Category: Schumpeter

Static Versus Dynamic Pictures

Schumpeter distinguished the static picture of capitalism in the textbook model, with the dynamic reality captured in the process of creative destruction.   Apparently Ronald Reagan also understood that a dynamic view is better than a static snapshot.   Michael Deaver recounts:

(p. 75) . . . I told him that I noticed his aversion to sitting for photo shoots.  He looked at me surprised.  "That’s funny, in all these years, nobody’s ever noticed that."   I asked him to elaborate.  "Well, you can never recover from a still shot."

Reagan was most comfortable with moving film, he went on to say.  He truly believed the television camera was a friend, a device that would separate the real from the phony.  Still cameras could always be used to make a candidate look like a fool.  When he explained this to me in the (p. 76) late 1960s, he said, "You know how I sometimes touch my nose before I make a point?  Well, a still shot would show me picking my nose, while a live shot would show me making my point."

 

Source:

Deaver, Michael K.   A Different Drummer:   My Thirty Years with Ronald Reagan.  Reprint ed.  Harper Paperbacks, 2003.

 

Successful Mutual Fund Expert Claims Capitalism is Revitalized by Creative Destruction

SAN FRANCISCO — One morning in November 2003, 15 Dodge & Cox senior managers gathered in a conference room here to decide an issue brewing for years: Was it time to close the flagship Dodge & Cox Stock Fund to new investors?

For months, senior managers had stood in the hallways and gathered in glass-paned offices, questioning what long had been a point of pride in the mutual-fund world: huge sums of money pouring in for investment.  It became "a water-cooler kind of issue," recalls Kenneth Olivier, the firm’s president.

. . .

Dodge also faces some other issues:  In December, longtime Chief Investment Officer John Gunn became chief executive, and a new president and executive vice president were named.  Another CEO switch could occur when Mr. Gunn turns 65 in 2008.  That would be a relatively large amount of turnover for a firm that has had only five CEOs in its history.

. . .

. . . , Mr. Gunn often speaks at mutual-fund forums and investor conferences.  The ruffled-hair Mr. Gunn resembles a college professor, wearing gray pants with yellow pinstripes, a light orange shirt and a yellow tie with zebras one recent day.  His feet on a chair, he quoted 20th century Austrian economist Joseph Schumpeter when talking about media stocks, noting "capitalism is revitalized by waves of creative destruction."  Ancient Asian artifacts, like a pink stone statue from a 14th-century tomb, adorn the office.

As for the flagship fund’s future, Mr. Pohl said as he and Mr. Gunn sat at a conference-room table,  "the fact that we have outperformed" since closing to new investors, "I think is proof" that the decision was made at the right time.

"So far," Mr. Gunn added, half-jokingly.

 

For the full story, see:

DIYA GULLAPALLI.   "When Mutual Funds Don’t Want Your Cash Dodge & Cox Says No To Many New Customers; Angst at the Water Cooler."   The Wall Street Journal  (Mon., May 1, 2006):   R1 & R?.

(Note: ellipses added.)

 

 

Source of graphic:  online version of WSJ article cited above.

Charles Koch Participates in Schumpeter’s Process of Creative Destruction

 

KochClharles.gif Charles Koch.  Source of image:  online version of WSJ article cited below.

 

I heard Charles Koch speak at the April 2005 Orlando meetings of the Association of Private Enterprise Education.  Part of his speech involved how he has tried to apply in his own business, Schumpeter’s process of creative destruction.  For a long time Koch has been a stalwart defender of the free market in word and deed.

Ideas seem to exhilarate him.  This no doubt explains in part why this professorial CEO delivers "dozens and dozens" of lectures around the country to his employees on these very topics.  But what does any of this have to do with explaining his company’s prodigious profitability?  Well, everything — he believes.  Mr. Koch contends that the key insight of his business career was melding these philosophical insights about the way the wealth-creation process works into a business operating system called "Market Based Management."  This system, which he has trademarked, enables every division of his business empire to operate as a separate, autonomous, profit-maximizing unit.  It is intended to reward employees who think like entrepreneurs.

