Category: Schumpeter

Just Throwing Money at R&D Does Not Work?

R&Denigma.gif
(Source: downloaded graphic from online version of WSJ see below, p. A13)

Booz Allen Hamilton Inc., a consulting firm, analyzed six years of financial results by 1,000 publicly traded companies responsible for the bulk of R&D spending globally. The firm found the companies that spent proportionately greater sums than their industry peers didn’t enjoy greater revenue gains or better profits.
The finding flies in the face of academic studies and accepted wisdom on the value of corporate research. It also comes as researchers warn that U.S. companies need to increase spending or risk falling behind rivals in China and India, which are rapidly industrializing.
Booz Allen concluded that once a minimum level of research and development spending is achieved, better oversight and culture were more significant factors in determining financial results. The study calculated the percentage of a company’s revenue spent on R&D and compared it with sales growth, gross profit, operating profit, market capitalization and total shareholder result.

McWilliams, Gary. “In R&D, Brains Beat Spending In Boosting Profit.” The Wall Street Journal
(Weds., October 11, 2005): A2 & A13.
Ah, so maybe the entrepreneur or R&D manager, can make a difference after all? (This is not a surprise, if you believe, as I do, that Clayton Christensen is on to something important.) Or, though less interesting, the results might just be due to diminishing returns to R&D.

Greenspan on Creative Destruction

This morning, Alan Greenspan delivered an excellent speech on “Economic Flexibility” at Georgetown before the National Italian American Foundation, Washington, D.C. Here is the part of the speech most directly relevant to the process of creative destruction:

Starting in the 1970s, U.S. Presidents, supported by bipartisan majorities in the Congress, responded to the growing recognition of the distortions created by regulation, by deregulating large segments of the transportation, communications, energy, and financial services industries. The stated purpose of this deregulation was to enhance competition, which had come to be seen as a significant spur to productivity growth and elevated standards of living. Assisting in the dismantling of economic restraints was the persistent, albeit slow, lowering of barriers to cross-border trade and finance.
As a consequence, the United States, then widely seen as a once-great economic power that had lost its way, gradually moved back to the forefront of what Joseph Schumpeter, the renowned Harvard professor, had called “creative destruction”–the continual scrapping of old technologies to make way for the innovative. In that paradigm, standards of living rise because depreciation and other cash flows of industries employing older, increasingly obsolescent technologies are marshaled, along with new savings, to finance the production of capital assets that almost always embody cutting-edge technologies. Workers, of necessity, migrate with the capital.
Through this process, wealth is created, incremental step by incremental step, as high levels of productivity associated with innovative technologies displace less-efficient productive capacity. The model presupposes the continuous churning of a flexible competitive economy in which the new displaces the old.
As the 1980s progressed, the success of that strategy confirmed the earlier views that a loosening of regulatory restraint on business would improve the flexibility of our economy. No specific program encompassed and coordinated initiatives to enhance flexibility, but there was a growing recognition that a market economy could best withstand and recover from shocks when provided maximum flexibility.

The full speech is available at the Federal Reserve web site at: http://www.federalreserve.gov/boarddocs/speeches/2005/20051012/default.htm

Sewing Machine Benefitted Laborers

Speaking of the invention of a practical, affordable sewing machine:

It was a democratizing influence. James Parton was exaggerating only a little when he wrote in the Atlantic Monthly in 1867 that it was “one of the means by which the industrious laborer is as well clad as any millionaire.” (p. 84)

Evans, Harold. They Made America: Two Centuries of Innovators from the Steam Engine to the Search Engine. New York: Little, Brown and Co., 2004.

When People Change


(p. 462) People don’t change when you tell them they should. They change when they tell themselves they must. Or as Johns Hopkins foreign affairs professor Michael Mandelbaum puts it, “People don’t change when you tell them there is a better option. They change when they conclude that they have no other option.”



Source:
Friedman, Thomas L. The World Is Flat: A Brief History of the Twenty-First Century. New York: Farrar, Straus and Giroux, 2005.


Thomas Friedman’s claim here is plausible, but I find it surprising, given his strong push for a worker safety net when the worker loses a job to creative destruction. The safety net Friedman proposes, in this book anyway, is one that does incorporate some incentives to find a job, but sounds like it could be ‘gamed’ to delay the tough decisions that might need to be made. Hayek had some useful observations on this issue way back in his Road to Serfdom.

Yes to Growth, No to Change

Apparently a perq of being a columnist for the New York Times, is that you get access to pretty high quality economics tutors. Tom Friedman tells us:

My economics tutor Paul Romer is fond of saying, “Everyone wants economic growth, but nobody wants change.” Unfortunately, you cannot have one without the other, especially when the playing field shifts as dramatically as it has since the year 2000. (p. 339)

Friedman, Thomas L. The World Is Flat: A Brief History of the Twenty-First Century. New York: Farrar, Straus and Giroux, 2005.

