Schumpeter – Page 17 – artdiamondblog.com

Good Rules Encourage Entrepreneurship, Resulting in Vibrant Economy

Some useful observations from the 2004 co-winner of the Nobel Prize in Economics, Edward Prescott:

Good tax rates, . . . , need be high enough to generate sufficient revenues, but not so high that they choke off growth and, perversely, decrease tax revenues. This, of course, is the tricky part, and brings us to the task at hand: Should Congress extend the 15% rate on capital gains and dividends? Wrong question. Should Congress make the 15% rate permanent? Yes. (This assumes that a lower rate is politically impossible.)
These taxes are particularly cumbersome because they hit a market economy right in its collective heart, which is its entrepreneurial and risk-taking spirit. What makes this country’s economy so vibrant is its participants’ willingness to take chances, innovate, acquire financing, hire new people and break old molds. Every increase in capital gains taxes and dividends is a direct tax on this vitality.
Americans aren’t risk-takers by nature any more than Germans are intrinsically less willing to work than Americans. The reason the U.S. economy is so much more vibrant than Germany’s is that people in each country are playing by different rules. But we shouldn’t take our vibrancy for granted. Tax rates matter. A shift back to higher rates will have negative consequences.
And this isn’t about giving tax breaks to the rich. The Wall Street Journal recently published a piece by former Secretary of Commerce Don Evans, who noted that “nearly 60% of those paying capital gains taxes earn less than $50,000 a year, and 85% of capital gains taxpayers earn less than $100,000.” In addition, he wrote that lower tax rates on savings and investment benefited 24 million families to the tune of about $950 on their 2004 taxes.
Do wealthier citizens realize greater savings? Of course — this is true by definition. But that doesn’t make it wrong. Let’s look at two examples: First, there are those entrepreneurs who have been working their tails off for years with little or no compensation and who, if they are lucky, finally realize a relatively big gain. What kind of Scrooge would snatch away this entrepreneurial carrot? As mentioned earlier, under a good system you have to provide for these rewards or you will discourage the risk taking that is the lifeblood of our economy. Additionally, those entrepreneurs create huge social surpluses in the form of new jobs and spin-off businesses. Entrepreneurs capture a small portion of the social surpluses that they create, but a small percentage of something big is, well, big.
Congratulations, I say. Another group of wealthier individuals includes those who, for a variety of reasons, earn more money than the rest of us. Again, I tip my hat. Does it make sense to try to capture more of those folks’ money by raising rates on everyone? To persecute the few, should we punish the many? We need to remember that many so-called wealthy families are those with two wage-earners who are doing nothing more than trying to raise their children and pursue their careers. Research has shown that much of America’s economic growth in recent decades is owing to this phenomenon — we should encourage this dynamic, not squelch it.

For the full commentary, see:
EDWARD C. PRESCOTT. “‘Stop Messing With Federal Tax Rates’.” The Wall Street Journal (Tues., December 20, 2005): A14.

Leading Clinton Economist Advocates a Schumpeterian “Dynamism”

Source of book image: http://www.amazon.com/gp/product/product-description/0743237536/104-0088216-5679944

Today’s review of the new Gene Sperling economic policy book in the New York Times Book Review, begins by emphasizing Sperling’s importance in the Clinton administration:

(p. 16) If you were inclined to identify Clintonism with a single person other than the big man himself, that person might well be Gene Sperling – a top campaign adviser in 1992; a tireless advocate of fiscal discipline during the first term; an inveterate policy wonk throughout all eight years of the administration. So it’s little surprise that this book-length vision for a Democratic economic strategy can best be described as Clintonism 2.0.

NOAM SCHEIBER. “Clintonism 2.0.” The New York Times Book Review, Section 7 (Sun., January 22, 2006): 16.

Here is the opening paragraph of Sperling’s chapter one, which is entitled ” Growing Together in the Dynamism Economy.”

