Process Innovations, Allowed by Deregulation, Creatively Destroyed Railroads

(p. A11) In “American Railroads: Decline and Renaissance in the Twentieth Century,” transportation economists Robert E. Gallamore and John R. Meyer provide a comprehensive account of both the decline and the revival.   . . .    They point to excessive government regulation of railroad rates and services as the catalyst for the industry’s decay.
. . .
. . . deregulation, Mr. Gallamore and Meyer demonstrate, was a process of creative destruction. Conrail was created by the government in 1976 in a risky, last-ditch attempt to rescue Penn Central and other bankrupt Eastern railroads. It was quickly losing $1 million a day, and its plight helped make the case for the major revamp of railroad regulation that came in 1980. A wave of mergers followed, and the new companies slashed routes and employees on the way to profitability. The shrinking of the national rail system helped, too, as freight companies consolidated traffic on a smaller (and therefore cheaper) network. Freight-train crews were cut to two or three people from four or five. Cabooses were replaced by electronic gear at the end of freight trains.

For the full review, see:
DANIEL MACHALABA. “BOOKSHELF; Long Train Runnin’; Track conditions got so bad in the 1970s that stationary freight cars were falling off the rails thanks to rotting crossties.” The Wall Street Journal (Weds., July 9, 2014): A11.
(Note: ellipses added.)
(Note: the online version of the review has the date July 8, 2014, and has the title “BOOKSHELF; Book Review: ‘American Railroads’ by Robert E. Gallamore and John R. Meyer; Track conditions got so bad in the 1970s that stationary freight cars were falling off the rails thanks to rotting crossties.”)

The book under review is:
Gallamore, Robert E., and John R. Meyer. American Railroads: Decline and Renaissance in the Twentieth Century. Cambridge, MA: Harvard University Press, 2014.

Flexibility of System of Industrial Relations Makes German Economy Strong

(p. 183) We have argued that the remarkable transformation of the German economy from the “sick man of Europe” to a lean and highly competitive economy within little more than a decade is rooted in the inherent flexibility of the German system of industrial relations. This system allowed German industry to react appropriately and flexibly over time to the demands of German unification, and the global challenges of a new world economy.

Source:
Dustmann, Christian, Bernd Fitzenberger, Uta Schoenberg, and Alexandra Spitz-Oener. “From Sick Man of Europe to Economic Superstar: Germany’s Resurgent Economy.” Journal of Economic Perspectives 28, no. 1 (Winter 2014): 167-88.

Dogs, and Movie About Dog, Banned in Iran

(p. D6) In Jafar Panahi’s new movie, a writer in Iran smuggles his pet dog into his home inside a tote bag. The film, “Closed Curtain,” addresses Iranian lawmakers’ recent ban on dog-walking in public, part of an effort to curb perceived Western influences including keeping pets. For two decades, Mr. Panahi has captured such vagaries of life in his native country.
“Closed Curtain,” which won the best screenplay award at the Berlin Film Festival in 2013, opens at New York City’s Film Forum on July 9. It is Mr. Panahi’s second film since December 2010, when Iran’s Islamic Revolutionary Court banned him from making movies for 20 years.

For the interview with Panahi, see:
TOBIAS GREY. “An Iranian Director’s Best Friend.” The Wall Street Journal (Fri., June 27, 2014): D6.
(Note: the online version of the interview has the date June 26, 2014, an has the title “Iranian Director Flouts Ban on Filming.”)

“In the Name of God and of Profit”

Writing of the period of the mid to late 1300s in the area of Florence:

(p. 114) The surviving archive of a single great merchant of this period, Francesco di Marco Datini of nearby Prato–not, by any means, the greatest of these early capitalists–contains some 150,000 letters, along with 500 account books or ledgers, 300 deeds of partnership, 400 insurance policies, several thousand bills of lading, letters of advice, bills of exchange, and checks. On the first pages of Datini’s ledgers were inscribed the words: “In the name of God and of profit.”

