Economics of Technology – Page 91

Andy Grove’s Case Against the Car Bailout

(p. A13) Imagine if in the middle of the computer transformation the Reagan administration worried about the upheaval and tried to rescue this vital industry by making huge investments in leading mainframe companies. The purpose of such investments would have been to protect the viability of these companies. The effect, however, would have been to put the brakes on transformation and all but ensure that the U.S. would lose its leadership role.

The government’s investment in General Motors might be directly helpful if the auto industry only had the recession to contend with. But that is not the case. The industry faces the confluence of a world-wide recession, rising fuel prices, environmental demands, globalization of manufacturing, and, most importantly, technological change involving the very nature of the automobile.

For the full commentary, see:
ANDREW S. GROVE. “What Detroit Can Learn From Silicon Valley; Vertically integrated production is a thing of the past. Will the auto industry’s new overseers catch on?” Wall Street Journal (Mon., JULY 13, 2009): A13.

Government Regulatory Costs Impede Energy Innovation

Robert Metcalfe receiving the National Medal of Technology in 2003. Source of photo: http://en.wikipedia.org/wiki/Robert_Metcalfe

The author of the commentary quoted below is famous in the history of information technology. His Harvard dissertation draft on packet switching was rejected as unrealistic. So he left the academy and became the main innovator responsible for making packet switching a reality, through the ethernet.
(He is also the “Metcalfe” behind “Metcalfe’s Law” about the value of a network increasing at a faster rate than the increase in the network’s size.)

(p. A15) . . . new small reactors meet important criteria for nuclear power plants. With no control rods to jam, they are far safer than the old models — you might well call them nuclear batteries. By not using weapons-grade enriched fuels, they are nonproliferating. They minimize nuclear waste. And they’re economical.
. . .
As venture capitalists, we at Polaris might have invested in one or two of these fission-energy start-ups. Alas, we had to pass. The problem with their business plans weren’t their designs, but the high costs and astronomical risks of designing nuclear reactors for certification in Washington.
The start-ups estimate that it will cost each of them roughly $100 million and five years to get their small reactor designs certified by the Nuclear Regulatory Commission. About $50 million of each $100 million would go to the commission itself. That’s a lot of risk capital for any venture-backed start-up, especially considering that not one new commercial nuclear reactor design has been approved and built in the United States for 30 years.
. . .

As we learned by building the Internet, fiercely competitive teams of research professors, graduate students, engineers, entrepreneurs and venture capitalists are the best drivers of technological innovation — not big corporations, and certainly not government bureaucracies. So, if it’s cheap and clean energy we want, we should clear the way for fission energy start-ups. We should lower the barriers at the Nuclear Regulatory Commission for the approval of new nuclear reactors, especially the new small ones. In particular, we should drop the requirement that the commission be reimbursed for reconsidering new fission reactor designs.

For the full commentary, see:
BOB METCALFE. “The New Nuclear Revolution; Safe fission power is our future — if regulators allow it..” Wall Street Journal (Weds., JUNE 24, 2009): A15.
(Note: ellipses added.)

The Epistemological Implications of Wikipedia

Source of book image: online version of the WSJ review quoted and cited below.

I think the crucial feature of Wikipedia is in its being quick (what “wiki” means in Hawaiian), rather than in its current open source model. Academic knowledge arises in a slow, vetted process. Publication depends on refereeing and revision. On Wikipedia (and the web more generally) knowledge is posted first, and corrected later.
In the actual fact, Wikipedia’s coverage is vast, and its accuracy is high.
I speculate that Wikipedia provides clues to developing new, faster, more efficient knowledge generating institutions.
(Chris Anderson has a nice discussion of Wikipedia in The Long Tail, starting on p. 65.)

(p. A13) Until just a couple of years ago, the largest reference work ever published was something called the Yongle Encyclopedia. A vast project consisting of thousands of volumes, it brought together the knowledge of some 2,000 scholars and was published, in China, in 1408. Roughly 600 years later, Wikipedia surpassed its size and scope with fewer than 25 employees and no official editor.

