Schumpeter – Page 17 – artdiamondblog.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.

“Fierce” Competition Even When One Firm has Half the Market

Graph source: page C6 of article cited below.

(C1) YOKKAICHI, Japan – Nestled in a valley in central Japan, surrounded by forested hills and terraced rice paddies, is one of the world’s most sophisticated – and secretive – semiconductor plants. Inside the windowless plant, built by the Japanese electronics maker Toshiba, tiny cranelike robots shuffle along automated production lines, moving stacks of silicon wafers the size of dinner plates. Masked technicians watch as rows of tall machines grind the wafers, etch circuits on their surfaces and cut them into tiny rectangular computer chips. Inside, visitors are allowed to peek through windows at only a small part of the factory floor. Toshiba is anxious to guard the secrets beyond because it needs them to wage one of the most ferocious battles in today’s electronics industry, for control of the fast-growing market for the advanced memory chips at the heart of portable music devices like the Apple iPod Nano. The fight pits Toshiba and its partner, SanDisk of Sunnyvale, Calif., a maker of memory cards, against Samsung Electronics of South Korea. Both camps are spending billions to build new factory lines, hire engineers and develop more powerful chips in a bid to gain supremacy. The chips, called NAND flash memory chips, differ from earlier computer memory chips in that data on them can be easily erased and replaced and they can store data even after the power is turned off. That makes them like miniature hard-disk drives, only much more durable because they lack moving parts. The newest flash memory chips are the size of a fingernail and can store two gigabytes, the equivalent of every word and image printed in nine years of a newspaper. While Toshiba invented the chips more than a decade ago, Samsung has seized the lead with bigger production volumes and lower prices. In the three months that ended in September, Samsung had a market share of 50.2 percent of the $2.97 billion in total global NAND sales, ac- (C6) cording to iSuppli, a market research firm based in El Segundo, Calif. Toshiba’s share was 22.8 percent. SanDisk is not included in iSuppli’s figures because it does not sell its chips, but instead uses them all in its own memory products. . . . At Toshiba’s Yokkaichi plant, there is a palpable determination to catch up with the larger Korean rival. Engineers work in shifts around the clock to speed up development and production of new chips. Noriyoshi Tozawa, the plant’s manager, said he kept workers on their toes with little reminders of darker times. One is an elevator that has been kept out of use since 2001; a sign on the doors says that it was turned off after a crash in computer chip prices almost forced the closure of the plant, which used to produce DRAM, another type of memory chip. "You have to always be at the leading edge to stay alive in this industry," Mr. Tozawa. "We know what it’s like to lose."

To read full article, see: MARTIN FACKLER. "Among Makers of Memory Chips for Gadgets, Fierce Scrum Takes Shape." The New York Times (Mon., December 12, 2005): C1 & C6.

scrum: "a rugby play in which the forwards of each side come together in a tight formation and struggle to gain possession of the ball when it is tossed in among them" Definition source: http://www.m-w.com/cgi-bin/dictionary?book=Dictionary&va=scrum&x=6&y=21

Drucker Predicted “Universities Won’t Survive”

Mr. Drucker also told us to expect enormous changes that will come in higher education, thanks to the rise of satellites and the Internet. “Thirty years from now big universities will be relics. Universities won’t survive. It is as large a change as when we first got the printed book.” He believed “High school graduates should work for at least five years before going on to college.” It will be news to most college presidents and a lot of alumni that “higher education is in deep crisis. Colleges won’t survive as residential institutions. Today’s buildings are hopelessly unsuited and totally unneeded.” All this from a life-long academic.
. . .
How higher education is managed did not impress Mr. Drucker; but what did is our continuing education system, whether in community colleges or by computers. Also: “Our most important education system is in the employees’ own organization.” That is where most Americans learn the most.

STEVE FORBES. “A Tribute to Peter Drucker.” The Wall Street Journal (Tues., November 15, 2005): A22.