Economics – Page 259 – artdiamondblog.com

Google Evolves

Gary Hamel has recently penned some thoughtful observations about what practices of Google have led to its success. An excerpt from that analysis appears below. (Hamel earlier wrote a popular book in which he makes extensive use of Schumpeter’s process of creative destruction.)

Only time will tell whether Google has succeeded in building an evolutionary advantage. But consider: Since it’s founding, it has repeatedly morphed its business model. Google 1.0 was a search engine that crawled the Web but generated little revenue; which led to Google 2.0, a company that sold its search capacity to AOL/Netscape, Yahoo and other major portals; which gave way to Google 3.0, an Internet contrarian that rejected banner ads and instead sold simple text ads linked to search results; which spawned Google 4.0, an increasingly global entity that found a way to insert relevant ads into any and all Web content, dramatically enlarging the online ad business; which mutated into Google 5.0, an innovation factory that produces a torrent of new Web-based services, including Gmail, Google Desktop, and Google Base. More than likely, 6.0 is around the corner.

Of course Google may ultimately fall victim to hubris and imperial overstretch as it takes on Microsoft, Yahoo, eBay, the occasional telecom giant and pretty much everyone else in cyberspace. Or like Microsoft, it may simply become like every other big company as it grows. But that’s not the way I’d bet. Google seems to have grasped the new century’s most important business lesson: The capacity to evolve is the most important advantage of all.

For the full commentary, see:

Hamel, Gary. "Management à la Google." The Wall Street Journal (Weds., April 26, 2006): A16.

And here is the information on Hamel’s most recent book:

Hamel, Gary. Leading the Revolution: How to Thrive in Turbulent Times by Making Innovation a Way of Life. Revised & Updated ed. Harvard Business School Press, 2002.

Source of image: http://www.amazon.com/gp/product/B000EPFVBE/sr=8-1/qid=1146333251/ref=pd_bbs_1/104-5668094-9083929?%5Fencoding=UTF8

Europe’s Antitrust Policies Based on “Pathological Revulsion” to Creative Destruction

One of the EU’s findings is that Microsoft uses its desktop dominance to capture the market for Web server software, and now the EU further charges Microsoft with failing to honor its ruling. So Microsoft’s takeover of serverware proceeds apace? Er, Brussels we have a problem.

At last count, Apache-Linux had 62% of the market, Windows 25%, with various others capturing smaller slices. True, Microsoft saw a nearly five-point increase in market share last quarter thanks to GoDaddy.com shifting its 3.5 million hosted sites from Linux to Windows. Maybe the EU should subpoena GoDaddy on grounds that for Microsoft to compete successfully for a customer is illegal.

The other pillar of Europe’s case is Microsoft’s alleged ability to foreclose the market to rival media-playing software. This week, EU lawyers are trying to swat down the inconvenient fact that, since their ruling, Apple’s iTunes and Macromedia’s Flash Player have carved out big niches for themselves. The Apple example is worth inspecting up close. It demonstrates that people don’t buy computers to run software, but to consume information and entertainment "content." Apple gave them the music they wanted, and its software easily found a home on their computers.

Yet the EU simply rejects the example as irrelevant because it doesn’t fit its mental category about what constitutes a "media player." More than stupid — this suggests a pathological revulsion against the kind of disorder in which an Apple can come along and upend all the procrustean assumptions of the EU’s drearily youthful staff of economists and lawyers. We’re not kidding when we say there’s a connection between the Microsoft case and the European 20-somethings who riot in the streets because they’d rather have no job than take a job from which they might fail and be fired.

For the full commentary, see:

HOLMAN W. JENKINS, JR. "BUSINESS WORLD; The Land (and Antitrust Case) That Time Forgot." The Wall Street Journal (Weds., April 26, 2006): A17.

An Osama-Sudafed Link?

The drug cops want everyone to share their mission. They think that doctors and pharmacists should catch patients who abuse painkillers — and that if the doctors or pharmacists aren’t good enough detectives, they should go to jail for their naïveté.

This month, pharmacists across the country are being forced to lock up another menace to society: cold medicine. Allergy and cold remedies containing pseudoephedrine, a chemical that can illegally be used to make meth, must now be locked behind the counter under a provision in the new Patriot Act.

