Creative Destruction – Page 24

Do Recessions Sometimes Encourage Creative Destruction?

Source of image: online version of the NYT article quoted and cited below.

(p. B1) The dot-com bust earlier in the decade dragged down high-fliers like Sun Microsystems and America Online but set the stage for a new generation of Web powerhouses like Google and other innovative Internet software companies like Salesforce.com, founded on disrupting the status quo.

The recession of the early 1990s sent I.B.M., then the dominant force in technology, into a five-year tailspin. But it also propelled Microsoft and Compaq, later acquired by Hewlett-Packard, and Dell to the forefront of computing.

Indeed, Silicon Valley may be one of the few places where businesses are still aware of the ideas of Joseph Schumpeter, an Austrian economist who wrote about business cycles during the first half of the last century. He said the lifeblood of capitalism was “creative destruction.” Companies rising and falling would unleash innovation and in (p. B4) the end make the economy stronger.

Recessions “can cause people to think more about the effective use of their assets,” said Craig R. Barrett, the retiring chairman of Intel, who has seen 10 such downturns in his long career. “In the good times, you can get a bit careless or not focused as much on efficiency. In bad times, you’re forced to see if there is a technology” that will help.

So who’s up, who’s down and who’s out this time around? Microsoft’s valuable Windows franchise appears vulnerable after two decades of dominance. Revenue for the company’s Windows operating system fell for the first time in history in the last quarter of 2008. The popularity of Linux, a free operating system installed on many netbooks instead of Windows, forced Microsoft to lower the prices on its operating system to compete.

Intel’s high-power processors are also under assault: revenue tumbled by 23 percent last quarter, marking the steepest decline since 1985.

Meanwhile, more experimental but lower-cost technologies like netbooks, Internet-based software services (called cloud computing) and virtualization, which lets companies run more software on each physical server, are on the rise.

For the full story, see:

BRAD STONE and ASHLEE VANCE. “$200 Laptops Break a Business Model.” The New York Times (Mon., January 25, 2009): B1 & B4.

Larry Moss Made a Difference

Laurence S. Moss

Source of photo: http://www3.babson.edu/academics/faculty/lmoss.cfm

On Sunday (3/8/09) I learned that Larry Moss passed away on February 24, 2009.
Larry was full of the joy of life. He was intense. He was an amateur magician, and a wit, and an energetic conversationalist. I used to run into him once a year at the History of Economics Society meetings, and always enjoyed our conversations.
He was a neo-Austrian, though not “pure” enough for some of the ultra-Rothbardians. I first met him at a long-weekend seminar in Austrian economics when I was a graduate student, and he was a presenter.
I remember that he and I thought that the dialogue would be richer, and the neo-Austrian position ultimately strengthened, if its defenders understood better some of the alternative positions. So we announced a kind of rump session during one of the free-time periods. During this session, Larry gave the attendees a brief summary of what Walras had been up to, and I summarized Becker’s paper on the robustness of the law of demand to various forms of irrational and habitual behavior.
If memory serves, we suffered some mild heckling, and Larry was more severely criticized for disloyalty to the cause. (I cannot prove it, but I believe he paid a price for that in terms of invitations to future similar gatherings.)
I did not follow Larry’s research systematically, but know that he wrote the definitive account of Mountifort Longfield’s economics. He also had a nice, early paper in the JEL on the uses of film in teaching economics.
He took Schumpeter seriously, and wrote the script for the wonderful Schumpeter tapes in the Knowledge Products series on great economists that Kirnzer edited.
A couple of year’s ago, I invited Larry to participate in the Schumpeter session that I organized at George Mason’s Summer Institute for the Preservation of the History of Economic Thought. He initially agreed, but then had to withdraw because of his health.
More recently, I submitted one of my more idiosyncratic efforts (on the career consequences of writing on polywater) to the journal that Larry edited. I received excellent comments, and the editorial process was handled with grace and efficiency.
Larry was one of the “good guys” in many different ways, and the world is worse for his passing.

Here are a couple of Larry’s more obscure writings, that I have found useful:
Moss, Laurence S. “Film and the Transmission of Economic Knowledge: A Report.” Journal of Economic Literature 17, no. 3 (1979): 1005-19.
Moss, Laurence S. “Review: Robert Loring Allen’s Biography of Joseph A. Schumpeter.” American Journal of Economics and Sociology 52, no. 1 (1993): 107-18.