In “The Wikipedia Revolution,” Andrew Lih, a new-media academic and former Wikipedia insider, tells the story of how a free, Web-based encyclopedia — edited by its user base and overseen by a small group of dedicated volunteers — came to be so large and so popular, to the point of overshadowing the Encyclopedia Britannica and many other classic reference works. As Mr. Lih makes clear, it wasn’t Wikipedia that finished off print encyclopedias; it was the proliferation of the personal computer itself.
. . .
By 2000, both Britannica and Microsoft had subscription-based online encyclopedias. But by then Jimmy Wales, a former options trader in Chicago, was already at work on what he called “Nupedia” — an “open source, collaborative encyclopedia, using volunteers on the Internet.” Mr. Wales hoped that his project, without subscribers, would generate its revenue by selling advertising. Nupedia was not an immediate success. What turned it around was its conversion from a conventionally edited document into a wiki (Hawaiian for “fast”) — that is, a site that allowed anyone browsing it to edit its pages or contribute to its content. Wikipedia was born.
The site grew quickly. By 2003, according to Mr. Lih, “the English edition had more than 100,000 articles, putting it on par with commercial online encyclopedias. It was clear Wikipedia had joined the big leagues.” Plans to sell advertising, though, fell through: The user community — Wikipedia’s core constituency — objected to the whole idea of the site being used for commercial purposes. Thus Wikipedia came to be run as a not-for-profit foundation, funded through donations.
. . .
It is clear by the end of “The Wikipedia Revolution” that the site, for all its faults, stands as an extraordinary demonstration of the power of the open-source content model and of the supremacy of search traffic. Mr. Lih observes that when “dominant encyclopedias” were still hiding behind “paid fire walls” — and some still are — Wikipedia was freely available and thus easily crawled by search engines. Not surprisingly, more than half of Wikipedia’s traffic comes from Google.

For the full review, see:
JEREMY PHILIPS. “Business Bookshelf; Everybody Knows Everything.” Wall Street Journal (Weds., March 18, 2009): A13.
(Note: ellipses added.)

The book being reviewed, is:
Lih, Andrew. The Wikipedia Revolution: How a Bunch of Nobodies Created the World’s Greatest Encyclopedia. New York: Hyperion, 2009.

Increase in Prizes to Advance Innovation

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

(p. A9) Are we impatient with NASA? Google offers $30 million in prizes for a better lunar lander. Do we like solving practical puzzles? InnoCentive Inc. has posted hundreds of lucrative research contests, offering cash prizes up to $1 million for problems in industrial chemistry, remote sensing, plant genetics and dozens of other technical disciplines. Perhaps we crave guilt-free fried chicken. The People for the Ethical Treatment of Animals offers a $1 million prize for the first to create test-tube poultry tissue that can be safely served for dinner.

Call it crowd-sourcing; call it open innovation; call it behavioral economics and applied psychology; it’s a prescription for progress that is transforming philanthropy. In fields from manned spaceflight to the genetics of aging, prizes may soon rival traditional research grants as a spur to innovation. “We see a renaissance in the use of prizes to solve problems,” says Tony Goland, a partner at McKinsey & Co. which recently analyzed trends in prize philanthropy.
. . .
Since 2000, private foundations and corporations have launched more than 60 major prizes, totaling $250 million in new award money, most of it focused on science, medicine, environment and technology, the McKinsey study found.
. . .
In growing numbers, corporate sponsors are embracing the prize challenge as a safe, inexpensive way to farm out product research, at a time when tight credit and business cutbacks have slowed innovation. Venture-capital investments have dropped by almost half since last year, reaching the lowest level since 1997, the National Venture Capital Association recently reported. “Here is a mechanism for off-balance-sheet risk-taking,” says Peter Diamandis, founder of the X Prize Foundation. “A corporation can put up a prize that is bold and audacious with very little downside. You only pay the winner. It is a fixed-price innovation.”

