809WB0.jpg

Thanks to Shane Eloe for alerting me that in their Sept. 19th issue, The Economist started a column named “Schumpeter.” Here are a couple of paragraphs from their first installment:

(p. 78) Joseph Schumpeter was one of the few intellectuals who saw business straight. He regarded business people as unsung heroes: men and women who create new enterprises through the sheer force of their wills and imaginations, and, in so doing, are responsible for the most benign development in human history, the spread of mass affluence. “Queen Elizabeth [I] owned silk stockings,” he once observed. “The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort…The capitalist process, not by coincidence but by virtue of its mechanism, progressively raises the standard of life of the masses.” But Schumpeter knew far too much about the history of business to be a cheerleader. He recognised that business people are often ruthless monomaniacs, obsessed by their dreams of building “private kingdoms” and willing to do anything to crush their rivals.

Schumpeter’s ability to see business straight would be reason enough to name our new business column after him. But this ability rested on a broader philosophy of capitalism. He argued that innovation is at the heart of economic progress. It gives new businesses a chance to replace old ones, but it also dooms those new businesses to fail unless they can keep on innovating (or find a powerful government patron). In his most famous phrase he likened capitalism to a “perennial gale of creative destruction”.

For the full commentary, see:
“Schumpeter; Taking flight; This week we launch a new column on business and management. Why call it Schumpeter?” The Economist (Sat., Sept. 19, 2009): 78.
(Note: the online version was dated Thurs., Sept. 17th)
(Note: ellipsis in original.)

Scientists Believe Life Emerged from a Process of “Creative Destruction” and Global Warming

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

(p. A9) In a paradox of creation, new evidence suggests that devastating avalanches of cosmic debris may have fostered life on Earth, not annihilated it. If so, life on our planet may be older than scientists previously thought — and more persistent.

Astronomers world-wide have been transfixed by a roiling gash the size of Earth in the atmosphere of Jupiter, caused by an errant comet or asteroid that smashed into the gas giant last month. The lingering turbulence is an echo of a cataclysmic bombardment that shaped the origin of life here 3.9 billion years ago, when millions of asteroids, comets and meteors pummeled our planet.
. . .
But in their super-heated plunge through the atmosphere, these asteroids and meteors may have helped create conditions ideal for emerging life. “Everyone focuses on the meteor that hits the ground,” says geochemist Richard Court at London’s Imperial College. “No one thinks about the products of its journey that get pumped into the atmosphere.”
As they vented, they collectively could have imported billions of tons of life-sustaining water into the air every year, Dr. Court and his colleague Mark Sephton recently determined. They calculated that these showers of volatile rocks delivered 10 times the daily outflow of the Mississippi River every year for 20 million years. By analyzing the fumes emitted under such extreme heat, they discovered these rocks also could have injected billions of tons of carbon dioxide into the air every year.
Combined with so much water vapor, the carbon dioxide could have induced a global greenhouse effect. That could have kept any life emerging on Earth safely in a planetary incubator at a time when the planet might easily have frozen because the Sun radiated 25% less energy than today. “The amount of CO2 that was produced is about the same we produce today through fossil fuel use and we know that is a climate-changing volume,” says Dr. Court.
. . .
“It is literally a revolution in our ideas about how our solar system evolved,” says asteroid expert William Bottke at the Southwest Research Institute. “It could be that our form of life today — every living thing that we see today — is due to this bombardment that happened 3.9 billion years ago.”

For the full commentary, see:
ROBERT LEE HOTZ. “SCIENCE JOURNAL; Some Creative Destruction on a Cosmic Scale; Scientists Say Asteroid Blasts, Once Thought Apocalyptic, Fostered Life on Earth by Carrying Water and Protective Greenhouse Gas.” The Wall Street Journal (Fri., AUGUST 14, 2009): A9.
(Note: ellipses added.)

Creative Destruction Is Scary, but “Inevitable and Probably Even Desirable”

(p. 5) Development is a complicated phenomenon. Decades before he popularized the phrase “creative destruction,” Joseph Schumpeter, the Austrian School economist, was honing his ideas about innovation and disruptive change in “The Theory of Economic Development.”

Disruptive change, creative destruction, is what I’m living every day. In the big cities, India’s economic development can seem so simple. Business thrives, the middle and upper classes are celebrating, and the country is moving inexorably ahead.
But around here, where a way of life is disappearing and no one knows what will take its place, where someone seems to lose for everyone who wins, it’s a lot harder to know what to make of India’s economic boom. From my vantage point, development seems both wonderful and frightening; it is both inspiring and, at times, dispiriting.
People sometimes ask me how I feel about India’s economic development. I tell them the truth. I say I don’t know. I say I feel ambivalent about the passing of a world I knew as a child, a transition that I know is inevitable and probably even desirable. But I haven’t reconciled myself to it yet.

