It’s the middle of the summer, and it’s time to check in with the I&E Reading Group. This summer, we have Michael Lewis’ Moneyball and Louis Menand’s Marketplace of Ideas. If you need a copy of either, I know we have them at The Mudd.
For our first book, Lewis provides us with a look at the world of baseball management. I would suggest that the money point of Moneyball has to do with the tension between quantitative tools and “experts” watching and assessing potential. In the context of evaluating talent, for example, should teams look at the numbers or listen to the scouts? But that isn’t quite right, either, because there is a long, entrenched history of listening to the scouts, so putting too much stock in the college on base percentage is anathema to the whole process. The scouts don’t believe the numbers, and management trusts the scouts. So the conventional wisdom is that the numbers lie.
It doesn’t end there, either. The type of quantitative analysis used for player evaluation has been extended to on-the-field strategy, again exposing a tension between what the numbers guys say and what various experts (i.e., managers, sportswriters, fans) think. (For a similar example in the context of American football, see here).
Continue reading Moneyball at The Academy
In the paragraphs below, I attempt to both summarize McGraw’s description of Schumpeter’s contribution to business cycles and add a few comments as to where his reasoning might help us interpret a post 1950 world.
For many years, Schumpeter focused his scholarly attention on understanding the ups and downs in the economy known as business cycles. He viewed these ups and downs as part and parcel of the dynamics of capitalism, which could not be understood without paying specific attention to the institutions through which capital flowed. The two volume 1,095 page magnum opus entitled Business Cycles captures Schumpeter’s look into virtually every nook and cranny of the dynamics of capitalism in the U.S., the U.K. and Germany. Although he apparently left few stones unturned in this voluminous study, many reviewers concluded that he was not very successful in distinguishing between the forest (of cyclical dynamics) and the trees (of specific institutions in particular countries.)
One Schumpeterian conclusion, however, did come through with incredible clarity: “…theoretical equipment, if uncomplemented by a thorough grounding in the history of the economic process, is worse than no theory at all (254).” Although Schumpeter would approve of the mathematical precision that modern economics has sought as well as of the empirical confirmation or rejection offered by econometric techniques, he would be aghast at economic analysis without either capitalists or entrepreneurs. For him, both economic growth and business cycles – which must be closely linked in the study of capitalism – required the entrepreneur as innovator whether it be through new processes (including physical and virtual factories), new forms of organization (such as corporations and partnerships) and new forms of financing (including well developed bond markets, seller financed purchases, and a vibrant market for venture capital.) Continue reading Schumpeter and Business Cycles
Before I catalog my notes on the last section of the book, The Sage, I’d like to simply point out some excellent resources that have helped me to put Schumpeter’s work in context. Indeed, that is one of the main challenges for economists today, I think, is what was genuinely important about Schumpeter’s work and what wasn’t.
Certainly, McCraw is a strong partisan of Capitalism, Socialism, and Democracy as being the seminal piece. Before you tuck that away as Gospel, you might wan to check out Robert Solow’s review of the book for the New Republic. Solow is a central figure in economic growth and development over the past half century (help me out here, Professor Finkler) and also took courses with Schumpeter at Harvard. He wasn’t so impressed with Schumpeter’s entrepreneur, and consequently the famous Solow growth model doesn’t draw heavily on these ideas. What could have been?
Another interesting perspective on the emergence and persistence of managerial capitalism is Deidre McCloskey’s piece, “Creative Destruction versus The New Industrial State,” comparing Schumpeter to John Kenneth Galbraith; Schumpeter being the face of Harvard economics for the first half of the century and Galbraith for the second. McCloskey is an important thinker and a brilliant writer, and her piece is excellent.
Then, of course, there is the Keynes versus Schumpeter rivalry. This being a pro-Schumpeter crowd, let’s start with management uber-guru Peter Drucker’s thoughts. Certainly, this territory is covered in the text.
I’ll post more on The Sage as we move toward our meeting date.
This is a continuing live blog for the Innovation & Entrepreneurship Reading Group‘s discussion of Thomas McCraw’s Prophet of Innovation. You can see previous entries by clicking on the “Schumpeter Live Blog” tag below.
The second section of the book covers Schumpeter’s life between 1925 and 1940, following the death of his beloved mother and his beloved wife, who died in childbirth of his son, who also died. McCraw emphasizes that this had a rather profound impact on Schumpeter as he straddled time between Bonn and Harvard, all the while repaying the massive debts he accumulated during his vaunt into the private sector. The capstone of this section is that he, indeed, settled into Harvard permanently and reluctantly married for a third time. These events set the stage for the final act of his life as The Sage, as McCraw puts it.