For the full article, see:
ROBERT LEE HOTZ. “SCIENCE JOURNAL; The Science Prize: Innovation or Stealth Advertising? Rewards for Advancing Knowledge Have Blossomed Recently, but Some Say They Don’t Help Solve Big Problems.” Wall Street Journal (Tues., May 8, 2009): A9.
(Note: ellipses added.)

The McKinsey study mentioned in the quotes above, was funded by the Templeton Foundation, and can be downloaded from:

McKinsey&Company. “”And the Winner Is …” Capturing the Promise of Philanthropic Prizes.” McKinsey & Company, 2009.
(Note: ellipsis in study title is in the original.)

Durant and Studebaker Made Transition from Carriage to Car

Christensen’s theory of disruptive innovation predicts that incumbents will seldom survive a major disruption. So it is interesting that Durant and Studebaker, appear to have been exceptions, since they made the transition from producing carriages to producing cars. (Willie Durant founded General Motors in 1908.)

(p. 189) In 1900, fifty-seven surviving American automobile firms, out of hundreds of contenders, produced some 4,000 cars, three-quarters of which ran on steam or electricity. Companies famous for other products were entering the fray. Among them were the makers of the Pope bicycle, the Pierce birdcage, the Peerless wringer, the Buick bathtub, the White sewing machine, and the Briscoe garbage can. All vied for the market with stationary-engine makers, machine-tool manufacturers, and spinoffs of leading carriage firms, Durant and Studebaker. Among the less promising entrants seemed a lanky young engineer from Edison Illuminating Company named Henry Ford, whose Detroit Automobile Company produced twenty-five cars and failed in 1900.

. . .
(p. 191) Willie Durant, who knew all about production and selling from his carriage business, decided it was time to move into cars after several months of driving a prototype containing David Buick’s valve-in-head engine–the most powerful in the world for its size–through rural Michigan in 1904. Within four years, Durant was to parlay his sturdy Buick vehicle into domination of the automobile industry, with a 25 percent share of the market in 1908, the year he founded General Motors.

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

Christensen’s theory is most fully expressed in:
Christensen, Clayton M., and Michael E. Raynor. The Innovator’s Solution: Creating and Sustaining Successful Growth. Boston, MA: Harvard Business School Press, 2003.

The Case for Patent System Reform

(p. A13) The Patent Office now gets some 500 million applications a year, leading to litigation costs of over $10 billion a year to define who has what rights. As Judge Richard Posner has written, patents for ideas create the risk of “enormous monopoly power (imagine if the first person to think up the auction had been able to patent it).” Studies indicate that aside from the chemical and pharmaceutical industries, the cost of litigation now exceeds the profits companies generate from licensing patents.

For the full commentary, see:

L. GORDON CROVITZ. “OPINION: INFORMATION AGE; Why Technologists Want Fewer Patents.” The Wall Street Journal (Mon., JUNE 15, 2009): A13.

Justice Department is Creating Barriers to Companies Trying to Create New Technologies

Intel CEO Craig Barrett. Source of caricature: online version of the WSJ article quoted and cited below.

(p. A9) Craig Barrett is spending the last days of his tenure as Intel chairman the same way he spent his previous 35 years at the corporation: moving at a superhuman pace that leaves exhausted subordinates in his wake.