For the full commentary, see:
AKASH KAPUR. “An Indian Says Farewell to Poverty, With Jitters.” The New York Times, Week in Review Section (Sun., August 8, 2009): 5.

“Established Experts Flee in Horror to All Available Caves and Cages”

(p. 96) While science and enterprise open vast new panoramas of opportunity, our established experts flee in horror to all available caves and cages, like so many primitives, terrified by freedom and change.

Source:
Gilder, George. Recapturing the Spirit of Enterprise: Updated for the 1990s. updated ed. New York: ICS Press, 1992.

Wattenberg’s Corporate Graveyard Illustrates Creative Destruction

The clip is the famous corporate graveyard scene from Ben Wattenberg’s 1977 “In Search of the Real America: A Challenge to the Chorus of Failure and Guilt.” The scene appears in the first of 13 episodes, the episode called “There’s No Business Like Big Business” which received the Tuck Award for the Advancement of Economic Understanding. The episode was produced and written by Austin Hoyt.
The corporate graveyard scene illustrates that under entrepreneurial capitalism, companies prosper that innovate in better serving the consumer.

URL address for graveyard scene video clip:
http://www.youtube.com/watch?v=DDMNYLiBexo

Wattenberg discussed the “In Search of the Real America” program, and the graveyard scene, in his recent book Fighting Words:

(p. 307) The central point of the program was that if big American corporations didn’t compete effectively, they suffer, and many would go out of business.

The producers had the wonderful idea of a visual of a graveyard on a foggy night, with headstones made from papier-mâché and a smoke machine providing the fog. I walked through the mock cemetery in a raincoat and read off the names of corporate tombstones, which included Central Leather (the seventeenth largest company in 1917), International Mercantile Marine (the eleventh largest in 1917), as well as failures like Baldwin Locomotive Works, American Woolen, Packard Motor Car, International Match, Pierce Petroleum, Curtiss-Wright, United Verde Mining, and Consolidation Coal.2 When we showed the Central Leather tombstone, a sound effect mooed; behind International Mercantile Marine’s, a steamship horn bellowed (I love shtick).
. . .
2 The program was based on an article by James Michaels, editor of Forbes. For many years, people would come up to me in airports, recalling that one scene and complementing me on the program.

Source:

Wattenberg, Ben J. Fighting Words: A Tale of How Liberals Created Neo-Conservatism. New York: Thomas Dunne Books, 2008.
(Note: ellipsis added.)
(Note: I have corrected a few obvious errors involving the omission and placement of commas in the list of companies in the text of Wattenberg’s Fighting book.)

. . . , Mr. Michaels graduated from Harvard in 1943 with a bachelor’s degree in economics.

Source:
RICHARD PÉREZ-PEÑA. “James Michaels, Longtime Forbes Editor, Dies at 86.” The New York Times (October 4, 2007).
(Note: of course, Joseph Schumpeter was a member of the Harvard faculty in 1943, and published the first edition of Capitalism, Socialism and Democracy in 1942.)

Source of book image: http://media.us.macmillan.com/jackets/500H/9780312382995.jpg

Economists Better at Measuring Destruction than Creativity

(p. 49) As entrepreneurs accelerate the processes of creative destruction that impel all economic advance, the economists measure the destruction, but not the creativity. They see the sinking value of existing capital but neglect the new ideas, hopes, enthusiasms, and plans of entrepreneurs.

Source:
Gilder, George. Recapturing the Spirit of Enterprise: Updated for the 1990s. updated ed. New York: ICS Press, 1992.

Today’s Middle Class Citizens of the U.S. Are Better Off Than Emperor Tiberius, Emperor Napoleon, and Saint Thomas Aquinas

In conversation at the HES meeting in Denver, Pete Boettke mentioned that the opportunity cost of blogging can be very high.
The passage below is from a draft of a key chapter of a long-awaited book authored by Berkeley economist and world-renowned blogger Brad DeLong. (At least in this case, Boettke is right.)

(p. 3) Could the Emperor Tiberius have eaten fresh grapes in January? Could the Emperor Napoleon have crossed the Atlantic in a night, or gotten from Paris to London in two hours? Could Thomas Aquinas have written a 2000-word letter in two hours–and then dispatched it off to 1,000 recipients with the touch of a key, and begun to receive replies within the hour? Computers, automobiles, airplanes, VCR’ s, washing machines, vacuum cleaners, telephones, and other technologies–combined with mass production–give middle-class citizens of the United States today degrees of material wealth–control over commodities, and the ability to consume services–that previous generations could barely imagine.

Source:
DeLong, J. Bradford. “Cornucopia: The Pace of Economic Growth in the Twentieth Century.” NBER Working Paper, w7602, 2000.