Creative Destruction – Page 28

Florence in Its Prime: Ghiberti’s “Gates of Paradise”

In my work on the labor economics of the process of creative destruction, I make use of the competition between Ghiberti and Brunelleschi over who would do the bronze door panels. Brunelleschi withdrew, after a "tie" decision from the judges. He then retooled, and bult the marvelous dome that is still one of the world’s architectural marvels.

If Michelangelo’s "David" heads the "must see" list of Renaissance masterpieces for most visitors to Florence, then I suspect "The Gates of Paradise," Lorenzo Ghiberti’s monumental doors of the Baptistery of San Giovanni, rank a close second. The 20-foot-tall portal — 10 exquisitely articulated gilt bronze reliefs of Old Testament scenes, framed by standing prophets, foliage and projecting heads — has mesmerized viewers since its completion in 1452. Michelangelo himself is supposed to have given the doors the name by which they are still known.

. . .

Next year, visitors to Florence will again see "The Gates" restored to their full splendor, permanently installed in the Museo dell’Opera del Duomo.

For the full commentary, see:

KAREN WILKIN. "Ghiberti’s Doors Are Heavenly Again." The Wall Street Journal (Tues., June 5, 2007): D5.

(Note: ellipsis added.)

Sturm und Drang Schumpeterianism

I am conflicted about how to evaluate Zachary’s Schumpeterian article in a recent Sunday New York Times. On the one hand he says much that is true and useful about Schumpeter and capitalism. On the other hand he seems to relish the destructive side of creative destruction, extending it beyond what Schumpeter intended, to include disasters such as war and environmental crises.

My view, on the other hand, is that the destructive side is usually over-estimated, can be reduced further, and is an unfortunate cost of innovation and progress.

Here is a part of the Zachary op-ed piece that I like:

An Austrian economist who taught at Harvard, Mr. Schumpeter in 1942 coined the term ”creative destruction” to describe what he viewed as the engine of capitalism: how new products and processes constantly overtake existing ones. In his classic work, ”Capitalism, Socialism and Democracy,” he described how unexpected innovations destroyed markets and gave rise to new fortunes.

The historian Thomas K. McCraw writes in his new biography of Schumpeter, ”Prophet of Innovation” (Belknap Press): ”Schumpeter’s signature legacy is his insight that innovation in the form of creative destruction is the driving force not only of capitalism but of material progress in general. Almost all businesses, no matter how strong they seem to be at a given moment, ultimately fail and almost always because they failed to innovate.”

Mr. Schumpeter’s concept of creative destruction is justly celebrated. The economics writer David Warsh calls it the most memorable economic phrase since Adam Smith’s ”invisible hand.” Peter Drucker, the late business guru, went so far as to declare Mr. Schumpeter the most influential economist of the last century.

Clearly, any quick survey of technological change validates Mr. Schumpeter’s essential insight. The DVD destroyed the videotape (and the businesses around it). The computer obliterated the typewriter. The automobile turned the horse and buggy into an anachronism.

Today, the Web is destroying many businesses even as it gives rise to others. Though the compact disc still lives, downloadable music is threatening to make the record album history.

”Schumpeter’s central idea is just as important now as ever,” says Louis Galambos, a business historian at Johns Hopkins University. ”The heart of capitalism and its claim as an efficient economic system over the long term is the role that innovation plays.”

For the full commentary, see:

G. PASCAL ZACHARY. "PING; The Silver Lining to Impending Doom." The New York Times, Section 3 (Sun., May 6, 2007): 3.

Why Starbucks Coffee is a Bargain

(p. 161) These coffee places, most of which didn’t even exist ten years ago, had several virtues. They were always in convenient locations. They permitted, even welcomed, patrons to sit and talk for several hours. And they had tables for spreading out my materials and electrical outlets for plugging in my equipment. In short, they provided a four-hour office rental for the price of a three-dollar latte.

. . .

