Economics of Technology – Page 103

Rosen’s Superstars Versus the Long Tail

One of Sherwin Rosen’s most important articles is "The Economics of Superstars" in which he argues that if a superstar’s performance is even slightly better than the next best performer’s, if the performance can be cheaply reproduced (as with radio, CDs, etc.) then a small premium multiplied thousands of times, might result in huge differences in earnings.

This argument works, so long as most of us are interested in the same sort of performance, and are willing to pay some small premium for the best performer of it. But what if we care as much about the content of the performance as the quality of the performance? (In other words, we care as much about what is done, as we care about how well it is done.)

The new book The Long Tail can be taken to imply that there are many niches, and that the days of the "superstar" are over (or at least that in the future, the compensation of the superstars will not be quite so super). If this argument works, and I think it does, then it implies that the new technologies will serve consumers by better matching consumer preferences with the services provided, and also implies that a more diverse group of suppliers (performers) will be able to sustain themselves.

More speculatively, it seems as though it might imply greater equality in the labor market. If this last is true, it goes against most accounts of the effects of recent high technology on the labor market.

The reference to the Rosen article is:

Rosen, Sherwin. "The Economics of Superstars." American Economic Review 71, no. 5 (Dec. 1981): 845-58.

The reference to The Long Tail is:

Anderson, Chris. The Long Tail. New York: Hyperion, 2006.

Antitrust Cases Can Hurt (Even Those that Get Dropped)

The antitrust lawsuit against IBM was dropped, and that against Microsoft result in the imposition of only minor legal remedies. So some may conclude that IBM and Microsoft bore little ill effects from the suits. But such suits can reduce morale, result in loss of talent, and restrain the efficiency, innovativeness and competitiveness of the prosecuted companies.

In the case of IBM, Lou Gerstner has made some strong, and plausible, comments on the deleterious effects of U.S. antitrust action:

(p. 118) The other critical factor—one that is sometimes overlooked—is the impact of the antitrust suit filed against IBM by the United States Department of Justice on January 31, 1969, the final day of the Lyndon B. Johnson administration. The suit was ultimately dropped and classified "without merit" during Ronald Reagan’s presidency, but for thirteen years IBM lived under the specter of a federally mandated breakup. One has to imagine that years of that form of scrutiny changes business behavior in very real ways.

Just consider the effect on vocabulary—an important element of any culture, including corporate culture. While IBM was subject to the suit, terms like "market," "marketplace," "market share," "competitor," "competition," "dominate," "lead," "win," and "beat" were systematically excised from written materials and banned at internal meetings." Imagine the dampening effect on a workforce that can’t even talk about selecting a market or taking share from a competitor. After a while, it goes beyond what is said to what is thought.

The reference to the book, is:

Gerstner, Louis V., Jr. Who Says Elephants Can’t Dance? Leading a Great Enterprise through Dramatic Change. New York: HarperCollins, 2002.

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.)

Medical Cures Going First to the Dogs

One of the dogs cured of melanoma by a new vaccine. Source of photo: screen capture from NBC news report.

Melanoma has taken many human lives, including my father’s on April 15, 2000. Government licensing and regulations reduce competition in medicine and slow the pace of medical innovation. Animal health care is less regulated. Is it an accident that dogs are being cured for melanoma before humans?

Vet Philip Bergman remembers the first time he tried the vaccine in a dog.

"That was a dog that thankfully underwent complete disappearance of his tumor," says Bergman. "It was remarkable, obviously, to us."

Since then, more than 100 dogs have been treated, including Lawana Hart’s Lucky, who last June appeared to have only a few months to live.

For the full report, see:

Robert Bazell. "Treatment for canines with cancer raises hopes; Researchers encouraged by melanoma vaccine’s success on dogs." NBC Evening News Report; online print version updated: 6:36 p.m. CT Oct 26, 2006.