"Long-term success entails constantly discovering new ways to create value for customers and building new capabilities to capture new opportunities," he instructs.  "In this sense, maintaining a business is, in reality, liquidating a business."  Mr. Koch likens the cycle to Schumpeter’s "creative destruction" — where the old and inefficient are ruthlessly swept away by the new.

 

For the full commentary, see: 

STEPHEN MOORE. "THE WEEKEND INTERVIEW with Charles Koch; Private Enterprise." The Wall Street Journal (Sat., May 6, 2006): A8.

 

Benjamin Rogge in 1973 Discussed Leapfrog Competition


Ben Rogge and the members of Wabash College’s John Van Sickle Club in 1973.  Source of image: The Wabash 1973 Yearbook, p. 173.

 

In explaining Schumpeter’s concept of competition within the process of creative destruction, I have long thought the phrase "leapfrog competition" was apt.  I have no memory of Schumpter himself using the phrase, but did think I remembered Rogge using the phrase.

Today (4/21/06) I used the Amazon.com "Search within the Book" feature to search for the "leapfrog", "leap-frog", and "frog" in Schumpeter’s Capitalism, Socialism and Democracy.  No use of any of the three was found.  This provides some support to my belief that Schumpeter himself did not use the phrase.

I also today examined my lecture notes from Benjamin Rogge’s Comparative Economic Systems course at Wabash College.  In the midst of a discussion of creative destruction on 1/25/73, I note "leap-frogging analogy" which supports my memory that Rogge made use of the phrase "leapfrog competition" in class.

In terms of in-print uses of the analogy, I have performed the same three searches using Liberty Fund’s HTML version of Rogge’s Can Capitalism Survive?  I found one "hit" which appears on p. 22 of the print versions of the book.  

The technical description of the market structure, in the language of the textbook model, would be that of “oligopoly”—the rule of the few.

All of this Schumpeter would label as nonsense. Why? Because the investigator would be examining “each year—taken separately” rather than the never-ending game of leapfrog that the data reveal and that represents the true nature of the competitive process.

I will be in the debt of anyone who can show me an earlier use of the word "leapfrog" in the context of a discussion of competiton in Schumpeter’s process of creative destruction.


“life is too short”

Source of book image:  http://www.amazon.com/gp/product/customer-reviews/0738204315/ref=cm_cr_dp_2_1/104-9985403-1047968?%5Fencoding=UTF8&customer-reviews.sort%5Fby=-SubmissionDate&n=283155

The Cluetrain Manifesto is a thought-provoking, entertaining, uneven, overly-mystical, somewhat dated classic on the impact of the internet on business and life.  Here is the book’s startling start:

WE DIE.

You will never hear those words spoken in a television ad.  Yet this central fact of human existence colors our world and how we perceive ourselves within it.  "Life is too short," we say, and it is.  Too short for office politics, for busywork and pointless paper chases, for jumping through hoops and covering our asses, for trying to please, to not offend, for constantly struggling to achieve some ever-receding definition of success.  (p. 1)

Locke, Christopher, Rick Levine, Doc Searls, and David Weinberger. The Cluetrain Manifesto: The End of Business as Usual. Cambridge, Mass.:  Perseus Books Group, 2001.

 

 

Radiologist Outsourcing Is Mainly a Myth

LeonhardtDavid.jpg David Leonhardt.  Source of image:  http://www.nytimes.com/2006/04/19/business/19leonhardt.html?_r=1&oref=slogin

 

A few years ago, stories about a scary new kind of outsourcing began making the rounds.  Apparently, hospitals were starting to send their radiology work to India, where doctors who make far less than American radiologists do were reading X-rays, M.R.I.’s and CT scans.

It quickly became a signature example of how globalization was moving up the food chain, threatening not just factory and call center workers but the so-called knowledge workers who were supposed to be immune.  If radiologists and their $350,000 average salaries weren’t safe from the jobs exodus, who was?

On ABC, George Will said the outsourcing of radiology could make health care affordable again, to which Senator Charles E. Schumer of New York retorted that thousands of American radiologists would lose their jobs.  On NPR, an economist said the pay of radiologists was already suffering. At the White House, an adviser to President Bush suggested that fewer medical students would enter the field in the future.