Source:
Greenblatt, Stephen. The Swerve: How the World Became Modern. New York: W. W. Norton & Company, 2011.

The “Miasmic Smog” of Europe’s Nostalgia “Stifled the Imaginations of Those Who Stayed”

(p. D12) Most people remember Mr. Drucker, a longtime contributor to the Journal who died in 2005, as the most influential management consultant of the 20th century. What they may not know is that, like Mr. Zweig, he was born in Austria and fled from the Nazis when Hitler came to power. What’s more, Mr. Drucker’s memories of prewar Vienna, which he compared in “Adventures of a Bystander” to Atlantis, Plato’s imaginary island paradise that fell from favor with the gods and disappeared into the Atlantic Ocean, are no less richly evocative than those in “The World of Yesterday.”
. . .
Born in 1909, three decades after Mr. Zweig, [Drucker] concluded as a young man that Europe’s nostalgia for its prewar past was a “miasmic smog” that stifled the imaginations of those who stayed there. So he emigrated to the U.S., where he found an open society that was bumptiously naive but also vital and forward-looking: “Unlike Europe, where it was felt that ‘the center cannot hold,’ the ‘center’ held in America. Society and community were sound, hale, indeed triumphant.” And whereas Mr. Zweig succumbed at last to despair, Mr. Drucker unhesitatingly embraced America’s democratic culture and flourished, building a new career for himself.

For the full essay/review, see:
TERRY TEACHOUT. “SIGHTINGS; One War, Two Fates.” The Wall Street Journal (Fri., June 6, 2014): D12.
(Note: ellipsis, and bracketed name, added.)
(Note: the online version of the essay/review has the date June 5, 2014.)

The Drucker book discussed by Teachout is:
Drucker, Peter F. Adventures of a Bystander. New York: Harper & Row, 1979.

Lynas Apologizes for Organizing Anti-GM (Genetic Modification) Movement

(p. 115) More than a decade and a half since the commercialization of first-generation agricultural biotechnology, concerns about transgenic crop impacts on human and environmental health remain, even though the experience across a cumulative 1.25 billion hectares suggests the relative safety of first-generation genetically engineered seed. The risks posed by agricultural biotechnology warrant continued attention, and new transgenic crops may pose different and bigger risks. Weighing against uncertain risks are benefits from increased food production, reduced insecticide use, and avoided health risks to food consumers and farm workers. At the same time, adoption is shown to increase herbicide use while reducing herbicide toxicity, save land by boosting yields while also making previously unfarmed lands profitable. Adoption benefits food consumers and farmers but also enriches seed companies that enjoy property right protections over new seed varieties. The (p. 116) balance of scientific knowledge weighs in favor of continued adoption of genetically engineered seed, which may explain why some longtime critics have reversed course. For example, Lord Melchett, who was the head of Greenpeace, has been advising biotechnology companies on overcoming constraints to the technology (St. Clair and Frank forthcoming). Mark Lynas, a journalist and organizer of the anti-GM (genetic modification) movement, publicly apologized for helping start the movement in his “Lecture to Oxford Farming Conference” (2013).
Agricultural biotechnology remains regulated by regimes developed at the introduction of the technology. Whereas precaution may have been appropriate before the relative magnitudes of risks and benefits could be empirically observed, accumulated knowledge suggests overregulation is inhibiting the introduction of new transgenic varieties. Regulation also discourages developing-country applications, where benefits are likely greatest. In the future, new genetic traits may promise greater benefits while also posing novel risks of greater magnitudes than existing traits. Efficient innovation and technology adoption will require different and, perhaps, more stringent regulation in the future, as well as continued insights from researchers, including economists, in order to assess evolving costs and benefits.

Source:
Barrows, Geoffrey, Steven Sexton, and David Zilberman. “Agricultural Biotechnology: The Promise and Prospects of Genetically Modified Crops.” Journal of Economic Perspectives 28, no. 1 (Winter 2014): 99-120.