For the video version, go to:

http://video.msn.com/v/us/msnbc.htm?g=d7f603e0-86bb-44db-bad0-524ec79b02c8&f=00&fg=copy

More Good Done With Standard Oil Money: Henry Flagler

The Flagler Memorial obelisk was erected in on a man-made island in 1920, when Miamians still remembered the accomplishments of Henry Flagler. Source of image: http://www.miamibeachfl.gov/newcity/depts/arce/art_public/rw_flagler_monument.asp

The Standard Oil "monopoly" is often lambasted as a sorry episode in our economic history. And yet a strong case can be made that the Standard Oil wealth was created mainly by efficiently providing consumers with a commodity they valued. In addition, mention is often made of the Rockefeller philanthropic activities. Less known, is that others who became rich from Standard Oil, also engaged in productive entrepreneurship, and philanthropy, with their wealth. One of these was Henry Flagler.

In a region that prizes showy monuments to wealth, the lone monument to the man who made it all possible has languished in isolation for decades.

A soaring concrete obelisk dedicated to Henry Flagler, the oil tycoon who hastened South Florida’s development by building a railroad all the way to Key West, it sits on a tiny man-made island in Biscayne Bay, reachable only by boat or, more typically, Jet Ski. Almost everyone here has glimpsed the Flagler Memorial, but few know what it is called, why it exists or how battered it looks up close.

”I’m telling you, it’s a beautiful work of art,” said Paul Orofino, a board member of the Environmental Coalition of Miami Beach, a nonprofit group that occasionally tidies up Monument Island, the memorial’s scruffy, overgrown home. ”It’s a tragedy that nobody pays attention to this thing.”

It is not the kind of South Florida tribute one might expect for Flagler, who extended his railroad from St. Augustine to West Palm Beach in 1894, Miami in 1896 and Key West — a segment that lasted only 23 years until a hurricane demolished it — in 1912.

Flagler was the state’s original megadeveloper, after all, creating its tourism industry by turning swampy pioneer settlements into the world’s grandest resorts. He was also, perhaps, its first huckster, advertising the nascent Miami as ”the most pleasant place south of Bar Harbor to spend the summer.”

His over-the-top winter home in Palm Beach, awash in gold, is now a museum, but most of its visitors come from out of state, said John Blades, the museum’s executive director. Mr. Blades has tried to get a statue of Flagler erected in Palm Beach, which owes its sumptuous existence to the man, but has so far failed.

”Flagler,” Mr. Blades said, ”is probably the most unappreciated titan of the Gilded Age.”

For the rest of the story of the impressive, but deteriorating, Flagler Memorial in Miami, see:

ABBY GOODNOUGH. "South Florida Journal; Unappreciated, With Memorials to Match." The New York Times (Fri., October 7, 2005): A12.

(Note: the hurricane destroyed the Key West link of the railroad in 1935.)

Henry Flagler. Source of image: http://flaglermuseum.us/html/flagler_biography.html

Closing the Alleged ‘Digital Divide’

One version of the laptops produced by One Laptop Per Child for roughly $100 a piece. Source of image: http://www.laptop.org/OLPC_files/nigeria.jpg

Simply giving each child a laptop, won’t much improve their standard of living. (See Easterly’s The Elusive Quest for Growth.) But maybe a few of the children will obtain access to information about what is possible in the outside world, and maybe that will lead them to fight for more freedom?

But at least, if they remain poor, it will not be possible to lay the blame on some sort of ‘digital divide.’ Lay the blame, instead on government economic planning.

Note the aside buried in the article: ‘competitive advantage’ economist Michael Porter is telling the Libyans how to develop a "national economic plan"?? (Say it ain’t so, Michael!)

SAN FRANCISCO, Oct. 10 — The government of Libya reached an agreement on Tuesday with One Laptop Per Child, a nonprofit United States group developing an inexpensive, educational laptop computer, with the goal of supplying machines to all 1.2 million Libyan schoolchildren by June 2008.

The project, which is intended to supply computers broadly to children in developing nations, was conceived in 2005 by a computer researcher at the Massachusetts Institute of Technology, Nicholas Negroponte. His goal is to design a wireless-connected laptop that will cost about $100 after the machines go into mass production next year.

. . .

At the World Economic Forum in Davos, Switzerland, in January, Bill Gates, Microsoft’s chairman, suggested that the next generation of cellphones might be a better way to reach across the so-called digital divide.

Mr. Negroponte said Microsoft refused to sell its Windows software to the project at a price that would make it possible to include in his system. As a result, his laptops will come with the freely available Linux operating system, which is becoming increasingly popular in the developing world.