(p. 162) Starbucks and its caffeinated cousins are part of what I call the free agent infrastructure. The components of this infrastructure, which I’ll review in a moment, include copy shops, office supply superstores, bookstore cafés, overnight delivery services, executive suites, and the Internet. Like America’s system of federal highways, the free agent infrastructures form the physical foundation on which the economy operates. But unlike the federal highway system, which was planned and paid for by the government, this infrastructure emerged more or less spontaneously. Like so many other aspects of Free Agent Nation, it is self-organized. Nobody is in charge of it. That’s why it woks. It works so well, in fact, that few people realize that this collection of commercial Establishments even constitutes an infrastructure.

Source:

Pink, Daniel H. Free Agent Nation: How America’s New Independent Workers Are Transforming the Way We Live. New York: Warner Business Books, 2001.

Should Netscape Be Viewed as a Failed Company, or as a Successful Project?

(p. 53) Recall the story of Netscape, once the darling of the New Economy. Netscape was formed in 1994. It went public in 1995. And by 1999, it was gone, purchased by America Online and subsumed into AOL’s operation. Life span: four years. Half-life: two years. Was Netscape a company—or was it really a project? Does the distinction even matter? What matters most is that this short-lived entity put several products on the market, prompted established companies (notably Microsoft) to shift strategies, and (p. 54) equipped a few thousand individuals with experience, wealth, and connections that they could bring to their next project.

And Netscape is not alone. A University of Texas study found that between 1970 and 1992, the half-life of Texas businesses shrank by 50 percent. Likewise, a Federal Reserve analysis of New York companies found that the type of firm that created the most new jobs (microbusineses with fewer than ten employees) often had the shortest life span. The life cycle of companies has been that jobs, too, have diminishing half-lives. Ten years ago, nobody ever heard of a Web developer. Ten years from now, nobody may remember Web developers.

Most important, at the very moment the longevity of companies is shrinking, the longevity of individuals is expanding. Unlike Americans in the twentieth century, most of us today can expect to outlive just about any organization for which we work. It’s hard to imagine a lifelong job at an organization whose lifetime will be shorter–often much shorter–than your own.

Source:

Pink, Daniel H. Free Agent Nation: How America’s New Independent Workers Are Transforming the Way We Live. New York: Warner Business Books, 2001.

“Free Agent Nation” Still Rings True

Source of book image: http://g-ec2.images-amazon.com/images/G/01/ciu/10/ae/8ca3d250fca0f5b077de4010.L.jpg

Daniel Pink’s 2001 Free Agent Nation has been on my to-read list since it first came out. It finally made it to the top—at least in the author-abridged two-cassette incarnation.

I always found the basic idea appealing: the appeal of the freedom of working for yourself—Harry Browne’s How I Found Freedom in an Unfree World, but for real.

But I also was a little anxious; fearful that the book would place too much emphasis on seeming flash-in-the-pan dot.com labor market phenomena and rhetoric.

To my relief, I can report that little in the book depends on the dot.com over-exuberance. The internet appears, as an infrastructure enabler, but the free agents are mainly doing more standard stuff, but doing it from a home office, and doing it project-by-project.

Pink is not an academic, which has pros and cons. One of the pros is that his prose is pleasant. Another is that he has an ear for a good story and a telling example. Perhaps a con is that he often hasn’t had the time, or the interest, (or maybe the data just don’t exist) to often follow-up with how widespread his examples are.

Still there’s some good stuff here. Like suggesting that free agency is what you would expect more of us to pursue, as we work our way up Abraham Maslow’s hierarchy of human needs. (In college I was enthused enough about Maslow that I was thinking of minoring in psychology, until they told me how many hours I would have to run rats through mazes before I’d be allowed to open a Maslow book.)

And there’s plausible discussion about how in some ways free agency is more secure than a regular job (multiple clients means diversification). And there is more freedom to control your own time, and be your authentic self.

There’s also some good discussion of how the government makes free agency harder through health care and taxation policies.

All-in-all, this book helps make the case that labor can thrive in a Schumpeterian world of creative destruction.

Reference to the book:

Pink, Daniel H. Free Agent Nation: How America’s New Independent Workers Are Transforming the Way We Live. New York: Warner Business Books, 2001.

“We In Las Vegas Reinvent Ourselves All the Time”

Dust from the implosion of the Stardust. Source of the photo: online version of the NYT article cited below.