In the 1990s, a new economic era was created when a period of intense globalization collided with an information technology revolution. Yet precisely defining a "new" economy is less important than understanding the nature of the change. I believe a more descriptive label is the “dynamism” economy. Of course, dynamic change in market economies is hardly new. The mid-twentieth-century economist Joseph Schumpeter identified the process of “creative destruction,” positing that a healthy market economy is continually moving forward, replacing old capital, old industries — and existing jobs — with more productive alternatives. Yet, what feels most “new” for average citizens is the breakneck speed at which the increased globalization, rapid technological advance, and the explosion of the Internet are putting fierce competitive pressures on the economy and accelerating change not only in products and services, but also in entire job categories and industries.

Part of the first chapter is viewable at Amazon.com. The book citation is: Sperling, Gene. The Pro-Growth Progressive: An Economic Strategy for Shared Prosperity. Simon & Schuster, 2005.

“Dynamism” as a descriptor for the good society also appeals to libertarian economics columnist Virginia Postrel, author of The Future and Its Enemies and webmaster of dynamist.com.

Theory Uncomplemented by History, “Is Worse than no Theory at All”

I have been primarily a theorist all my life and feel quite uncomfortable in having to preach the historian’s faith. Yet I have arrived at the conclusion that theoretical equipment, if uncomplemented by a thorough grounding in the history of the economic process, is worse than no theory at all.

Excerpted from a letter from Schumpeter to Miss Edna Lonegan, dated February 16, 1942, stored in the Schumpeter archives at Harvard, and reprinted in:
Swedberg, Richard. Schumpeter: A Biography. Princeton, NJ: Princeton University Press, 1991, pp. 229-230.

Beware of the “Sparkling Error”

Schumpeter once wrote that “We all of us like a sparkling error better than a trivial truth.”
This image reminds me of the prudence of adopting a healthy scepticism toward the “sparkling error.”
I believe that the image from Finding Nemo is by computer graphics artist Randy Berrett. The source of the image is the online version of Joe Morgenstern. “MORGENSTERN ON MOVIES: Finding Pixar; A new exhibit examines a studio that can’t stop examining itself.” The Wall Street Journal (Sun., January 7, 2006): P11.
The “sparkling error” Schumpeter quote is from Schumpeter’s diary, and is quoted in: Swedberg, Richard. Schumpeter: A Biography. Princeton, NJ: Princeton University Press, 1991, aphorism 86, on page 205.

Schumpeter: “let us begin”

David Rockefeller remembers Schumpeter’s arrival to teach a graduate level class:

(p. 79) Arriving in class with an air of being in a great hurry, he would throw his overcoat on a chair, whip his handkerchief’ from his pocket, flip it out toward the room, then fold it and carefully mop his brow and the top of his balding head before saying, in his heavy German accent, “Ladies and gentlemen, let us begin.”

Rockefeller, David. Memoirs. New York: Random House, 2002.

Economic Growth Achieved by Entrepreneurs Taking Prudent Risks

(p. 489) Nor should anyone feel guilty about taking prudent risks.This is a fundamental truth that I learned from Joseph Schumpeter, who believed that without entrepreneurs willing to bring new products and ideas to the market and investors ready to finance them, it would be impossible to achieve real economic growth.The alternative, as we have learned to our sorrow in the twentieth century, is government control of the factors of production with results that can be seen in the devastated landscapes and abandoned factories of Russia and Eastern Europe, and the scarred lives of billions of human beings throughout Asia. South America, and Africa.

Rockefeller, David. Memoirs. New York: Random House, 2002.

The Innovator’s Dilemma at the Movies?

Sounds like a possible example of Clayton Christensen’s where the incumbent (movie theaters) move up-market in response to the threat from the disruptive technology (increasingly high quality home entertainment systems):