Mr. Barrett has maintained this lifestyle since he replaced Andrew Grove as CEO of Intel in 1998. “Was it hard to follow a legend?” he asks himself in his typical blunt way, adding, “What do you think?” Mr. Barrett barely broke pace when he became chairman in 2005, and shows no sign of slowing even now, at age 69, as he faces retirement.
. . .
The latest thing that has him animated is the record $1.45 billion antitrust fine levied against Intel by the European Union this week. Mr. Barrett shakes his head and says, “The antitrust rules and regulations seem designed for a different era. When you look at high-tech companies, with the high R&D budgets, specialization and market creation they need to hold their big market shares, it’s so very different from the old world of oil companies and auto makers that the antitrust regulations were designed for. They are out of sync with reality.
“And how do you reconcile European regulators, who don’t believe that any company should have more than 50% market share — even a market that company created — with the way we operate here? Of course, now it seems as if our Justice Department is preparing to march in lock-step behind Europe. In the end, all they are going to do is create barriers to companies growing, entering into new markets, and bringing new technologies into those markets. And when we stop being the land of opportunity, all of those smart immigrant kids getting their Ph.D.s here are going to start heading home after they graduate. Then watch what happens to our competitiveness.”

For the full story, see:
MICHAEL S. MALONE. “OPINION: THE WEEKEND INTERVIEW with Craig Barrett; From Moore’s Law to Barrett’s Rules; Intel’s chairman on antitrust silliness and the secrets of high-tech success.” Wall Street Journal (Sat., MARCH 16, 2009): A9.
(Note: ellipsis added.)

Our “Patently Absurd” Patent System

(p. A15) The Founders might have used quill pens, but they would roll their eyes at how, in this supposedly technology-minded era, we’re undermining their intention to encourage innovation. The U.S. is stumbling in the transition from their Industrial Age to our Information Age, despite the charge in the Constitution that Congress “promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.”
. . .

Both sides may be right. New empirical research by Boston University law professors James Bessen and Michael Meurer, reported in their book, “Patent Failure,” found that the value of pharmaceutical patents outweighed the costs of pharmaceutical-patent litigation. But for all other industries combined, they estimate that since the mid-1990s, the cost of U.S. patent litigation to alleged infringers ($12 billion in legal and business costs in 1999) is greater than the global profits that companies earn from patents (less than $4 billion in 1999). Since the 1980s, patent litigation has tripled and the probability that a particular patent is litigated within four years has more than doubled. Small inventors feel the brunt of the uncertainty costs, since bigger companies only pay for rights they think the system will protect.
These are shocking findings, but they point to the solution. New drugs require great specificity to earn a patent, whereas patents are often granted to broad, thus vague, innovations in software, communications and other technologies. Ironically, the aggregate value of these technology patents is then wiped out through litigation costs.
Our patent system for most innovations has become patently absurd. It’s a disincentive at a time when we expect software and other technology companies to be the growth engine of the economy. Imagine how much more productive our information-driven economy would be if the patent system lived up to the intention of the Founders, by encouraging progress instead of suppressing it.

For the full commentary, see:
L. GORDON CROVITZ. “OPINION: INFORMATION AGE; Patent Gridlock Suppresses Innovation.” Wall Street Journal (Mon., JULY 14, 2008): A15.
(Note: ellipsis added.)

Berkshire BYD Technology Bet Based on Munger’s View of BYD Manager

“BOOK VALUE: Berkshire Hathaway’s Charles Munger reads businesses well — and, as a bibliophile, he goes through several books a week.” Source of caricature and caption: online version of the WSJ article quoted and cited below.

At a Berkshire Hathaway annual meeting a few years ago, I remember hearing Warren Buffett say that he stays away from technology stocks because he does not know how to judge which technologies are likely to succeed in the long-run. So I was a bit puzzled by the news that Berkshire Hathaway was investing in BYD, a Chinese company producing an electric car.
The passages quoted below may partially solve the puzzle: the investment in BYD was pushed by Charlie Munger and David Sokol, and was based more on a judgment about the quality of BYD’s management, than the prospects for BYD’s technology.

(p. C1) Mr. Munger’s views have pushed Berkshire into some surprising directions. Several years ago, Mr. Munger learned of an obscure Chinese maker of batteries and automobiles called BYD Inc., which hopes to create a cheap, functional electric car.