Higher Return to R&D in U.S than in Japan and Europe

 

The following may be further support for Martin Neil Baily’s claim that the U.S. is more productive than Europe and Japan because the U.S. is more open to creative destruction.

 

<615> . . ., most reserachers conclude that the rates of return to R&D are comparable magnitudes in different countries. This is confirmed by our <616> meta-analysis. However, the elasticities are significantly lower in Europe and Japan, as compared with the USA. (pp. 615-616)

 

Source:  Wieser, Robert. "Research and Development Productivity and Spillovers: Empirical Evidence at the Firm Level." Journal of Economic Surveys 19, no. 4 (2005): 587-621.

Also see: Baily, Martin Neil. "Macroeconomic Implications of the New Economy." Proceedings, Federal Reserve Bank of the Kansas City (2001): 201-268. (Especially see graph on p. 220) Martin Feldstein’s Jackson Hole presentation, was also supportive of the Baily claim.

 

Brozen and Demsetz: Modern-Day Schumpeterians

The dominant view among economists in the field of industrial organization in the 1960s was that industries with a few firms were monopolistic and that this explained why profit rates were higher in concentrated industries than in unconcentrated ones. Harold Demsetz, a former Chicago colleague who moved to UCLA in 1971, dubbed this the “market concentration doctrine.” Brozen, with Demsetz, was a modern-day Schumpeterian who saw a dynamic competitive process at work. In industries in which a few companies had a large market share, they believed, concentration didn’t cause high profits. Rather, concentration and high profits were caused by successful competition. In his 1982 book, Concentration, Mergers, and Public Policy (Macmillan), Brozen weaves together evidence from Demsetz and other economists, along with his own findings, to drive home that point.

Henderson, David R. “In Memoriam: Yale Brozen.” The Freeman 48, no. 6 (June 1998). Posted online at: http://www.libertyhaven.com/thinkers/yalebrozen/memoriam.html

Software Industry Exemplifies Creative Destruction

(p. 4)  In our view, Microsoft’s dominant share in operating systems evolved legitimately from a free-market competitive process. The PC software industry was legally open and contained many talented players (Sun, Netscape, Novell, Oracle, Apple, IBM), some larger than Microsoft, some smaller. The market process in this industry has always been characterized by intense innovation, rapid growth, sharply falling prices, and bitter rivalry (and occasional cooperation) between rivals. The industry exemplifies Austrian economist Joseph Schumpeter’s vision of competition as a process of creative destruction. Microsoft achieved its market position by aggressively innovating and promoting an open, standardized operating system platform . . . 

 

Source: 

Armentano, Dominick T. Antitrust: The Case for Repeal. 2nd ed: Mises, 1999.

 

The Impossible Dream?

In Locked in the Cabinet, Robert Reich’s amusing allegory about life in Washington, Reich laments that the Democratic Party — and in particular the labor constituents in the party — did not support his vision of education and training as a means of enabling the labor force to adapt to and flourish in a time of rapid economic change and dislocation. Instead, they constituted what Reich called the "Save the Jobs Party," which wanted to preserve the industry, the companies and the jobs that exist today.

I think there is a similar phenomenon in antitrust. Antitrust is about process, and a particularly arduous one at that. We are proud that antitrust "protects competition, not competitors". We say that the market has winners and losers and that that is good.

Unfortunately, process is less attractive, in the concrete world in which real disputes arise and real grievances are formed, than is a comforting end-state. And political actors, I fear, are generally more zealous in guarding the latter than in seeking the former.

So, I can imagine constituents and lobbyists and public interest groups demanding the intervention of antitrust authorities to prevent the BA/NYNEX merger, to open up Korea for more car exports, or to restrict the imports of Japanese television sets into the United States. And I can imagine constituents urging that competition authorities in the EC should leave the Boeing/McDonnell Douglas merger alone or that the antitrust agencies here should stop meddling with hospital mergers in Michigan. But it’s hard to imagine tens of thousands of people gathered on the Mall, carrying placards with pictures of Joseph Schumpeter, and demanding that the government give them more "creative destruction."

 

Source:

A. DOUGLAS MELAMED. "International Antitrust in an Age of International Deregulation." Address Before George Mason Law Review Symposium: Antitrust in the Global Economy, Washington, D.C., October 10, 1997.

(Note: At the time, Melamed was Principal Deputy Assistant Attorney General, Antitrust Division, U.S. Department of Justice. Bold emphasis was added by Diamond.)

 

The Creative Destruction of New York City

. . . the eyes of the city are focused firmly on its future, not on its history, and as a result, it subscribes to what the economist Joseph Schumpeter has called “creative destruction.” New York is constantly remaking and reinventing itself, both in its physical structures and in its population.

From the preface of:
Kenneth Jackson and David Dunbar. Empire City: New York Through the Centuries. New York: Columbia University Press, 2002.
(Note: ellipsis added.)