Although there is some disagreement amongst economists, many argue that traditional monetary and fiscal policy will not take the US economy from its current relatively stagnant state to the robust growth needed to employ many of the 8 million who were unemployed during the recent recession as well as the new entrants into the labor force. As those in Intermediate Macroeconomics learned, since we add roughly 1.5 million people to the work force each year, we need about that number of jobs just to keep unemployment from worsening.
As several studies from the Kauffman Foundation have shown, the vast majority of new jobs created in the United States come from new firms (that is firms that are five years old or younger), not from large firms or small firms and not from governments. In recent years, fewer new firms have been created than in the past, and each of these firms has generated fewer jobs than in the past. The Kauffman Foundation has put together a non-partisan “Startup Act Proposal” to jump start the economy. It is entitled “Access to Capital: Fostering Job Creation and Innovation Though High-Growth Startups.” The four key provisions are as follows:
1. Provide a permanent capital gains exemption to investment in startups held for at least five years.
2. Reduce the corporate tax burden for new companies in the first three years they have taxable income. (This may be already doable under subchapter S of the corporate tax code.)
3. Reduce Sarbanes-Oxley requirements for firms with less than $1 billion in market capitalization.
4. Subject federal regulation to 10 year sunset.
Carl Schramm and Robert Litan, on behalf of the Kauffman Foundation also argue for removing the caps on skilled immigrants and immigrant driven entrepreneurial ventures.
In fact, the dirty little secret of the media industry is that content aggregators, not content creators, have long been the overwhelming source of value creation…
The economic structure of the media business is not fundamentally different from that of business in general. The most-prevalent sources of industrial strength are the mutually reinforcing competitive advantages of scale and customer captivity. Content creation simply does not lend itself to either, while aggregation is amenable to both.
I’m not sure what to make of this piece. It reads something like a five-forces analysis, and argues not only that Netflix is the real deal, but that there are significant barriers to entry in the streaming content business. It will be interesting to send this balloon up in next year’s IO class and see if anyone cares to shoot it down.
When countries are ranked according to how important a role entrepreneurship plays in their economies, Israel almost always comes out near the top. In their book Start-Up Nation: The Story of Israel’s Economic Miracle, Dan Senor and Saul Singer look at the possible reasons. I am half-way through the book, and I like how the authors try to offer as nuanced a view as they can. In searching for reasons, it is often tempting to run with a “simple” cultural explanation. While culture certainly must play a role, there are many other important factors, sometimes interacting with culture. I am especially interested in how government policy has enabled the blossoming of entrepreneurial ventures.
Moving on to innovation, I can’t wait to read Inside Real Innovation by Fitzgerald, Wankerl and Schramm. Professor Brandenberger has built up my expectations quite a bit through his enthusiastic summary of some of the main arguments, including the emphasis on the non-linearity of the process of innovation.
Well, if you get to any of those, let me know what you think. I will definitely read something more literary as well, but I am really not sure what that will be. In addition, I hope I’ll have a chance to listen to some great live music every now and then, and I wish you the same.
As the waters surge southward towards the Gulf, The New Yorker reprints John McPhee’s classic “Atchafalaya,” about the Army Corps of Engineers’ handiwork on the Mississippi River. McPhee is possibly the greatest American non-fiction writer of the past fifty years and is renown for his ability to describe natural phenomena. One of the key takeaways from the article is that New Orleans simply wouldn’t exist in the form that it does were in not for the Corps pinning the river in place some years back.
We’re also blessed with another Malcolm Gladwell piece, this time examining the development of the Apple mouse. Click the mouse on the right for an on-line slideshow of various prototypes. In what will certainly be music to Professor Brandenberger’s ears, Gladwell chooses some money quotes from psychologist Dean Simonton, including
“Quality is a probabilistic function of quantity.”
“The more successes there are, the more failures there are as well”
Apple also has some weak spots which a canny competitor should be able to exploit to make compelling products that Apple won’t be able to duplicate or directly compete with.
1. Apple doesn’t do social well on a large scale. Ping? Game Center? Please. Social applications don’t seem to be in Apple’s DNA…
2. Apple can’t do the cloud either…
3. iTunes is getting long in the tooth…
4. I can’t remember if this is my own theory or I read about this on Daring Fireball or something, but the Apple products & services that Apple does well are the ones that Steve Jobs uses (or cares about) and the ones he doesn’t use/care about are less good (or just plain bad).