The idea of a laptop for every schoolchild grew out of Mr. Negroponte’s experience in giving children Internet-connected laptops in rural Cambodia. He said the first English word out of the mouths of the Cambodian students was “Google.”

Discussions between the One Laptop project and the Libyan government began as part of work being done by the Monitor Group, an international consulting firm co-founded by the economist Michael E. Porter. It is now helping the Libyans develop a national economic plan.

. . .

The first test models will be distributed to the five participating countries companies at the end of this November, according to Mr. Negroponte, and mass production is planned for June or July of 2007.

The computers come with a wireless connection, a built-in video camera, an eight-hour battery and a hand crank for recharging batteries. They will initially be priced below $150, and the price is expected to decline when they are manufactured in large numbers.

For the full story, see:

JOHN MARKOFF. "U.S. Group Reaches Deal to Provide Laptops to All Libyan Schoolchildren." The New York Times (Weds., October 11, 2006): A14.

(Note: ellipses added.)

MIT’s Nicholas Negroponte. Source of image: online version of the NYT article cited above.

Mellon Allowed Great Innovation By Restraining Intrusive Government

(p. W4) Though scarcely known today, Andrew W. Mellon was a colossus in late 19th-century and early 20th-century America. He would come to play a major role in the management of the American economy, but first he built one of the country’s great fortunes, one that would rank him today with Bill Gates and Warren Buffett. He is now the subject of a comprehensive, if slightly grudging, biography by David Cannadine, the distinguished British historian.

Mellon is not associated with any single industry, in the way that Andrew Carnegie and John D. Rockefeller are. He was a venture and equity-fund capitalist, one of the first to function on a major scale. He and his younger brother, Dick, took over their father’s Pittsburgh-based investment and coal-mining business and expanded it into many fields, including copper, oil, petrochemicals and aluminum (Alcoa).

No banker was as gimlet-eyed; Mr. Cannadine shows Mellon shrewdly and coldly calculating every investment prospect. Yet few venture capitalists were as daring. In the 1890s, when Rockefeller was ruthlessly monopolizing the petroleum industry, Mellon didn’t flinch from setting up a competing refinery. When Mellon finally sold out to Rockefeller, he did so at a considerable profit. Several years later he came back to oil and eventually built Gulf into an industry giant.

Original Supply-Sider

But Mellon was more than an entrepreneurial industrialist. In his mid-60s he became a famous — and infamous — public servant, performing as Treasury secretary under three presidents, from 1921 to 1932. He was the original supply-sider, pushing tax cuts under Presidents Harding and Coolidge. He argued that the high tax rates left over from World War I were depressing economic activity; that lower rates would turn the economy around; that high-income earners would end up paying more and that low-income earners would be removed from the tax roles entirely.

His program was a fantastic success. The top rate was cut to 25% from 77%. The rich did indeed pay more, while low- and middle-income earners saw their tax bills shrink to nothing or next to nothing. The economy boomed. The U.S. outstripped more heavily taxed nations, such as Britain and France. Mellon also pushed painstakingly for the creation of an international monetary system to replace the one shattered by World War I. The big challenge was huge Allied war debts to the U.S. and onerous German reparations. Mellon negotiated the easiest terms that were politically possible so that trade and economies could revive.

We sometimes forget just how dynamic the 1920s were in America. The automobile became a commonplace item for working Americans; labor-saving devices, such as the washing machine, grew ever more common as well; movies and radio provided mass entertainment as never before (an experimental television broadcast was carried out in 1927); and stock ownership widened to include more members of the middle class.

It was a time of great innovation and inventiveness, and in a sense Mellon presided over it all by allowing it to happen without intrusive government policies.

For the full review, see:

STEVE FORBES. "BOOKS; The Man Who Made the Twenties Roar." The Wall Street Journal (Fri., October 6, 2006): W4.

Reference for the book:

David Cannadine. MELLON. Knopf, 2006. 779 pages, $35

Source of book image: online version of the WSJ article cited above.

Why Should We Be Forced to Subsidize Those Who Choose to Live in the Boonies?