It was Saturday night at the Palace 20, a huge megaplex here designed in an ornate, Mediterranean style and suggesting the ambience of a Las Vegas hotel. Moviegoers by the hundreds were keeping the valet parkers busy, pulling into the porte-cochere beneath the enormous chandelier-style lamps. Entering the capacious lobby, some of them dropped off their small children in a supervised playroom and proceeded to a vast concession stand for a quick meal of pizza or popcorn shrimp before the show.
Others, who had arrived early for their screening of, say, ”Wedding Crashers” or ”The Dukes of Hazzard” — their reserved-seat tickets, ordered online and printed out at home, in hand — entered through a separate door. They paid $18 — twice the regular ticket price (though it included free popcorn and valet service) — and took an escalator upstairs to the bar and restaurant, where the monkfish was excellent and no one under 21 was allowed.
Those who didn’t want a whole dinner, or arrived too late for a sit-down meal, lined up at the special concession stand, where the menu included shrimp cocktail and sushi and half bottles of white zinfandel and pinot noir. As it got close to curtain time, they took their food and drink into one of the adjoining six theater balconies, all with plush wide seats and small tables with sunken cup holders. During the film, the most irritating sound was the clink of ice in real glasses.
Not your image of moviegoing? Pretty soon it might be. At a time when movie attendance is flagging, when home entertainment is offering increasing competition and when the largest theater chains — Regal Entertainment, AMC Entertainment (which has recently announced a merger with Loews Cineplex) and Cinemark — are focused on shifting from film to digital projection, a handful of smaller companies with names like Muvico Theaters, Rave Motion Pictures and National Amusements are busy rethinking what it means to go to the movie theater. (B1)

BRUCE WEBER. “Liked the Movie, Loved the Megaplex; Smaller Theater Chains Lure Adults With Bars, Dinner and Luxury.” The New York Times (Wednesday, August 17, 2005): B1 & B7.

With Flat Tax, Estonia Has 11% Growth

“Prime Minister Andrus Ansip of Estonia in the cabinet room, which is equipped with a computer for each minister.” Source of caption and photo: online version of NYT article quoted and cited below.

(p. A4) TALLINN, Estonia – Estonia, one realizes after a few days in the abiding twilight of a Baltic winter, is not like other European countries.
The first tip-off is the government’s cabinet room, outfitted less like a ceremonial chamber than a control center. Each minister has a flat-screen computer to transmit votes during debates. Then there is Estonia’s idea of an intellectual hero: Steve Forbes, the American publishing scion, two-time candidate for the Republican presidential nomination and tireless evangelist for the flat tax.
Fired with a free-market fervor and hurtling into the high-tech future, Estonia feels more like a Baltic outpost of Silicon Valley than of Europe. Nineteen months after it achieved its cherished goal of joining the European Union, one might even characterize Estonia as the un-Europe.
“I must say Steve Forbes was a genius,” Prime Minister Andrus Ansip declared during an interview in his hilltop office. “I’m sure he still is,” he added hastily.
The subject was the flat tax, which Mr. Forbes never succeeded in selling in the United States. Here in the polar reaches of Europe it is an article of faith. Estonia became the first country to adopt it in 1994, as part of a broader strategy to transform itself from an obscure Soviet republic into a plugged-in member of the global information economy.
By all accounts, the plan is working. Estonia’s economic growth was nearly 11 percent in the last quarter – the second fastest in Europe, after Latvia, and an increase more reminiscent of China or India than Germany or France.
People call this place E-stonia, and the cyber-intoxication is palpable in Tallinn’s cafes and bars, which are universally equipped with wireless connections, and in local success stories like Skype, designed by Estonian developers and now offering free calls over the Internet to millions.
. . .
Germans showed how allergic they were to the idea when Angela Merkel chose a flat tax advocate as her economic adviser. Antipathy toward him was so intense that political analysts say it probably cost Chancellor Merkel’s party a clear majority in the German Parliament.
Yet the concept has caught on in this part of Europe. Latvia, Lithuania and Slovakia all have a flat tax, while the Czech Republic and Slovenia have considered one. Tax policy, not support for the American-led war in Iraq, is the bright line that separates the so-called old Europe from the new.

For the full article, see:
MARK LANDLER. “Letter From Estonia: A Land of Northern Lights, Cybercafes and the Flat Tax.” The New York Times (Weds., December 21, 2005): A4.
(Note: ellipsis added.)