A Chinese tech company is nothing like the shoe and underwear makers Berkshire had been buying. But Mr. Munger was enthusiastic, less about the technology than about Wang Chuanfu, who runs BYD. Mr. Wang, Mr. Munger says, is “likely to be one of the most important business people who ever lived.”
Mr. Buffett was skeptical at first. But Mr. Munger persisted. David Sokol, chairman of Berkshire utility MidAmerican Energy Holdings Co., paid a visit to BYD’s factory in China and agreed with Mr. Munger’s assessment. Last year, MidAmerican paid $230 million for a 10% stake in BYD.
“BYD was Charlie’s idea,” Mr. Buffett said. “When he encounters genius and sees it operating in a practical way, he gets blown away.”

For the full story, see:

SCOTT PATTERSON. “Here’s the Story on Berkshire’s Munger.” Wall Street Journal (Fri., MAY 1, 2009): C1 & C3.

Entrepreneurs, Not MITI, Decided Japan Outcomes in ’60s, ’70s and ’80s

(p. 164) Ishibashi’s regime was followed in the early 1960s by the “income-doubling campaign” of his associate Hayato Ikeda, who assumed power in 1961 and continued the supply-side thrust. The result was a steady upsurge of domestic growth, with firms and industries rapidly gaining experience in intense rivalries at home before entering the global arena as low-cost producers, and with government cutting taxes and increasing revenues and savings.

It is from this domestic crucible of intense competition with normal rates of bankruptcy far above those in the United States, with scores of rivals in every field, that the great Japanese companies have emerged. At various times during the last three decades, for example, there have been 58 integrated steel firms, 50 motorbike companies, 12 auto firms, 42 makers of hand-held calculators, 13 makers of facsimile machines, and 250 producers of robots. Overlooking this welter are always the crested bureaucrats of MITI, sometimes offering useful aid and guidance–but at the center, deciding outcomes, have always been the entrepreneurs.

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

“Dynamism Has Been Leached From Our System,” But Not from Our Brains or Our Hearts

Sometimes one of Peggy Noonan’s columns reminds us that she was once one of Ronald Reagan’s best speech writers:

(p. A11) I heard a man named Nathan Myhrvold speak of a thing called Microsoft. I saw a young man named Steve Jobs prowl a New York stage and unveil a computer that then we thought tiny and today we’d call huge. A man named Steve Wozniak became a household god as my son reported his visionary ways. It was a time so full of genius and dynamism that it went beyond words like “breakthrough” and summoned words like “revolution.” If you were paying attention, if you understood you were witnessing something great, the invention of a new age, the computer age, it caught at your throat. It was like hearing great music. People literally said what had been said in the age of Thomas Edison: “What will they think of next?” What a buoyant era.
. . .
And for a moment, as I sent and received my first airborne Wi-Fi emails, I was back there. And I was moved because I realized how much I missed it, how much we all do, that “There are no walls” feeling. “Think different.” “On January 24th, Apple Computer will introduce Macintosh. And you’ll see why 1984 won’t be like ‘1984.’ ” That was 25 years ago. The world was on fire.
It has cooled. And the essential problem with the crash we’re in is no one can imagine quite feeling that way again. People can remember it, but they can’t quite resummon it.
. . .
I end with a hunch that is not an unhappy one. Dynamism has been leached from our system for now, but not from the human brain or heart. Just as our political regeneration will happen locally, in counties and states that learn how to control themselves and demonstrate how to govern effectively in a time of limits, so will our economic regeneration. That will begin in someone’s garage, somebody’s kitchen, as it did in the case of Messrs. Jobs and Wozniak. The comeback will be from the ground up and will start with innovation. No one trusts big anymore. In the future everything will be local. That’s where the magic will be. And no amount of pessimism will stop it once it starts.

For the full commentary, see:
PEGGY NOONAN. “Remembering the Dawn of the Age of Abundance; Times are hard, but dynamism isn’t dead.” Wall Street Journal (Sat., Feb. 21, 2009): A11.
(Note: ellipses added.)