Kerry Caruselle, the only passenger on her federally subsidized flight between Pueblo and Denver, leaves the plane. Source of the photo: online version of the NYT article cited below. Grant Campbell has plenty of room to spread out on his federally subsidized flight between Pueblo and Denver. Source of the photo: online version of the NYT article cited below.

(p. A1) PUEBLO, Colo. — Hoping for an empty seat beside you on your next flight? No problem — just schedule a trip to someplace like Kingman, Ariz.; Brookings, S.D.; or Pueblo.

They are among more than 100 locales around the country that receive federally subsidized airline service, and the average number of passengers on each flight is about three.

Most of these flights on 19-seat prop planes have plenty of elbow room — a rare luxury in this age of jampacked commercial jets. Some major airlines have cut their fleets about 20 percent since 2001 and have abandoned unprofitable routes, meaning planes are flying fuller than at any time since World War II.

The more tranquil cabins come courtesy of the Essential Air Service, put in place when the airline industry was deregulated in 1978. The idea was to help travelers in smaller cities adjust to the new competitive era of air travel. The intention was for the service to go away after 10 years, but it was renewed for a second decade — and then made permanent.

Over time, though, the program has come to seem mostly expensive and, to its critics, unessential.

After all, travelers adjusted very well after deregulation, and started driving the extra distance to busier regional airports nearby that offered increasingly cheap and plentiful jet service. That left the program with (p. C7) mostly empty planes, making them more costly to fly. Add in higher maintenance and fuel costs, and spending has more than quadrupled since 1996, to $110 million.

That, of course, is not a lot in the federal scheme of things. But the program is a good case study of how poorly the government sometimes keeps pace with the free market and consumer tastes, and how entrenched interests, even in the face of some creative map-drawing, can keep such a program aloft in the face of efforts to ground it.

. . .

The emptier the subsidized flights, it seems, the more cherished the program became. Members of Congress regularly pressured the Transportation Department to continue subsidies to towns they represented. A lobbying group sprang up solely to fight to preserve and expand the program.

For the full story, see:

JEFF BAILEY. "Subsidies Keep Airlines Flying to Small Towns." The New York Times (Fri., October 6, 2006): A1 & C7.

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

Entrepreneur Makes Risky, Massive Infrastructure Bet

A Louisiana site where Cheniere is building a terminal for liquified natural gas. Source of image: online version of the NYT article cited below.

Charif Souki is making a risky business decision. If he is wrong, he and his investors will lose much. If he is right, consumers will be better off, having a larger supply of liquified natural gas (LNG). And if he is right, he should be allowed to make a lot of money, both because that is just, and because it is useful for those who have bet right in the past, to have ample means to bet right in the future.

(p. C1) CAMERON PARISH, La. — The Sabine River channel, where alligators and speckled trout live alongside petrochemical plants and oil refineries, has suddenly become the center of a quiet revolution in the world of natural gas.

And it is mainly at the prodding of a little-known company called Cheniere Energy, with help from Exxon Mobil and Sempra Energy. Together they have overcome formidable regulatory hurdles to build three new liquefied natural gas terminals on the channel that will double the nation’s capacity to import natural gas by 2011.

It has been 24 years since anyone on American shores has built a new liquefied natural gas terminal. Two of the country’s four existing onshore terminals, which dock tankers the size of aircraft carriers ferrying supercooled gas from places like Qatar and Trinidad, were mothballed for years because production at home was plentiful and prices were low.

As recently as five years ago almost nobody in the energy world thought it possible to make money from a new American terminal project — with price tags that start at $600 million — let alone get a federal permit.

One lonely believer was Charif Souki, a Lebanese immigrant entrepreneur who had previously raised (p. C4) money for real estate in Paris and hotels in Hawaii before becoming chairman of Cheniere, a floundering gas exploration company. Not even the 9/11 attacks, which made many people on the Atlantic and Pacific Coasts view liquefied natural gas terminals as potential terrorist targets, diverted him from his vision.

Now, even as natural gas prices sag, along with his company’s stock price, and the word glut is on the tip of the tongue among the drilling crowd, Mr. Souki says he is fixed on the longer view.