If any city in the United States has dynamism, it is Las Vegas. Yet, note in the passage below, that even in Las Vegas there are those who want dynamism to die.

Las Vegas has become known in recent decades for tearing down the notable resorts that first put the Strip on the map, and famous places like the Dunes, the Hacienda and the Sands have been replaced by the Bellagio, the Mandalay Bay and the Venetian.

“The Stardust was the Bellagio of its day, the most dazzling casino out there,” said Nicholas Pileggi, who spent four years researching the exploits of Frank Rosenthal, the mobster who ran the Stardust, for his best-selling nonfiction book “Casino” and the fictionalized screenplay for the Robert DeNiro film of the same name. “But time moves on.”

The oldest casino structure on the Strip now is a part of a coffee shop at the Sahara and dates back just 55 years.

“Unlike most other cities, we in Las Vegas reinvent ourselves all the time,” Mr. Boyd said. “In order to keep up with the competition, you have to keep improving your product. That’s what we’re going to do here at the Stardust. But we still have great memories.”

Some are not so accepting of the changes in the city. Joel Rosales, 23, owns the Web site LeavingLV.net, which pays tribute to each property that is razed.

The loss of the Stardust, Mr. Rosales said, is particularly disappointing.

“Having been born and raised here in Vegas, it’s always been a rock,” he said of the resort. “I wouldn’t say I’m as upset as I am disappointed that we as a city have no sense of preserving our past and heritage, no matter how tacky or out-of-date it may be.”

For the full story, see:

STEVE FRIESS. "Aging Resort Demolished to Make Way for a Young One." The New York Times (Weds., March 14, 2007): A14.

Celebration of, and then demolition of, the Stardust. Source of the photo: online version of the NYT article cited above.

Advice from Charles Koch: A Successful Business Schumpeterian

Source of book image: http://media.wiley.com/product_data/coverImage300/89/04701398/0470139889.jpg

When Charles Koch became the chief executive of Rock Island Oil & Refining after the death of his father in 1967, the company was a moderately successful enterprise based in Wichita, Kan. He renamed it Koch Industries in honor of his father — and over the next 40 years proceeded to transform Fred Koch’s legacy into the world’s largest private company. Koch Industries — now a commodity and financial conglomerate that includes brands such as Stainmaster, Lycra and Dixie cups — has 80,000 employees in 60 countries. Its revenue last year was $90 billion. In one generation, the book value of Koch Industries has increased 2,000-fold. That’s an 18% compounded annual return — comparable with the long-term track record of Warren Buffett’s Berkshire Hathaway.

. . .

At age 71, Mr. Koch clearly feels that the time has come to pass along the business formula that has served him so well. In "The Science of Success," he describes a technique, called Market-Based Management (MBM), that he says evolved from his reading, early in his career, in history, political science, economics and other disciplines. He arrived at an understanding of what allows a free society to prosper, Mr. Koch says, and decided to apply those principles to business.

. . .

. . . He is especially fond of the "Austrian school" of economists, such as Ludwig von Mises and Joseph Schumpeter, who emphasized production processes, technology and the dynamic competitive models of "creative destruction."

For the full review, see:

MARK SKOUSEN. "BOOKS; A Short Course in Long-Term Value." The Wall Street Journal (Weds., March 7, 2007): D8.

(Note: ellipses added.)

More on Creative Destruction in Science Fiction

On April 11, 2007 I posted an entry noting a new science fiction book with the title Creative Destruction. Not having read the book, I wondered aloud whether the book contained any reference to Schumpeter.

Yesterday (4/13/07), I was delighted to receive an email from the author of the book, answering my question. With his permission, I reproduce his email below:

Dr. Diamond,

I noticed your blog entry about Creative Destruction, my computer-themed SF collection. You asked: Does Schumpeter get a mention?

Absolutely. Here are the opening lines of the foreword:

     If the Internet bubble had a patron saint, he was an obscure economist named Joseph Schumpeter.

     Schumpeter owes his posthumous celebrity to two words: creative destruction. In 1942, he wrote of the "… Process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.