Don’t ask what meth has to do with the war on terror. Not even the most ardent drug warriors have been able to establish an Osama-Sudafed link.

The F.D.A. opposed these restrictions for pharmacies because they’ll drive up health care costs and effectively prevent medicine from reaching huge numbers of people (Americans suffer a billion colds per year). These costs are undeniable, but it’s unclear that there are any net benefits.

In states that previously enacted their own restrictions, the police report that meth users simply switched from making their own to buying imported drugs that were stronger — and more expensive, so meth users commit more crimes to pay for their habit.

For the full commentary, see:

JOHN TIERNEY. "Potheads and Sudafed." The New York Times (Tues., April 25, 2006): A27.

Expecting Nationalization, Companies Held Off Investing in Bolivia

Bolivian President Morales announcing the nationalization of Bolivia’s energy industry. Source of image: http://www.nytimes.com/2006/05/03/world/americas/03bolivia.html

Bolivia’s nationalization of its energy industry, announced Monday by President Evo Morales, was a vivid illustration that the populist policies, championed most prominently by Venezuela, were spreading.

. . .

. . . while Brazil might feel tremors from Bolivia’s decision, it is Bolivia that may be risking its potential as a major natural gas exporter.

Companies had been holding off on investments in Bolivia for some time, unnerved by growing talk of precisely the kind of step that Mr. Morales took this week. Foreign direct investment, much of which goes to energy and mining, fell to $103 million in 2005, from $1 billion in 1999.

What is more, unlike oil, natural gas is not easily exportable, with costly liquefaction facilities, customized tankers or pipelines needed to take the fuel to markets. Chile, a potential market for Bolivian gas, may choose instead a project to import the fuel from as far away as Africa.

Even Brazil, while now reliant on Bolivian gas, has recently discovered large offshore gas reserves of its own. Thus the window of opportunity for Bolivia to become a leading gas exporter may be closing, even as it grows more courageous in its dealings with foreigners.

"If Brazil decides to give the cold shoulder to Bolivia," said Carlos Alberto López, an independent consultant for oil companies in La Paz, "Bolivia will be left with its gas underground."

For the full story, see:

SIMON ROMERO and JUAN FORERO. "Bolivia’s Energy Takeover: Populism Rules in the Andes." The New York Times (Weds., May 3, 2006): A8.

Bolivian soldiers after seizing natural gas facilities. Source of image: http://www.nytimes.com/2006/05/03/world/americas/03bolivia.html

Louis Rukeyser: Optimistic, Witty, Defender of Free Markets; RIP

Louis Rukeyser. Source of image: http://www.reviewjournal.com/lvrj_home/2002/Apr-06-Sat-2002/business/18455995.html

Louis Rukeyser, long-time host of PBS’s Friday night "Wall Street Week," died May 2, 2006, at the age of 73. (JAMES GRANT. "Louis Rukeyser, Television Host, Dies at 73." The New York Times (Weds., May 3, 2006).)

Louis Rukeyser was a pun-loving, urbane, optimistic analyzer of Wall Street and defender of the free market. His weekly "Wall Street Week" was the first show my daughter Jenny watched at home after we brought her home from her birth at Children’s Hospital.

I never met him, though I remember once being on the same airplane with him. He was the narrator for my audio book: Frank Knight and the Chicago School.

PBS, true to form, fired Rukeyser from the show he created. I never watched it again, and the ratings for the Rukeyser-less version tanked: sometimes there is justice in the world.

Source of image: http://www.audioclassics.net/html/econ_files/knight.cfm

Jane Jacobs Saw Spontaneous Cities Work Better Than Planned Cities

Jane Jacobs died on Tues., April 25, 2006 at the age of 89. ("Jane Jacobs, Author and Activist, Dies." The Wall Street Journal (Tues., April 25, 2006), online edition.)

Jacobs’s ideas came from the heart. Her foray into urban theory was partly inspired by the failed urban renewal efforts of the post-World War II era that displaced tens of thousands of poor and minority residents and resulted in the isolation or destruction of previously vibrant neighborhoods in New York, Chicago, Pittsburgh and elsewhere.