"We’re losing radiologists," Representative Sherrod Brown, an Ohio Democrat, said on CNN while Lou Dobbs listened approvingly.  "We’re losing all kinds of white-collar jobs, all kinds of jobs in addition to manufacturing jobs, which we’re losing by the droves in my state."

But up in Boston, Frank Levy, an economist at the Massachusetts Institute of Technology, realized that he still had not heard or read much about actual Indian radiologists.  Like the once elusive Snuffleupagus of Sesame Street, they were much discussed but rarely seen.  So Mr. Levy began looking.  He teamed up with two other M.I.T. researchers, Ari Goelman and Kyoung-Hee Yu, and they dug into the global radiology business.

In the end, they were able to find exactly one company in India that was reading images from American patients.  It employs three radiologists.  There may be other such radiologists scattered around India, but Mr. Levy says, "I think 20 is an overestimate."

Some exodus.

 

For the full story, see:

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

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.

Doctors Erect Barriers to Keep Out Competition

RadiologistBangalore.jpg 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.

Seeing How Life Has Improved Since the Days of the Cowboys

cowboyPBS.jpg A cowboy on "Texas Ranch House."   Source of image:  the WSJ article cited below.

 

"Texas Ranch House" — circa 1867 — is the latest PBS experiment in transporting a group of people back to another era so we can watch them live and struggle the way our ancestors did.  (Part one of eight begins Monday, 8-9 p.m. ET, but check local listings.)  As with past series such as "Colonial House," everything — clothing, tools, food, housing and all-around deprivation — is authentic.  Once again, though, stuffing 21st-century mentalities into period costumes and situations is a tough fit. And once again, it’s the folks wearing the bodices that chafe the most.

The Western setting is fascinating for two reasons:  What seems familiar from movies and TV takes on fresh significance when there are real people — not pampered actors — trying to scratch out an existence on the frontier 24/7, with no plot to guide them.  There is also the fact, as one of the participants points out early on, that many of us exist today only because a forebear actually did make the real journey West and manage to survive there long enough to bear children.  What luck, we are reminded more than once during this series, that those ancestors were so different from contemporary Americans.

. . .

The trouble that threatens to sabotage the entire experiment develops in the widening gap between the cowboys and the Cooke family.  The first time one of the employees disses boss man Mr. Cooke, yelling "Don’t let your wife run your life," we react with disgust at the insult.  As one of the women in the household explains to the camera, all the cowboys "are sexist bastards."  Besides, instead of rising early to ride the range in search of mavericks for 10 hours, the cowboys — mostly young Americans plus one frisky British boarding-school boy playing the part of 19th-century remittance man — indulge in long naps during the 100-degree days and often wake up in the morning with hangovers after nights of hard drinking.

At some point, though, certain facts begin to sink in:  Mr. Cooke does have management shortcomings and Mrs. Cooke is far more involved in running the business side of the ranch than a frontier wife would have been.  The ladies, in general, don’t enjoy the roles or status that historical reality would dictate, and some act out in defiant, liberated ways.  A fatal flaw, if not the only one, for the success of the ranch enterprise.  In 1867, spending days making cornhusk dolls while the house filled with flies and vegetables rotted in the garden wasn’t an option for folks who wanted to stay alive.  And, like it or not, keeping the ranch hands happy, as obnoxious as they might be, was more important than maintaining marital bliss.

This being a made-for-television environment, no one perishes, but there are no happy endings here, either.  When one of the Cooke daughters says to the camera, "I feel lost and dazed and hurt," you feel genuinely sorry for her.  At the same time, it’s clearer than ever that emotional pampering, navel-gazing and gender warfare are modern luxuries.  Like it or not, if these had been features of daily life in the West 100 years ago, many of the people reading this would never have been born.

 

For the full review, see:

Nancy deWolf  Smith.  "TV REVIEW; The West That Never Was."  The Wall Street Journal  (Fri., April 28, 2006):   W10.