Creative Destruction – Page 29

“Come With Me, If You Want to Live”

Schumpeter famously stated that creative destruction is "the essential fact" about capitalism. Was he right?

To determine what is "the essential fact" you need to first answer the question "essential for what purpose?" If the purpose is "life, liberty, and the pursuit of happiness" then I think you can show that creative detruction is indeed the essential fact about capitalism; in the key sense that with creative destruction you have a form of capitalism that is best able to enhance "live, liberty, and the pursuit of happiness."

The Terminator famously said "Come with me, if you want to live!" ("Terminator 2: Judgment Day," 1991). Life is a choice. You can choose death instead. Most people, most of the time, choose life. But there are examples of choosing death. E.g., Leon Kass, an oft-quoted "expert" on medical ethics issues, is against current efforts to lengthen the human life span:

(p. D4) While an anti-aging pill may be the next big blockbuster, some ethicists believe that the all-out determination to extend life span is veined with arrogance. As appointments with death are postponed, says Dr. Leon R. Kass, former chairman of the President’s Council on Bioethics, human lives may become less engaging, less meaningful, even less beautiful.

“Mortality makes life matter,” Dr. Kass recently wrote. “Immortality is a kind of oblivion — like death itself.”

That man’s time on this planet is limited, and rightfully so, is a cultural belief deeply held by many. But whether an increasing life span affords greater opportunity to find meaning or distracts from the pursuit, the prospect has become too great a temptation to ignore — least of all, for scientists.

“It’s a just big waste of talent and wisdom to have people die in their 60s and 70s,” said Dr. Sinclair of Harvard.

(And there’s the occasional hermit, like the unibomber, who chooses to live a brutish life without electricity and indoor plumbing.) So long as I, Arnold, and our compatriots, are allowed an island somewhere to peacefully pursue life, I do not much care what Leon and his friends do. My argument, and the book I am writing on creative destruction, are not written for Leon. They are written for all those who choose life, liberty, and the pursuit of happiness.

The NYT quote related to Leon Kass’s praise of mortality, is from p. D4 of:

MICHAEL MASON. "One for the Ages: A Prescription That May Extend Life." The New York Times (Tues., October 31, 2006): D1 & D4.

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.)

“Man in White Suit” Science Fiction, Now Nearly Science Fact

PART of what sold James Tirey on a change in attire was the coffee spilled on his legs during a rough flight. ”It stayed sticky until it dried,” he said, ”about mid-Atlantic.”

To avoid such incidents, he bought a new pair of pants with an invisible, high-tech surface suited to the exigencies of business travel. These pants look and feel like most others, but the ingenious finish on the fabric is different: it is made of tiny, nanosized particles that repel water, ketchup, honey, blood, vinaigrette and a thousand other potential indignities. With such a surface, he said, ”if coffee is spilled on you, it just beads up” or runs off. The pants can be wiped with a paper napkin — even the skimpy cocktail kind handed out on airplanes — leaving the material dry and unscathed.

Mr. Tirey, who lives in northern Virginia, bought his pants, called the Steel Pant, at Beyond, a Eugene, Ore., company that makes and sells outerwear for men and women at BeyondFleece.com. The material is manufactured by the Swiss company Schoeller Textil, which makes both the weave and the nanofinish, called NanoSphere. On the Beyond Web site, the pants cost $119, the nanocoating an additional $15. ”It was definitely worth the money,” Mr. Tirey said of the purchase.

For the full story, see:

ANNE EISENBERG. "NOVELTIES; The Chemist’s Find: A Way to Shrug Off Spills." The New York Times , Section 3(Sun., August 27, 2006): 5.

Big Business Is Often Bashed, But Is Not Always Bad

(p. 4) BUSINESS bashing by politicians in America has a long history, including rhetoric far more inflammatory than the denunciations being directed at Wal-Mart this year by some Democrats, who sometimes sound as if they are running against the company instead of another politician.

. . .

The company may not appreciate the honor, but its place in the political debate reflects its revolutionary effect on the American economy.

Put simply, the big winners as the economy changes have often been scary to many, particularly those with a stake in the old economic order being torn asunder.

“Twice as many Americans shop at Wal-Mart over the course of a year than voted in the last presidential election,” said H. Lee Scott Jr., the company’s chief executive, in a speech to the National Governors Association in February.

Wal-Mart’s success reflects its ability to charge less for a wide range of goods. That arguably has reduced inflation and made the economy more efficient. It has introduced innovations in managing inventory and shipping goods.