Broad Increases in Income and Wealth

Graph source: online version of WSJ article cited below. http://online.wsj.com/article/SB113513427028228173.html?mod=opinion_main_commentaries

New reports by the Census Bureau and the Federal Reserve Board on the economic well-being of the typical American family reveal that over the past three decades, the vast majority of families have experienced a rapid growth in their income and wealth. Now that nearly six out of 10 households own stock and two out of three own their own homes, the average family — for the first time ever — has net worth (assets minus liabilities) of more than $100,000. Median family income has climbed to more than $54,000 a year.
Almost no one in the national media has taken notice of this good news, which has been camouflaged by a barrage of misleading and gloomy stories on “stagnant wages,” “the growing income gap between rich and poor,” “the disappearing middle class” and “rising poverty in America.” The reality is that if the economic growth, employment and family-finances numbers get any better, the media will soon have to start calling this the “Clinton economy.”
What the reports tell us is that the vast majority of Americans have not bumped into income glass-ceilings, but rather are experiencing an astonishing pace of upward income mobility. The Census data from 1967 to 2004 provides the percentage of families that fall within various income ranges, starting at $0 to $5,000, $5,000 to $10,000, and so on, up to over $100,000 (all numbers here are adjusted for inflation). These data show, for example, that in 1967 only one in 25 families earned an income of $100,000 or more in real income, whereas now, one in six do. The percentage of families that have an income of more than $75,000 a year has tripled from 9% to 27%.
But it’s not just the rich that are getting richer. Virtually every income group has been lifted by the tide of growth in recent decades. The percentage of families with real incomes between $5,000 and $50,000 has been falling as more families move into higher income categories — the figure has dropped by 19 percentage points since 1967. This huge move out of lower incomes and into middle- and higher-income categories shows that upward mobility is the rule, not the exception, in America today.

For the full story, see:
STEPHEN MOORE and LINCOLN ANDERSON. “Great American Dream Machine.” The Wall Street Journal (Weds., December 21, 2005): A18.

Disruptive Innovation Threatens Boeing and Lockheed?

Source of table: online version of WSJ article cited below.

EL SEGUNDO, Calif. — Maverick entrepreneur Elon Musk, who says he is prepared to spend nearly $200 million of his personal fortune creating a family of low-cost, reusable rockets, recently landed an unexpected customer: the U.S. intelligence community.
Mr. Musk and his fledgling company, closely held Space Exploration Technologies Corp., for years worked on advanced technologies and less-expensive manufacturing concepts to build small rockets capable of launching commercial or government satellites weighing around 1,000 pounds.
But the new contract for a single, classified launch — shrouded in such secrecy that neither the spy agency nor specific type of satellite was identified — envisions construction of a massive rocket by Mr. Musk’s company, known as SpaceX. The launch vehicle is slated to be comparable to the largest, most powerful models built by Boeing Co. and Lockheed Martin Corp., but costing a fraction of the prices charged by the rocket-industry leaders
. . .
Mr. Musk doesn’t minimize the challenge of trying to win more government business while criticizing government procurement practices. “I think it’s extremely risky,” he says of his overall strategy, “but we’ve got to fight for our right to win customers.” If development of simpler, less-costly rocket alternatives is left to major defense contractors, he argues, “I can assure you it will never, never happen.”
. . .
In spite of skepticism and criticism of SpaceX, industry leaders are keeping a wary eye on Mr. Musk, with some vowing stepped-up competition against the industry newcomer.
Tom Marsh, a senior Lockheed Martin space official, told a space conference last month that his company “absolutely intends to pursue, and to pursue vigorously” the market for smaller rockets initially targeted by SpaceX.

ANDY PASZTOR. “For Rocket Start-Up, Sky’s the Limit; Surprise Contract Boosts SpaceX as It Competes With Boeing, Lockheed.” THE WALL STREET JOURNAL (Thurs., September 15, 2005): B6.

Wal-Mart Benefits Rural Poor

Our research shows that Wal-Mart operates two-and-a-half times as much selling space per inhabitant in the poorest third of states as in the richest third. And within that poorest third of states, 80 percent of Wal-Mart’s square footage is in the 25 percent of ZIP codes with the greatest number of poor households. Without the much-maligned Wal-Mart, the rural poor, in particular, would pay several percentage points more for the food and other merchandise that after housing is their largest household expense.

Source:

PANKAJ GHEMAWAT AND KEN A. MARK. "The Price Is Right." The New York Times (Weds., August 3, 2005): A23.