McCloskey’s “Great Fact” of “the Ice-Hockey Stick”

HockeyStick2011-08-23.jpg

Source of image: http://www.bombayharbor.com/productImage/Ice_Hockey_Stick/Ice_Hockey_Stick.jpg

(p. 2) Economic history has looked like an ice-hockey stick lying on the ground. It had a long, long horizontal handle at $3 a day extending through the two-hundred-thousand-year history of Homo sapiens to 1800, with little bumps upward on the handle in ancient Rome and the early medieval Arab world and high medieval Europe, with regressions to $3 afterward–then a wholly unexpected blade, leaping up in the last two out of the two thousand centuries, to $30 a day and in many places well beyond.
. . .
(p. 48) The heart of the matter is sixteen. Real income per head nowadays exceeds that around 1700 or 1800 in, say, Britain and in other countries that have experienced modern economic growth by such a large factor as sixteen, at least. You, oh average participant in the British economy, go through at least sixteen times more food and clothing and housing and education in a day than an ancestor of yours did two or three centuries ago. Not sixteen percent more, but sixteen multiplied by the old standard of living. You in the American or the South Korean economy, compared to the wretchedness of former Smiths in 1653 or Kims in 1953, have done even better. And if such novelties as jet travel and vitamin pills and instant messaging are accounted at their proper value, the factor of material improvement climbs even higher than sixteen–to eighteen, or thirty, or far beyond. No previous episode of enrichment for the average person approaches it, not the China of the Song Dynasty or the Egypt of the New Kingdom, not the glory of Greece or the grandeur of Rome.
No competent economist, regardless of her politics, denies the Great Fact.

Source:
McCloskey, Deirdre N. Bourgeois Dignity: Why Economics Can’t Explain the Modern World. Chicago: University of Chicago Press, 2010.
(Note: ellipsis added.)

20 Years Before Fall of Rome, Ammianus Described “a World Exhausted by Crushing Taxes”

(p. 48) . . . ghosts surged up from the Roman past. An ancient literary critic who had flourished during Nero’s reign and had written notes and glosses on classical authors; another critic who quoted extensively from lost epics written in imitation of (p. 49) Homer; a grammarian who wrote a treatise on spelling that Poggio knew his Latin-obsessed friends in Florence would find thrilling. Yet another manuscript was a discovery whose thrill might have been tinged for him with melancholy: a large fragment of a hitherto unknown history of the Roman Empire written by a high-ranking officer in the imperial army, Ammianus Marcellinus. The melancholy would have arisen not only from the fact that the first thirteen of the original thirty-one books were missing from the manuscript Poggio copied by hand–and these lost books have never been found–but also from the fact that the work was written on the eve of the empire’s collapse. A clearheaded, thoughtful, and unusually impartial historian, Ammianus seems to have sensed the impending end. His description of a world exhausted by crushing taxes, the financial ruin of large segments of the population, and the dangerous decline in the army’s morale vividly conjured up the conditions that made it possible, some twenty years after his death, for the Goths to sack Rome.

Source:
Greenblatt, Stephen. The Swerve: How the World Became Modern. New York: W. W. Norton & Company, 2011.
(Note: ellipsis added.)

Lack of Innovation, Not Globalization, Killed U.S. Furniture Industry

The following is from a review by Marc Levinson, one of our leading experts on process innovation. I’m guessing that there is more wisdom in the review than in the book being reviewed:

(p. C6) . . . it was not by chance that the U.S. furniture industry provided easy pickings for foreign manufacturers.