He is convinced the nation will need to import more gas because North American production is declining. That is the same view Mr. Souki held six years ago, when he decided to shake up the company’s business plan. He defiantly changed its stock symbol to LNG in 2003, and devoted himself to scoping out the country’s coastlines for potential terminal sites.

The already energy-intensive shoreline along the Gulf of Mexico, he concluded, made the most sense, economically and politically, and he started buying real estate in uninhabited harbors close to existing pipelines and gas-thirsty refineries and petrochemical plants.

“People were actually amused that we would be thinking about importing natural gas,” dryly giggled Mr. Souki, 53, a man with a taste for double-breasted suits. “Nobody took us very seriously.”

Cheniere was so unprofitable and utterly spurned by investors in 2002 that Mr. Souki had to borrow $30,000 from his company’s president just to meet a payroll. But over the last four years, Mr. Souki has managed to arrange financing, sign up long-term buyers and master the regulatory process.

For the full story, see:

CLIFFORD KRAUSS. "A Big Bet on Natural Gas." The New York Times (Weds., October 4, 2006): C1 and C4.

The map shows the area in which the terminal is being built. The bottom photo shows a Louisiana site where Cheniere is building a terminal for liquified natural gas. Source of image: online version of the NYT article cited above.

Laptops Update Read and Friedman’s “I, Pencil” Story

Source of graphic: scanned from p. B1 of NYT article cited below.

Leonard Read in his classic "I, Pencil" told the story of how the various compenents of a mere pencil came from different suppliers the world over. People who did not know each other, and might not like each other if they met, but who were brought together in productive co-operation through the power of the market. Milton Friedman frequently presented his own verison of this story. The cover of my 1980 edition of Free to Choose has a picture of Friedman holding a pencil as if in the middle of this story. And there is a short video-clip of Friedman telling the story.

A similar story could be told with many other products, and several sources have presented the raw materials in print to tell the story for laptop computers. (By "raw materials" I mean that they list the diversity of sources of the inputs; but usually without drawing all the lessons that Reed and Friedman drew.) One source is a chapter in Thomas Friedman’s The World is Flat.

Two other sources are articles that appeared within a few days of each other in The New York Times and The Wall Street Journal.

The reference to The New York Times article is:

DAVID BARBOZA. "An Unknown Giant Flexes Its Muscles; Amid Talk of Deal With I.B.M., Lenovo of China Sheds Some Obscurity." The New York Times (Sat., December 4, 2004): B1 & B3.

The reference to The Wall Street Journal article is:

Jason Dean and Pui-Wing Tam. "The Laptop Trail; The Modern PC Is a Model Of Hyperefficient Production And Geopolitical Sensitivities." The Wall Street Journal (Thurs., June 9, 2005): B1 & B8.

Source of graphic: scanned from p. B1 of WSJ article cited above.

Profit-Maximizing Infrastructure Installation

Verizon employees in New York installing fiber optic cable. Source of photo: online version of the NYT article cited below.

(p. C1) Building a whole new state-of-the-art network is a laborious and expensive process that Verizon says it must undertake to fend off rivals like Comcast and Vonage, which are moving fast into the phone business. As Verizon replaces more of its old copper network with more durable fiber lines, the company also expects to save billions of dollars in maintenance costs.

Verizon will spend about $20 billion by the end of the decade to reach 16 million homes from Florida to California. But it is in New York City where Verizon has the most at stake, because New Yorkers are some of the nation’s biggest buyers of video, Internet and phone services. The company plans to spend about $3 billion to reach the city’s 3.1 million homes and apartments.

With such a high concentration of potential customers, competition is fierce — and Verizon has been losing ground. Time Warner Cable, Cablevision and others are stealing about 1,000 Verizon phone customers a day, and their discounted services are making it hard for Verizon to win them back — another reason to get the fiber network up quickly.

“The guys understand the importance of this fiber project,” said Robert Fighera, a lineman and chief union steward in the Bronx, nodding to the workmen nearby. “We’re also stockholders, and we know we have to install this or we’ll fall by the wayside of all these other companies.”

For the full story, see:

KEN BELSON. "Verizon Is Rewiring New York, Block by Block, in a Race for Survival." The New York Times (Mon., August 14, 2006): C1 & C6.