     "Creative destruction," he said, "is the essential fact about capitalism." Every dotcom, of course, claimed its new technology would sweep out the old in a frenzy of creative destruction. Occasionally — think Yahoo! and Amazon — they were even correct.

The stories in the collection are most definitely science fiction — I have degrees in physics and computer science — but I also have an MBA from the University of Chicago.

Best regards,

– Ed Lerner

(Note: I have changed the format of the email, a little. The ellipsis was in the original.)

Creative Destruction in Science Fiction

Source of book image: http://ec1.images-amazon.com/images/P/0809557487.01._SS500_SCLZZZZZZZ_V38973347_.jpg

There’s a new collection of science fiction stories entitled Creative Destruction (after one of the main stories in the collection that is also entitled "Creative Destruction"). I have not read the book, but used to enjoy reading science fiction, and hope to have a look before too long.

I welcome comments from anyone who has read the book. Does Schumpeter get a mention?

The reference to the book is:

Lerner, Edward M. Creative Destruction. Rockville, MD: Wildside Press, 2006.

Kodak Tries to Survive Creative Destruction

A Kodak digital production printer. Source of photo: online version of the NYT article cited below.

Digital photography replacing film technology is an example of Schumpeter’s process of creative destruction, and maybe also of the gradual growth of a disruptive technology. Leading incumbent firms frequently have trouble prospering, or even surviving, during such a change. Both the Wall Street Journal and the New York Times had articles on the latest news from Kodak. Here is an excerpt from the New York Times version:

On Tuesday, as the Eastman Kodak Company unveiled its long-anticipated consumer inkjet printer in New York, the mood at the company’s Rochester headquarters could not have been more positive.

“People know we are back on the offensive,” said Frank Sklarsky, Kodak’s chief financial officer. “And that’s making them a lot more charged up about coming to work.”

But yesterday, Kodak gave them reason again to feel depressed. The company said it would cut 3,000 more jobs this year, on top of the 25,000 to 27,000 it had already said would be gone by the end of 2007. At that rate, Kodak will end the year with about 30,000 employees, half the number of just three years ago and a fraction of the 145,000 people it employed in 1988, when its brand was synonymous with photography.

Kodak executives insist that the new cuts do not indicate any snags in the continuing struggle to transform itself from a film-based company into a major competitor in digital imagery. And analysts, too, say the cuts are inevitable, and probably healthy.

For the full NYT story, see:

CLAUDIA H. DEUTSCH. "Shrinking Pains at Kodak." The New York Times (Fri., February 9, 2007): C1 & C4.

For the related WSJ story, see:

WILLIAM M. BULKELEY and ANGELA PRUITT. "Kodak Sees More Job Cuts, Higher Restructuring Costs." The Wall Street Journal (Fri., February 9, 2007): B4.

Source of the first and third graphic: the WSJ article cited above. Source of the second graphic: the NYT article cited above.

Woodrow Wilson: The Automobile is “a Picture of the Arrogance of Wealth”

It is the common characteristic of new products from creative destruction that new products are first so expensive that only the rich can afford them, but then fairly soon, usually within a few years at most, the price falls to the level that ordinary people can afford. At that point, what the rich gets are added features, at a high premium, but the basic product is widely available. Consider the automobile:

(p. 193) The autos of the time were a luxurious novelty. One model even offered electric curlers in the back seat for on-the-go primping. They were unreliable and expensive, costing around $1,500, twice the average annual family income. And they were enormously unpopular. Anticar activists tore up roads, ringed parked cars with barbed wire, and organized boycotts of car-driving businessmen and politicians. Public resentment of the automobile was so great that even future president Woodrow Wilson weighed in, saying, "Nothing has spread socialistic feeling more than the automobile . . . a picture of the arrogance of wealth." Literary Digest suggested, "The ordinary ‘horseless carriage’ is at present a luxury for the wealthy; and although its price will probably fall in the future, it will never, of course, come into as common use as the bicycle."

Source:

Kim, W. Chan, and Renée Mauborgne. Blue Ocean Strategy: How to Create Uncontested Market Space and Make Competition Irrelevant. Boston: Harvard Business School Press, 2005.

(Note: ellipsis in original. Also, the book provides sources for each quote in the passage above.)