The reference to Larry’s Schumpeter tapes is:
Moss, Laurence S. Joseph Schumpeter & Dynamic Economic Change: Capitalism as “Creative Destruction”. Nashville, TN: Knowledge Products, Inc., 1988. audio.

A Toast to Schumpeter on His Birthday (February 8, 1883)

Source: scan (and crop) of the cover of the May 23, 1983 issue of Forbes .

In the May 23, 1983 issue of Forbes there appeared a now-famous essay by the late and great management guru Peter Drucker in which he pointed out that 1983 was the centennial of the birth of both John Maynard Keynes and Joseph A. Schumpeter. He noted that in the decades since the great economists’ passing, the academic and policy worlds worshiped at the feet of Keynes, and all but ignored Schumpeter (hence the many candles in front of the Keynes portrait on the cover, and the single, small candle in front of the Schumpeter portrait).

But Drucker argued that the world had gotten it wrong. Schumpeter was more important because he had understood a crucial truth: the process of creative destruction is indeed the essential fact about capitalism.

The reference for the original Drucker essay is:
Drucker, Peter F. “Modern Prophets: Schumpeter or Keynes?” Forbes, May 23, 1983, 124-28.

The reference to the reprint of the Drucker essay is:
Drucker, Peter F. “Modern Prophets: Schumpeter or Keynes?” In The Frontiers of Management New York: Penguin Putnam, Inc., 1999, 104-15.

A typo-laden version of the essay has been posted on the web at:
http://www.peterdrucker.at/en/texts/proph_01.html

(Note: I thank Aaron Brown for alerting me to the neat cover that appears at the top of this entry).

Inventors Move from Declining Industries to New, Expanding Industries

Petra Moser’s comments (see below) about inventors applying similar ideas to different industries seem complementary to Burke’s emphasis on the importance of serendipitous “connections.” An inventor exposing herself to many industries’ problems and products, would be more likely to see additional applications for inventions originally developed for another industry.

(p. 3) By some logic, there is no earthly reason why bicycles should still exist.

They are a quaint, 19th-century invention, originally designed to get someone from point A to point B. Today there are much faster, far less labor-intensive modes of transportation. And yet hopeful children still beg for them for Christmas, healthful adults still ride them to work, and daring teenagers still vault them down courthouse steps. The bicycle industry has faced its share of disruptive technologies, and it has repeatedly risen from the ashes.
. . .
“Much of the history of the ‘American system of manufacturing’ is the story of inventors moving from a declining industry to a new expanding industry,” says Petra Moser, an economic historian at Stanford who studies innovation. “Inventors take their skills with them.”
Gun makers learned to make revolvers with interchangeable parts in the mid-19th century, Ms. Moser says. Then those companies (and some former employees, striking out on their own) applied those techniques to sewing machines when demand for guns slackened. Later, sewing machine manufacturers began making woodworking machinery, bicycles, cars and finally trucks.
. . .
Meanwhile, we’ve already seen some of the “destruction” half of Joseph Schumpeter’s famous “creative destruction” paradigm, with many newspapers cutting staff and other production costs. Unfortunately for newspapers, historians say, the survivors in previous industries facing major technological challenges were usually individual companies that adapted, rather than an entire industry. So a bigger shakeout may yet come.
But perhaps the destruction will lead to more creativity. Perhaps the people we now know as journalists — or, for that matter, autoworkers — will find ways to innovate elsewhere, just as, over a century ago, gun makers laid down their weapons and broke out the needle and thread. That is, after all, the American creative legacy: making innovation seem as easy as, well, riding a bike.

For the full commentary, see:
CATHERINE RAMPELL. “Ideas & Trends; How Industries Survive Change. If They Do.” The New York Times, Week in Review Section (Sun., November 15, 2008): 3.
(Note: ellipses added.)

Car Bailout Destroys Dynamism of Process of Creative Destruction

(p. A29) Not so long ago, corporate giants with names like PanAm, ITT and Montgomery Ward roamed the earth. They faded and were replaced by new companies with names like Microsoft, Southwest Airlines and Target. The U.S. became famous for this pattern of decay and new growth. Over time, American government built a bigger safety net so workers could survive the vicissitudes of this creative destruction — with unemployment insurance and soon, one hopes, health care security. But the government has generally not interfered in the dynamic process itself, which is the source of the country’s prosperity.