. . .

But the fact that Wal-Mart has more shoppers than any politician has voters shows that many of those workers — and many people higher on the income scale — find its prices irresistible. That group no doubt includes some of the company’s critics.

Previous business targets of politicians have similarly been both popular and reviled. The railroads enabled much of America to prosper, but to many people in the late 19th century they were viewed as villains.

They upset old economic relationships by making it possible to ship goods over much longer distances, thus introducing competition for local businesses and farms.

For the full commentary, see:

FLOYD NORRIS. "THE NATION; Swiping at Industry From Atop the Stump." The New York Times, Section 4 (Sun., August 20, 2006): 4.

(Note: ellipses added.)

Illinois protesters bashing Wal-Mart during the summer of 2006. Source of photo: online version of the NYT article cited above.

More and Better Jobs Gained by ‘Insourcing’ than are Lost to ‘Outsourcing’

N. Gregory Mankiw, former chair of W.’s Council of Economic Advisors. The media, most Democrats, and some Republicans, skewered Mankiw in 2004 for simply and clearly stating the truth about outsourcing. Source of photo: online version of the NYT article cited below.

In December 2005, the McKinsey Global Institute predicted that 1.4 million jobs would be outsourced overseas from 2004 to 2008, or about 280,000 a year. That’s a drop in the bucket. In July, there were 135.35 million payroll jobs in the United States, according to the Bureau of Labor Statistics. Thanks to the forces of creative destruction, more jobs are created and lost in a few months than will be outsourced in a year. Diana Farrell, director of the McKinsey Global Institute, notes that in May 2005 alone, 4.7 million Americans started new jobs with new employers.

What’s more, the threat of outsourcing varies widely by industry. Lots of services require face-to-face interaction for people to do their jobs. That is particularly true for the biggest sectors, retail and health care. As a result, according to a McKinsey study, only 3 percent of retail jobs and 8 percent of health care jobs can possibly be outsourced. By contrast, McKinsey found that nearly half the jobs in packaged software and information technology services could be done offshore. But those sectors account for only about 2 percent of total employment. The upshot: “Only 11 percent of all U.S. services job could theoretically be performed offshore,” Ms. Farrell says.

Economists have also found that jobs or sectors susceptible to outsourcing aren’t disappearing. Quite the opposite. Last fall, J. Bradford Jensen, deputy director at the International Institute of Economics, based in Washington, and Lori G. Kletzer, professor of economics at the University of California, Santa Cruz, documented the degree to which various service sectors and jobs were “tradable,” ranging from computer and mathematical occupations (100 percent) to food preparation (4 percent).

Not surprisingly, Mr. Jensen and Professor Kletzer found that in recent years there has been greater job insecurity in the tradable job categories. But they also concluded that jobs in those industries paid higher wages, and that tradable industries had grown faster than nontradable industries. “That could mean that this is our competitive advantage,” Mr. Jensen says. “In other words, what the U.S. does well is the highly skilled, higher-paid jobs within those tradable services.”

There is evidence that within sectors, lower-paying jobs are being outsourced while the more skilled ones are being kept here. In a 2005 study, Catherine L. Mann, senior fellow at the Institute for International Economics, found that from 1999 to 2003, when outsourcing was picking up pace, the United States lost 125,000 programming jobs but added 425,000 jobs for higher-skilled software engineers and analysts.

For the full commentary, see:

DANIEL GROSS. "Economic View; Why ‘Outsourcing’ May Lose Its Power as a Scare Word." The New York Times, Section 3 (Sun., August 13, 2006): 5.

U.S. Economy Can Prosper, Even if G.M. Does Not

The fragility of success for large corporations is documented in the early chapters of the Foster and Kaplan book that is mentioned below.

(p. 1) THE announcement last week that General Motors would cut 25,000 jobs and close several factories is yet another blow to the Goliath of automakers and its workers. But only if you work for G.M. is the company’s decline a worry. For consumers, the decline can be seen as a symbol of healthy competition.

G.M.’s sales, market share and work force have all been falling for a generation, even as the quality of its vehicles has gone up. Why? Because its competitors’ products have improved even more. Today’s auto buyers enjoy an unprecedented array of well-built, well-equipped, reasonably priced vehicles offered by many manufacturers.

. . .

(p. 3) . . . even if a new generation is drawn to G.M.’s products, recovery of its former position seems unlikely.  Other brands have improved, too:  J.D. Power estimates that for the auto industry overall, manufacturing defects declined 32 percent since 1998 alone.

