If Only Caroline Had Read Schumpeter

Innovation is sometimes slowed because innovators do not know that creative destruction will replace old jobs with equally good, or better, new jobs:

In 1834 Walter Hunt of New York City made such a leap in lateral thinking. In his little machine shop down a narrow alley in Abingdon Square, he devised a machine for stitching cloth with two threads from two separate sources, one a needle on a vibrating arm and the other a transverse shuttle fed by an unwinding bobbin.
. . .
Hunt, an altruistic Quaker, never pursued his invention because his 15-year-old daughter, Caroline, recoiled from the thought that it would put seamstresses out of work. (p. 87)

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

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.

Comparing Monopoly and Competition


(Source: p. 368, see below)

Comparisons between monopoly and competition, . . ., must be made gingerly. One is liable to fall into nonsense of the sort “If my grandmother had wheels she would be a tram.” (p. 366)

McCloskey, Donald N. The Applied Theory of Price. 2nd ed. New York: Macmillan Publishing Company, 1985.
The usual assumption in price theory texts is that the cost structure would be the same for an industry whether it was competitive or monopolized. The graph above, from McCloskey, is the only one I am aware of that tries to represent the realistic possibility that costs may be significantly lower in monopoly. Usually we think of new goods resulting from creative destruction, but Schumpeter also emphasized new processes, and the new processes presumably would often reduce costs.

Courage and Cunning in the Defense of Freedom

LiAo9-19-05picNYT.jpg
(Li Ao on 9/19/05. Source: NYT online, see below)

BEIJING, Sept. 22 – China’s leaders may have felt they had no better friend in Taiwan than Li Ao, a defiant and outspoken politician and author who says that Taiwan should unify with Communist China.
But when China invited Mr. Li to tour the mainland this week, the Communist Party got a taste of its rival’s pungent democracy.
During an address at Beijing University on Wednesday evening, broadcast live on a cable television network, Mr. Li chided China’s leaders for suppressing free speech, ridiculed the university administration’s fear of academic debate and advised students how to fight for freedom against official repression.
“All over the world leaders have machine guns and tanks,” Mr. Li told the students and professors in the packed auditorium. “So I’m telling you that in the pursuit of freedom, you have to be smart. You have to use your cunning.”
. . .
Though Mr. Li did not criticize President Hu directly, he made pointed references to the lack of freedoms in China and suggested that the “poker-faced” bureaucrats of the Communist Party did not have enough faith in their legitimacy to allow normal intellectual discussion.
With several top university officials sitting by his side, he called the administrators “cowardly” for ferreting out professors at the school who were suspected of opposing Communism.

JOSEPH KAHN. “China’s Best Friend in Taiwan Lectures in Beijing About Freedom.” New York Times (Fri., September 23, 2005): A7.

Management in Private Sector, Public Sector, and Academe

Paul Wolfowitz, new World Bank President, remembering a joke told by his former boss, George Shultz:

“I remember George Shultz,” whom he once worked for, “was once asked how he would compare management in the private sector, public sector, and academics,” Mr. Wolfowitz says. “In the private sector you better be careful what you ask for because people are going to go out and do it. . . . The government, you don’t have to worry about that. You tell people (to) do something and you check back two months later and nothing’s happened. But in the academic world, you tell people to do something and they look at you strangely and they say, ‘Who the heck do you think you are giving us orders?'” (p. A10; “to” added; “. . . ” in original)

PAUL A. GIGOT. “Dr. Wolfowitz, I Presume.” Wall Street Journal (September 24, 2005): A10.

World Bank’s Favorite New Book

Speaking of Paul Wolfowitz, the new World Bank President:

His favorite new source book is the World Bank’s “Doing Business” report, an annual guide to the obstacles that countries impose on their own entrepreneurs. The 2006 version is just out, and for the first time Mr. Wolfowitz had it rank countries, from 1 to 155, on the “ease of doing business.” New Zealand ranked first, and the U.S. third (after Singapore), but African nations held down 25 of the last 30 places.
Take Burkina Faso, a landlocked West African country that came in at . . . 154. “If you were in a food supply business,” Mr. Wolfowitz says, “registering a business would require minimum capital equal to nearly five times annual income. Fees alone cost 1½ times income per capita . . . to register your land, you have to pay fees, 16% of the value of the land. So the result is in a country of 12 million people, only 50,000 are in the formal” economy.
So why is he optimistic? Burkina has grown for the last decade, he says, and the country has political cohesion. “I had a great meeting with the president of Burkina” on a recent trip, and “I shouldn’t say this, but I want to find a way to communicate these results to him and say, do something about it, your country will grow even more.”

PAUL A. GIGOT. “Dr. Wolfowitz, I Presume.” Wall Street Journal (September 24, 2005): A10.
The “Doing Business” report is in its second or third annual version, and is described enthusiastically in Thomas Friedman’s new book The World is Flat. John Devereux suggested to me that one interpretation of the criteria used for the ranking, is that they are a step in the direction of measuring openness to creative destruction.

“Treat Me with Benign Neglect.”

Source: Screen capture from CNN “Refusing to Leave” report by Dan Simon on the morning of 9-9-05.

“This is America. Has your neighborhood ever been invaded by state troopers from another state?” “I will leave when I am dead.” Ashton O’Dwyer can’t understand why he is being forced to leave his dry, intact home in New Orleans. He asks the city: “Treat me with benign neglect.” The 9-9-05 report was followed up by Drew Griffin on 9-10-05 with the “Staying Put” report that presented businesses, and Afro-Americans, expressing sentiments similar to O’Dwyer’s.
Dr. Michael Baden on the “On the Record” Fox News show, hosted by Greta Van Susteren at about 9:47 PM central time on 9-9-05, stated that there was little danger from the “toxic” water unless people drink it. (Toxic water is the main reason given for the current, post-hurricane, forced evacuations.) Baden claims if the city wants to help people, they would be much more effective if they sprayed the water against mosquitoes.
(Dr. Michael Baden is the Chief Forensic Pathologist of the New York State Police, and was formerly the Chief Medical Examiner of New York City.)

Watch the CNN report: “Refusing to Leave“:

Watch the CNN report: “Staying Put“:

For more on O’Dwyer, see also:
CHRISTOPHER COOPER. “Old-Line Families Escape Worst of Flood and Plot the Future.” THE WALL STREET JOURNAL (September 8, 2005): A1.

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.

 

Flexibility of Labor Laws: American Asset

<284> As Harvard University economist Robert Lawrence notes, the greatest single asset <285> that the American economy has always had is the flexibility and mobility of its labor force and labor laws. That asset will become even more of an advantage in the flat world, as job creation and destruction both get speeded up. (pp. 284-285)

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