But this, apparently, is about to change. Democrats from Barack Obama to Nancy Pelosi want to grant immortality to General Motors, Chrysler and Ford. They have decided to follow an earlier $25 billion loan with a $50 billion bailout, which would inevitably be followed by more billions later, because if these companies are not permitted to go bankrupt now, they never will be.
This is a different sort of endeavor than the $750 billion bailout of Wall Street. That money was used to save the financial system itself. It was used to save the capital markets on which the process of creative destruction depends.
Granting immortality to Detroit’s Big Three does not enhance creative destruction. It retards it. . . .
. . .
But the larger principle is over the nature of America’s political system. Is this country going to slide into progressive corporatism, a merger of corporate and federal power that will inevitably stifle competition, empower corporate and federal bureaucrats and protect entrenched interests? Or is the U.S. going to stick with its historic model: Helping workers weather the storms of a dynamic economy, but preserving the dynamism that is the core of the country’s success.

For the full commentary, see:
DAVID BROOKS. “Bailout to Nowhere.” The New York Times (Fri., November 18, 2008): A29.
(Note: ellipses added.)

Every Hour of Every Business Day “About 25,000 Jobs Are Destroyed and Created”

(p. A15) It’s important to acknowledge that dynamic product markets create dynamic labor markets as well. In recent years, government statistics show that about 25,000 jobs are destroyed and created every hour that America is open for business. All this economic change is essential, but it presents very real challenges to workers.

For the full commentary, see:
MARTIN NEIL BAILY and MATTHEW J. SLAUGHTER. “What’s Behind the Recent Productivity Slowdown.” The Wall Street Journal (Sat., DECEMBER 13, 2008): A15.

Gains in Productivity Due to “Bipartisan Removal of Regulations that Stifle Competition and Innovation”

In the Clinton administration, Martin Neil Baily was the Chair of the Council of Economic Advisers. He is one of those Democratic economists, along with Brad DeLong and Larry Summers, who appreciates the importance of innovation through the process of creative destruction, in making our lives better.

(p. A15) The economic attention of U.S. government and business leaders is fixed squarely on the downturn and financial crisis. Whether or not bailouts are proper short-term medicine, economists agree that the long-run solution for restoring economic growth lies in raising productivity.

The single best measure of a country’s average standard of living is productivity: the value of output of goods and services a country produces per worker. The more workers produce, the more income they receive, and the more they can consume. Higher productivity results in higher standards of living.

So how has U.S. productivity grown recently? Unfortunately, very slowly. After averaging 2.7% productivity growth from 1995 through 2002, annual growth of productivity in the nonfarming business sector has slowed dramatically — to just 1.7% in 2005, 1.0% in 2006, and 1.4% in 2007. At this new average rate of under 1.4%, it would take nearly 52 years for average U.S. living standards to double — versus just 26 years at the earlier average. Signs of this slowdown are apparent, particularly in the waning competitiveness of U.S. sectors like automobiles, financial services and information technology.

On Monday, we are issuing a new report that details a set of policies the government could implement to boost U.S. productivity growth. Time is of the essence in addressing this challenge because the economy-wide impacts of structural policies tend to appear only gradually, in part because of many-year corporate planning horizons. It is also because faster productivity growth will ease the burden of massive U.S. fiscal deficits now projected for the coming years.

A central theme of this report is the critical role that competitive product markets play in spurring productivity growth and boosting standards of living. One of the great U.S. policy successes of recent decades has been the bipartisan removal of regulations that stifle competition and innovation in product markets. U.S. industries that face strong competitive intensity are more productive than highly regulated or otherwise sheltered industries. This competition, in turn, yields higher incomes and greater choices for consumers.

Maintaining the productivity benefits of product market competition requires sound choices in areas including trade and investment, regulation and infrastructure.

For the full commentary, see:
MARTIN NEIL BAILY and MATTHEW J. SLAUGHTER. “What’s Behind the Recent Productivity Slowdown.” The Wall Street Journal (Sat., DECEMBER 13, 2008): A15.

Good Jobs and Bad Jobs

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

Labor is usually viewed as a victim of the process of creative destruction, because some old jobs are destroyed when a new technology replaces an old one. But part of the process is the creation of new jobs, and on average, the new jobs are created have better characteristics than the old jobs that are destroyed.
The article quoted below, discusses some of the characteristics that make a job better or worse.

(p. D2) Nineteen years ago, Jennifer Courter set out on a career path that has since provided her with a steady stream of lucrative, low-stress jobs. Now, her occupation — mathematician — has landed at the top spot on a new study ranking the best and worst jobs in the U.S.