Given the tragedy in his life and his need to pay off his massive debts, it is not surprising that this was not the most productive period for his scholarship. Two pieces jumped out at me as worth discussing — “Social Classes in an Ethnically Homogeneous Environment” and “The Instability of Capitalism.” Continue reading The Adult
Welcome to the Innovation & Entrpreneurship Reading Group’s Live Blog of Thomas McCraw’s Prophet of Innovation: Joseph Schumpeter and Creative Destruction. The theme of the book is Schumpeter’s emphasis on capitalism as a process of creative destruction. That is, entrepreneurship and innovation creates value and is the engine of the capitalist economy, but those that win at the game (successful entrepreneurs) leave a “gale of creative destruction” in their paths. Hence, he sees capitalism as a positive-sum game, but not necessarily as making everyone better off. Just ask any horse and buggy dealer.
The first chunk of the book, L’Enfant Terrible, covers the first 42 years of Schumpter’s life. During that time, he had him traveling from Austria to England to Cairo to the United States, serving as a lawyer, a minister of finance, a businessman, and a scholar. In the scholarship realm, depending on whom you believe, he wrote what was perhaps his defining work — The Theory of Economic Development.*
David Hounshell provides some context for this early work and Schumpeter’s entrepreneur, mark 1.
The entrepreneur is the innovator in Schumpeter’s conception. His original word for the entrepreneur was der Unternehmer, literally undertaker—not in the sense of mortician but from the French verb, entreprendre, to undertake. Schumpeter identifies the entrepreneur as the person who makes new combinations and carries them out. Entrepreneurs are change agents; they create the basis for economic growth.
Continue reading L’Enfant Terrible
If innovation is of interest to you, you might consider reading up on Nathan Myrhvold. My mention of Josh Lerner’s new book in the previous post prompted me to think of Mr. Myrhvold, whose latest scheme is to acquire thousands and thousands of patents. What that will do to US innovation and competitiveness is anyone’s guess. (Of course, your guess is probably more meaningful if you actually know something about the economics and policy dimensions of innovative activities).
Here’s a short profile in the New York Times and a longer piece written by Malcolm Gladwell for The New Yorker.
Gladwell has written a couple of pieces on innovation and entrepreneurship over the past year or two. He even rediscovered some Schumpeterian ideas in a piece from a few weeks back.
No shortage of ideas, that’s for sure.
That’s the title of Robert Litan’s speech from the Foreign Policy Research Institute, and it is a crisp and interesting read. Here’s a taste:
Entrepreneurs are vital to the economy not only because of the innovations they bring to the market, but also for the jobs they create. The Kauffman Foundation sponsored a study recently to look at the source of job growth in the United States since 1980. The conclusion is remarkable, or at least I believe it to be. Since 1980 until the recession, all net new jobs—net meaning gross jobs minus layoffs — have been created by firms under five years old. Think about that. That means all existing firms as of 1980 have not increased their employment since that year. In fact, if anything, the firms that existed in 1980, as a group, have lost employees. Using these data, we have made a rough estimate that at least 1/3 percent of our employment and a somewhat smaller fraction of our GDP since 1980 is due to young new firms that have since grown. These are amazing facts.
The piece contains some nice blurbs about the difference between state-guided capitalism, managerial capitalism, and entrepreneurial capitalism. These concepts seem to follow the Schumpeterian notion of innovation, which is why it’s important to understand Schumpeter (!)
A number of faculty members have formed a reading group for issues of innovation and entrepreneurship. Fittingly, it is called the Innovation and Entrepreneurship Reading Group.
Our first book is Thomas McCraw’s award-winning Prophet of Innovation: Joseph Schumpeter and Creative Destruction. Schumpeter is a central figure in entrepreneurship and innovation scholarship, and is closely associated with the idea that entrepreneurship drives economic growth. He describes innovation as a “perennial gale of creative destruction,” whereby new ideas and products destroy and displace the status quo. Hence, innovation is not unambiguously good thing, as by its very definition it creates classes of winners and losers.
Schumpeter provides the conventional framing of the innovation process as a triumvirate — invention, innovation, and diffusion. Invention is simply the development of a new idea or technology. He argued that inventions were not the story, and that innovation was associated with creating value of the idea. By this definition, innovation is not restricted to technological phenomena. An organization can be innovative by restructuring or doing things in a different way, provided, of course, that there is some value added.
If you are interested, check The Moodle for more information. Or you can contact me directly. I would be happy to spend some time with any student or group of students interested in discussing the book.