There is also great pressure to hold prices down, which is bad for companies like G.M. with vast amounts of overhead.  According to the consumer price index, new cars and light trucks today cost less in real-dollar terms than in 1982, despite having air bags, antilock brakes, CD players, power windows and other features either unavailable or considered luxury options back then.

This means that during the very period that General Motors has declined, American car buyers have become better off.  Competition can have the effect of ”creative destruction,” in the economist Joseph Schumpeter’s famous term, harming workers in some places, while everyone else comes out ahead.

. . .

As it continues to shrink, G.M. may serve as an exemplar of what the world economy will do in many arenas — knock off established leaders, while improving quality and cutting prices. In their 2001 book ”Creative Destruction,” Richard Foster and Sarah Kaplan, analysts at McKinsey & Company, documented how even powerhouse companies that are ”built to last” usually succumb to competition.

Competition can be a utilitarian force that brings the greatest good to the greatest number. Someday when the remaining divisions of General Motors are bought by some start-up company that doesn’t even exist yet, try to keep that in mind.

For the full commentary, see:

GREGG EASTERBROOK. "What’s Bad for G.M. Is . . ." The New York Times, Section 4 (Sunday, June 12, 2005): 1 & 3.

(Note: the ellipsis in the title is in the original title; the ellipses in the article, were added.)

The full reference to the Foster and Kaplan book, is:

Foster, Richard and Sarah Kaplan. Creative Destruction: Why Companies that Are Built to Last Underperform the Market—and How to Successfully Transform Them. New York: Currency Books, 2001.

Static Assumptions Undermine Economic Policy Analysis

Over 50 years ago, Schumpeter emphasized that static models of capitalism miss what is most important in capitalism. Yet static analysis still dominates most policy discussions. But there is hope:

(p. A14) A bit of background: Most official analysis of tax policy is based on what economists call "static assumptions." While many microeconomic behavioral responses are included, the future path of macroeconomic variables such as the capital stock and GNP are assumed to stay the same, regardless of tax policy. This approach is not realistic, but it has been the tradition in tax analysis mainly because it is simple and convenient.

In his 2007 budget, President Bush directed the Treasury staff to develop a dynamic analysis of tax policy, and we are now reaping the fruits of those efforts. The staff uses a model that does not consider the short-run effects of tax policy on the business cycle, but instead focuses on its longer run effects on economic growth through the incentives to work, save and invest, and to allocate capital among competing uses.

For the full story, see:

ROBERT CARROLL and N. GREGORY MANKIW. "Dynamic Analysis." The Wall Street Journal (Weds., July 26, 2006): A14.

Life Has Improved; And Can Continue to Improve

Source of graphic: online version of the NYT article cited below.

(p. 1) New research from around the world has begun to reveal a picture of humans today that is so different from what it was in the past that scientists say they are startled. Over the past 100 years, says one researcher, Robert W. Fogel of the University of Chicago, humans in the industrialized world have undergone “a form of evolution that is unique not only to humankind, but unique among the 7,000 or so generations of humans who have ever inhabited the earth.”

. . .

(p. 19) . . . stressful occupations added to the burden on the body.

People would work until they died or were so disabled that they could not continue, Dr. Fogel said. “In 1890, nearly everyone died on the job, and if they lived long enough not to die on the job, the average age of retirement was 85,” he said. Now the average age is 62.

A century ago, most people were farmers, laborers or artisans who were exposed constantly to dust and fumes, Dr. Costa said. “I think there is just this long-term scarring.”

For the full story, see:

Kolata, Gina. "The New Age; Older and Better; So Big and Healthy Grandpa Wouldn’t Even Know You." The New York Times, Section 1 (Sunday, July 30, 2006): 1 & 18-19.

Source of graphic: online version of the NYT article cited above.

Source of graphic: online version of the NYT article cited above. Source of book image: http://www.cambridge.org/us/catalogue/catalogue.asp?isbn=0521808782

Fogel’s book is a primary academic source for much of what is interesting in the New York Times article. Fogel predicts that if we don’t screw things up, half of today’s college students will live to be 100. He shows that academics in the past have consistently and significantly underestimated the maximum lifespans that would be attainable in the future.

The full reference for the Fogel book is:

Fogel, Robert William. The Escape from Hunger and Premature Death, 1700-2100, Cambridge Studies in Population, Economy and Society in Past Time. Cambridge, UK: Cambridge University Press, 2004.