Fundamentally, there is little difference behind the social engineering mentality of those who wrought the disaster of postwar urban renewal and the mindset of today’s planners trying to regulate away suburbia in hopes of master-planned urban living for everyone.

More and more, these planners are calling for the centralization of land-use control under state and regional governments, usurping the American tradition of local control over development. In the view of many planners, this command-and-control bureaucracy is needed because municipal planning is too "uncoordinated" to achieve "societally beneficial" goals like open-space preservation, mass transit and urban densification.

But if they go back and reread "Death and Life," they’ll find Jacobs rightly asking, "How is bigger administration, with labyrinths nobody can comprehend or navigate, an improvement over crazy-quilt township and suburban governments?"

She went on to ridicule the idea of regionalism as "escapism from intellectual helplessness" predicated on the delusion that the problems planners are unable to solve at the local level will somehow be more easily addressed on a larger-scale, concluding that "no other expertise can substitute for locality knowledge in planning."

Politicians and planners would do well to commemorate Jacobs by revisiting her work. Despite the best efforts of well-intentioned planners, you can’t "create" a vibrant city or neighborhood. The best cities and neighborhoods just happen, and the best thing we can do is to step out of the way of innovators and entrepreneurs.

For the full commentary, see:

LEONARD GILROY. "Urban Planners Are Blind To What Jane Jacobs Really Saw." The Wall Street Journal (Tues., May 2, 2006): D8.

The reference to Jacobs’ most important book is:

Jacobs, Jane. The Death and Life of Great American Cities. New York: Random House, 1961.

Source of book image: http://archives.cnn.com/2000/books/news/11/23/jane.jacobs.ap/

Doctors Erect Barriers to Keep Out Competition

A Bangalore radiologist. One of three radiologists in India known to be reading U.S. scans. Each of the three has a U.S. degree, as required by U.S. law. Source of image: http://www.nytimes.com/2006/04/19/business/19leonhardt.html?_r=1&oref=slogin

(p. C1) Radiologists seem like just the sort of workers who should be scared. Computer networks can now send an electronic image to India faster than a messenger can take it from one hospital floor to another. Often, those images are taken during emergencies at night, when radiologists here are sleeping and radiologists in India are not.

There also happens to be a shortage of radiologists in the United States. Sophisticated new M.R.I. and CT machines can detect tiny tumors that once would have gone unnoticed, and doctors are ordering a lot more scans as a result.

When I talked this week to E. Stephen Amis Jr., the head of the radiology department at Montefiore Medical Center in the Bronx, he had just finished looking at some of the 700 images that had been produced by a single abdominal CT exam. "We were just taking pictures of big, thick slabs of the body 20 years ago," Dr. Amis said. "Now we’re taking thinner and thinner slices."

Economically, in other words, ra-(p. C6)diology has a lot in common with industries that are outsourcing jobs. It has high labor costs, it’s growing rapidly and it’s portable.

Politically, though, radiology could not be more different. Unlike software engineers, textile workers or credit card customer service employees, doctors have enough political power to erect trade barriers, and they have built some very effective ones.

To practice medicine in this country, doctors are generally required to have done their training here. Otherwise, it is extremely difficult to be certified by a board of other doctors or be licensed by a state government. The three radiologists Mr. Levy found in Bangalore did their residencies at Baylor, Yale and the University of Massachusetts before returning home to India.

"No profession I know of has as much power to self-regulate as doctors do," Mr. Levy said.

So even if the world’s most talented radiologist happened to have trained in India, there would be no test he could take to prove his mettle here. It’s as if the law required cars sold here to have been made by the graduates of an American high school.

Much as the United Automobile Workers might love such a law, Americans would never tolerate it, because it would drive up the price of cars and keep us from enjoying innovations that happened to come from overseas. But isn’t that precisely what health care protectionism does? It keeps out competition.

For the full story, see:

Leonhardt, David. "Political Clout in the Age of Outsourcing." The New York Times (Weds., April 19, 2006): C1 & C4.