In the 1990s, U.S. furniture making was a backward industry. Its productivity–the efficiency with which capital and labor are put to use–grew only one-third as fast as in manufacturing overall. While firms in other industries were investing in laser cutters and five-axis milling machines, furniture makers were devoting only 2.6% of their revenue to capital investment. Instead, they relied heavily on cheap labor, paying their average worker 29% less than the average in all manufacturing.
Nor was there much innovation. When Ikea’s flat-pack furniture, designed to minimize shipping costs and leave assembly to the purchaser, arrived in the United States in 1985, American manufacturers had nothing like it. Ms. Macy reports that Universal Furniture cut costs by designing for efficient production at high volume; U.S. manufacturers did not. Similarly, when JBIII countered the distant Chinese by guaranteeing that Vaughan-Bassett would deliver orders within a week, his own company’s credit and delivery departments couldn’t cope.
Globalization takes the blame for many ills these days. But the implosion that Ms. Macy chronicles owes less to import competition than to executives in a sheltered industry who failed to keep up with a changing world.

For the full, largely negative, review, see:
MARC LEVINSON. “Made in America; It’s not easy to copyright a furniture design–and somebody will always come along and make it for less.” The Wall Street Journal (Sat., July 19, 2014): C5-C6.
(Note: ellipsis added.)
(Note: the online version of the review has the date July 18, 2014, and has the title “Book Review: ‘Factory Man’ by Beth Macy; It’s not easy to copyright a furniture design–and somebody will always come along and make it for less.”)

The book being mainly panned is:
Macy, Beth. Factory Man: How One Furniture Maker Battled Offshoring, Stayed Local – and Helped Save an American Town. New York: Little, Brown and Company, 2014.

Nobel-Prize-Winner Views Success as Rigged (Except for Nobel Prizes)

(p. 245) . . . , Solow interprets the evidence on intergenerational mobility as showing that the economy is not very meritocratic. (Oddly, he exempts the economics profession. He seems to believe that lack of success is often the result of bad luck or a rigged system, unless you are an economist, in which case it’s your own fault.) Although I noted in my article that those born into extreme poverty face particularly difficult obstacles, I view the rest of the economy as more meritocratic than Solow does. In addition to the Kaplan and Rauh study, I recommend a popular book called The Millionaire Next Door (Stanley and Danko 1996). Written by two marketing professors who extensively surveyed high net worth individuals, the book reports that the typical millionaire is not someone who was born into wealth but rather is someone who has worked hard and lived frugally.

Source:
Mankiw, N. Gregory. “Correspondence: Response from N. Gregory Mankiw.” Journal of Economic Perspectives 28, no. 1 (Winter 2014): 244-45.
(Note: ellipsis added; italics in original.)

The Stanley and Danko book that Mankiw praises (and I use in my Economics of Entrepreneurship seminar) is:
Stanley, Thomas J., and William D. Danko. The Millionaire Next Door: The Surprising Secrets of America’s Wealthy. First ed. Atlanta: Longstreet Press, 1996.

“Different Structural Models Can Fit Aggregate Macroeconomic Data About Equally Well”

(p. 1149) There is an apparent lack of encompassing-forecasting and economic models that can explain the facts uniformly well across business cycles. This is perhaps an inevitable outcome given the changing nature of business cycles. The fact that business cycles are not all alike naturally means that variables that predict activity have a performance that is episodic. Notably, we find that term spreads were good predictors of economic activity in the 1970s and 1980s, but that credit spreads have fared better more recently. This is of course a challenge for forecasters, as we do (p. 1150) not know the origins of future business cycle fluctuations. Much needs to be learned to determine which and how financial variables are to be monitored in real time especially in an evolving economy when historical data do not provide adequate guidance.
Explanations for the Great Recessions usually involve some form of nonlinearity. The sudden nature of the downturn following the collapse of Lehman is consistent with nonlinearity being part of the transmission mechanism. At the same time, we lack robust evidence of nonlinearity from aggregate low-frequency macroeconomic data. Essentially, there is an identification issue as different structural models can fit aggregate macroeconomic data about equally well.

For the full article, see:
Ng, Serena, and Jonathan H. Wright. “Facts and Challenges from the Great Recession for Forecasting and Macroeconomic Modeling.” Journal of Economic Literature 51, no. 4 (Dec. 2013): 1120-54.