Current Workplace Revolution Benefits Labor

(p. 8) Would you change places with your grandfather? Would you want to work 11 brutal hours a day… in yesterday’s Bethlehem Steel mill, a Ford Motor Company factory circa 1935? Not me. Nor would I change places with my father … who labored in a whilte-collar sweatshop, at the same company, in the same building, for 41 l-o-n-g years.

A workplace revolution is under way. No sensible person expects to spend a lifetime in a single corporation anymore. Some call this shift the "end of corporate responsibility." I call it … the Beginning of Renewed Individual Responsibility. An extraordinary opportunity to take charge of our own lives.

Source of passage:

Peters, Tom. Re-imagine! London: DK, 2003.

(Note: all of the ellipses in the above passage, appear in the original.)

Intense Competition in Chip Duopoly

Phil Hester, apparently a chip hotshot, joined A.M.D. ten months ago as its technology chief, to "help lead its battle against Intel." (Hector Ruis, mentioned below, is the C.E.O. of A.M.D.)

Mr. Hester and other A.M.D. executives say that the technology in its laboratories gives them plenty of reason for optimism, and that in some product categories Intel is just catching up to advances A.M.D. pioneered. Just next month, for example, A.M.D. is expected to introduce improvements to Opteron, and both companies are designing chips to run cooler and consume less energy.

Much like Intel, A.M.D. is working to increase the number of processors on each chip from two to four, and the company says it will introduce new designs for servers and desktop systems that will be released in mid-2007, followed later in the year by a new design for notebooks. Many analysts are also expecting the company to counter Intel’s pricing moves with price cuts of its own. At A.M.D.’s annual conference for analysts last month, Mr. Hester also disclosed an unusual plan to let other manufacturers build chips that work closely with its own chips, indicating an openness and flexibility that has not been seen before in the company’s strategy.

With that effort, referred to as Torrenza, A.M.D. is licensing some of its chip specifications to other technology developers so they can add specialized functions, like advanced graphics and math processing.

“We want to open up our technology and unleash a completely new wave of innovation,” Mr. Ruiz told analysts at the conference.

Advanced Micro has picked up about five percentage points of market share over the past year, nearly all of that from Intel, according to Mercury Research. Today, A.M.D.’s overall share is about 21 percent, to Intel’s 74 percent, and at the analyst meeting Mr. Ruiz said the goal was to have a 30 percent share by 2008.

Mr. Hester said A.M.D.’s road map for new products had not changed much since his arrival. Mostly he has focused on improving the way employees manage projects and pushing them to develop multiple designs at one time. He said he also emphasized cooperation inside development teams, rather than having teams compete for attention.

The competitive situation has helped with this. “Being the underdog creates a culture of cooperation,” Mr. Hester said.

For the full story, see:

LAURIE J. FLYNN. "Jumping at the Chance to Fire Away in the Chip War." The New York Times (Weds., July 19, 2006): C7.

(Note: the online version of the article has a different title, viz., "A.M.D. Seeks to Gain in Its Rivalry With Intel.")

Tom Peters: Over-the-Top Schumpeterian

Source of book image: http://www.amazon.com/gp/product/customer-reviews/078949647X/ref=cm_cr_dp_2_1/104-2835260-2878345?ie=UTF8&customer-reviews.sort%5Fby=-SubmissionDate&n=283155

Tom Peters became famous as the co-author of the business classic In Search of Excellence (1982). His Re-imagine! is exuberant, optimistic, exaggerated, and stylistically over-the-top. I find it fun, bracing, entertaining, and sometimes edifying. If you like the prose of The Cluetrain Manifesto and Gilder’s Telecosm, then you may also like Re-imagine!

Here is an early, very brief passage:

(p. 9) My overall vision, in brief: Business is cool. It’s about Creativity and Invention and Growth and Service. It’s about Adam Smith’s "hidden hand." And Nobel laureate Frederick Hayek’s "spontaneous discovery process." And economist Joseph Schumpeter’s "gales of creative destruction." At its best, it’s about building things that make life less burdensome than it was in medieval times. About getting us beyond—far, far, far beyond—the quasi-slavery of the Middle Ages, the indentured servitude of the first 150 years of the Industrial Revolution, and the cubicle slavery of the last three-quarters of a century.

Yes, business is cool.

(Or at least it can be.)

The citation to the book is:

Peters, Tom. Re-Imagine! London: DK, 2003.

(Note: the italics in the above passage appears that way in the original.)