“It’s a lot more than just some boring subject that everybody has to take in school,” says Ms. Courter, a research mathematician at mental images Inc., a maker of 3D-visualization software in San Francisco. “It’s the science of problem-solving.”
The study, released Tuesday from CareerCast.com, a new job site, evaluates 200 professions to determine the best and worst according to five criteria inherent to every job: environment, income, employment outlook, physical demands and stress. (CareerCast.com is published by Adicio Inc., in which Wall Street Journal owner News Corp. holds a minority stake.)
The findings were compiled by Les Krantz, author of “Jobs Rated Almanac,” and are based on data from the U.S. Bureau of Labor Statistics and the Census Bureau, as well as studies from trade associations and Mr. Krantz’s own expertise.
According to the study, mathematicians fared best in part because they typically work in favorable conditions — indoors and in places free of toxic fumes or noise — unlike those toward the bottom of the list like sewage-plant operator, painter and bricklayer. They also aren’t expected to do any heavy lifting, crawling or crouching — attributes associated with occupations such as firefighter, auto mechanic and plumber.

For the full story, see:
SARAH E. NEEDLEMAN. “Doing the Math to Find the Good Jobs; Mathematicians Land Top Spot in New Ranking of Best and Worst Occupations in the U.S.” The Wall Street Journal (Tues., Jan. 6, 2008): D2.

For the ranking of 200 jobs, and the components that went into the ranking, see:
http://www.careercast.com/jobs/content/JobsRated_Top200Jobs

Supporters of Whaling Industry Objected to Light from Gas

In the process of creative destruction, the industry that is being destroyed often seeks to protect itself from the new innovation:

(p. 45) In England, objectors to gaslight argued that it undercut the whaling industry.

Source:
Burke, James. The Pinball Effect: How Renaissance Water Gardens Made the Carburetor Possible – and Other Journeys. Boston: Back Bay Books, 1997.

Eastman Was a Self-Financed Entrepreneur

Mark Casson has argued that the more original the entrepreneur’s innovation, the more likely he will need to finance all, or a large part, of it himself. To the extent that this is true, it represents an important argument for allowing the accumulation of wealth (and thereby an argument against substantial personal income, and inheritance, taxes.)
Here is an example, consistent with Casson’s argument, of a self-financed entrepreneur:

(p. 36) The idea of loading film into a camera, snapping the picture and then sending the film to a store to be processed was the brainchild of an American from Rochester, New York, called George Eastman. One day in 1879, at the bank where he had worked since leaving school at the age of fourteen, he didn’t get the promotion he was expecting. So he left and used his savings to set himself up as a “Maker and Dealer in Photographic Supplies.” At this time, picture taking was a messy, cumbersome and expensive business, involving glass-late negatives, buckets of chemicals an monster wooden cameras. When Eastman had finished his experiments with the process, his slogan promised, “You press the button. We do the rest.”

Source:
Burke, James. The Pinball Effect: How Renaissance Water Gardens Made the Carburetor Possible – and Other Journeys. Boston: Back Bay Books, 1997.

Deaths in ‘Natural’ Disasters Caused by Absence of Economic Growth

We are often made to feel guilty for the suffering of other countries in “natural” disasters. But the deaths are more due to the lack of infrastructure, sound buildings and the like, which in turn are due to the countries’ lack of economic growth, which in turn is due to their rejection of the process of capitalist creative destruction.

(p. 90) The simple truth is that money matters more than anything else in most disasters. Which is another way of saying that where and how we live matters more than Mother Nature. Developed nations experience just as many natural disasters as undeveloped nations. The difference is in the death toll. Of all the people who dies from natural disasters on the planet from 1985 to 1999, 65 percent came from nations with incomes below $760 per capita, according to the Intergovernmental Panel on Climate Change. The 1994 Northridge earthquake in California, for example, was similar in magnitude and depth to the 2005 earthquake in Pakistan. But the Northridge earthquake killed only sixty-three people. The Pakistan earthquake killed about a hundred thousand.

People need roofs, roads, and health care before quibbles like personality and risk perception count for much. And the effect is geometric. If a large nation raises its GNP from $2,000 to $14,000 per person, it can expect to save 530 lives a a year in natural disasters, according to a study by Matthew Kahn at Tufts University. And for those who survive, money is a form of liquid resilience: it can bring treatment, stability, and recovery.

Source:
Ripley, Amanda. The Unthinkable: Who Survives When Disaster Strikes – and Why. New York: Crown Publishers, 2008.