Remembrances of Galbraith (and Buckley and Demsetz and Drucker)

John Kenneth Galbraith passed away a couple of days ago, on Sat., April 29, 2006 at the age of 97. (see: "Economist, Writer Galbraith Dies at 97." Omaha World-Herald (Sun., April 30, 2006): 11A)

I remember at a Republican Convention in Miami (1968 I think) when one of the networks had the late Frank Reynolds sitting with Galbraith and William F. Buckley, Jr., to provide occasional commentary on the scene. On this occasion, Galbraith was going on and on about how all of the Republicans had arrived at the convention in their yachts. Buckley sat by, nodding, in uncharacteristic silence. Finally, with a few seconds until they needed to break away, Buckley slowly and deliberately drawled at Galbraith something like the following: ‘And John, when you visit your friends in Hyannis Port, I trust that you find the accommodations adequate?’ As they cut to commercial, you could hear Reynolds, and others in the background, convulsed in laughter.

Actually Buckley and Galbraith were friends, for several years skiing together in Europe. Apparently Galbraith was an indifferent and very slow skier, leading Buckley to observe that Galbraith looked as though he was skiing up the slope backwards. (I read this many years ago, but, alas, do not remember where.)

David Levy and I once wrote a paper in which we measured the writing quality of articles by many important economists. When we presented the paper to the meetings of the American Economic Association, Galbraith was the discussant of our paper. For his comments, he basically recycled an old paper he had written on writing economics, and showed no signs of having read our paper. But he did seem to enjoy our mentioning that by our measures, he turned out to be one of the best writers in the profession. My memory is that at one point, just before or just after the formal proceedings, he actually patted me on the back.

Galbraith wrote many books. One that I enjoyed, and learned from, was his account of the stock market crash of 1929.

Perhaps his most famous book was The New Industrial State, in which he argues that some of the larger firms in the United States form what he called the "technostructure." The technostructure firms were widely held, by many stock owners, few of whom had the incentive or power, to closely monitor whether the firms’ managers were serving the stock owners by maximizing profits. As a result, the technostructure firms’ managers were free to pursue other goals, such as their own power. (Galbraith was OK with the assumption that firms outside the technostructure were maximizing profits.)

Harold Demsetz tested this hypothesis by comparing the rate of profit of firms in and out of the technostructure, reasoning that if technostructure firms were not maximizing profits, we would expect their profits to be lower than those of other firms. He found that there was no difference between the rate of profits of the so-called ‘technostructure’ firms, and the non-technostructure firms. Demsetz’s conclusion was that there was no distinguishable technostructure, and no new industrial state.

I tell my classes that if we don’t throw entrepreneurs such as Michael Milken in prison, they can provide us with the means to keep CEOs pursuing shareholder value (profits) as their goal. The way it would work would be that if CEOs start pursuing something else, their firm’s stock price falls, and the firm becomes an attractive take-over target for someone like Milken.

I also point out that if firms maximize profits, a lot of rich people benefit, but that a lot of average people benefit too—Drucker emphasized that roughly half of the value of stock equity in the United States is held by worker pension funds.

I did not agree with Galbraith’s efforts to grow the government, but he was witty, and urbane, and intelligent. The intellectual scene was more interesting, and fun, with him than without him. He will be missed.

Some references to publications mentioned in, or supporting, the discussion above:

Demsetz, Harold. "Where Is the New Industrial State?" Economic Inquiry 12, no. 1 (1974): 1-12.

Diamond, Arthur M., Jr., and David M. Levy. "The Metrics of Style: Adam Smith Teaches Efficient Rhetoric." Economic Inquiry 32, no. 1 (1994): 138-45.

Drucker, Peter Ferdinand. The Unseen Revolution: How Pension Fund Socialism Came to America. 1st ed: Harpercollins, 1976.

Galbraith, John Kenneth. The Great Crash 1929. Houghton Mifflin Co., 1961.

Galbraith, John Kenneth. The New Industrial State. Houghton Mifflin, 1967.

Kornbluth, Jesse. Highly Confident: The Crime and Punishment of Michael Milken. William Morrow & Co., 1992.

Source of book image: http://www.whatihaveread.net/biblio/book_1458.html

“Damn it Fidel! What are you going to do about this lousy, piece-of-**** island of yours?”

Source of image of book: http://www.amazon.com/gp/product/1586483242/qid=1145298612/sr=2-1/ref=pd_bbs_b_2_1/104-9985403-1047968?s=books&v=glance&n=283155

Fernando Cardosa is the former Brazilian President who is best known for having temporarily tamed Brazil’s runaway inflation. Although not a principled believer in the free market, Cardoso made some efforts to reduce the damage the Brazilian government was doing to the economy. The following startling passage is from a useful review of a new memoir by Cardoso:

. . . , Mr. Cardoso mentions a telling moment at a 1999 summit meeting in Havana. When the heads of state were alone at a luncheon, one said to Castro: "Damn it Fidel! What are you going to do about this lousy, piece-of-**** island of yours? We’re sick of apologizing for you all the time, Fidel. It’s getting embarrassing." The anecdote shows how disingenuous Latin governments can be when they remain silent about the Cuban dictatorship.

For the full review, see:

MARY ANASTASIA O’GRADY. "A Leader Who Got Real." The Wall Street Journal (Thurs., April 6, 2006): D8.

(Note: ellipsis added.)

Here is the full reference to Cardoso’s memoir:

Cardoso, Fernando Henrique. The Accidental President of Brazil: A Memoir. PublicAffairs, 2006. [with Brian Winter; 291 pages; $26.95]

State Colleges and Universities “suffer from all the inefficiency and poor decision-making of Soviet-style factories”

In its public meetings, panelists from Wall Street and elsewhere in the business world have criticized academia as failing to meet the educational needs of working adults, stem a slide in the literacy of college graduates and rein in rising costs.
During a February meeting in San Diego, Trace Urdan, a senior research analyst for the investment banking firm Robert W. Baird & Company, said state colleges and universities “amount to state-run enterprises and suffer from all the inefficiency and poor decision-making of Soviet-style factories.”

For the full story, see:
SAM DILLON. “Panel Considers Revamping College Aid and Accrediting.” The New York Times (Weds., April 12, 2006): A14.

Common Measures Aid Transparent Transactions

Source of book image: http://www.amazon.com/gp/product/customer-reviews/0743216768/ref=cm_cr_dp_2_1/104-9985403-1047968?%5Fencoding=UTF8&customer-reviews.sort%5Fby=-SubmissionDate&n=283155
The Measure of All Things is an interesting book for several reasons. It shows how hard it is to stay focused on noble pursuits in the face of revolution, war, disease, and peasant ignorance. It raises questions about where common standards of measurement should and do come from; and makes useful points about the value of common standards of measurement for free trade. It tells us how hard it was to do science 200 years ago, and tells us of the devotion of those who tried.
Here is a useful passage on why common standards of measurement matter for the free market:

(p. 137) Prieur believed that uniform measures would make France a great nation, smoothly administered from the center and united through trade. The metric system would transform France into “a vast market, each part exchanging its surplus.” It would make exchanges “direct, healthy, and rapid,” diminishing the “frictions” which impeded the wheels of commerce. These frictions included anything that masked the true price of an item, such as the variable measures of the Ancien Regime. The price of an item, Prieur argued, necessarily depended on many factors: its scarcity, the work necessary to produce it, the quality of the product. But in the final analysis, price was whatever people agreed it should be. This meant that when people agreed on a price they needed to know what they were getting, not be baffled by secret shifts in the quantity being exchanged. Those who claimed that differences in measures aided commerce were just talking about their personal profits. “The French Republic,” he wrote, “can no longer tolerate men who earn their living by mystery.” Worse, those who profited from the diversity of measures, said Prieur, corrupted those who tried to conduct honest and transparent exchanges by “complicating commerce, spoiling good faith, and sowing error and fraud among the nations.” Until commerce was carried out with complete probity, the common people would doubt the advantages of free trade. Only if price were the sole variable in exchange would these exchanges be based on clear understanding between parties.

Alder, Ken. The Measure of All Things: The Seven-Year Odyssey and Hidden Error That Transformed the World. Paperback Reprint ed: Free Press, 2003.