Might make for an interesting discussion over in one of those innovation classes I hear so much about.
I have recently seen two examples of creative ways to get free labor over the internet. I suppose the whole open source movement should be counted in this category, too, but that’s old news. (And there’s probably more to it than I think.) At a workshop two weeks ago, I heard about Fold-It, a “a revolutionary new computer game enabling you to contribute to important scientific research.” Larry Robertson told us about it at Millikin University, in the context of a discussion on the meaning of entrepreneurship. What could be a more creative and low-cost way to get people to think about protein structures?
The other example is not so much about advancing science as about making money. We all know and love those annoying little wavy words we have to decipher to submit web forms. They are referred to as “CAPTCHAs,” which apparently stands for “completely automated public Turing test to tell computers and humans apart.” What you may not know is that you are working for someone, say, Google, when you decipher those words. The New York Times has the full story. reCAPTCHA started as a project of Professor von Ahn at Carnegie Mellon, as their website says. That same site, you may notice, starts with www.google.com, which is because Google bought reCAPTCHA in 2009. Through reCAPTCHA, Google is enlisting you and me to decipher words in scanned documents that the image-to-text software had trouble with. Hey, if I can help digitize old books, I’m all for that. I hope I don’t have to pay a ton to read those same words in the right order. I can’t wait to hear more about the next scheme of Professor von Ahn.
One thing about capitalism that’s pretty certain is that it’s changing. Capitalism a hundred years ago looked very different from capitalism today, and capitalism looks different in different countries. The field of comparative economic systems was born out of the socialism vs. capitalism debate, and, for that reason, those of us interested in that field should be thankful for that debate. At the same time, the socialism vs. capitalism debate has done and is doing much harm to intelligent discussion of economic systems. Those of us reading Capitalism, Socialism and Democracy this term know that Schumpeter thought socialism could follow capitalism naturally, in Marxian fashion, but it really wouldn’t look very different from the super-big-business capitalism that would exist at that time.
Today’s OnPoint on NPR featured two distinguished guests who were discussing the future of capitalism. Business guru and Harvard professor Michael Porter (remember the 5-forces analysis?) talked about his recent article in the Harvard Business Review on the new capitalism, based on Shared Value, in which firms recognize that the way to be truly profitable is to align their goals with societies and to do good while doing well. But not in that outdated Corporate Social Responsibility (CSR) way, relegating to a CSR department the task of undoing the harm done by the core business, but by integrating the doing good part into the core business mission. Porter argued that the best companies are doing this already, and that capitalism will be made better not through more regulation and more government, but, au contraire, by businesses moving to the “shared value” model.
Robert Reich, author of Supercapitalism, was the other guest, and he was not buying any of that feel-good talk. He couldn’t help but remember the many examples he personally saw of companies investing a lot into what was clearly bad for society but good for profit. His book on the future of capitalism, Supercapitalism, agrees with Porter in finding the CSR model wanting, but thinks that the future lies in separating capitalism from democracy as much as possible. These were questions Schumpeter struggled with in his book. It is easy (apparently, for some) to dismiss those musings from 1942 as idle speculation, but these contemporary contributions and debates remind us that we still know little about how economic and political systems work, that knowing more would still be extremely important, and that capitalism is changing in perhaps fundamental ways even as we continue to talk about a model of a market economy that never really existed. Porter’s view seems to be going in the direction of moving government and business closer to each other. Reich thinks the way to progress is through separating those two as much as possible.
Last time we met for the Schumpeter Roundtable tutorial, we discussed Schumpeter’s point that perhaps the greatest strength of capitalism is that it provides precise, prompt, exact and effective incentives in the promise of great riches and the threat of great destitution. He would know, having been on both ends of that spectrum (well, almost). That sort of system has inequality built into it—inequality that serves an important purpose, some would say. A discussion on inequality and progress ensued, with spiritual, moral, economic, and technological dimensions, eventually leading one participant to remark that “going to Best Buy is a spiritual journey!” But there is, of course, a serious question: Is inequality good for a society (in the long run)? Or, to put it in terms of a trade-off, how much inequality is best? Tonight Tom Ashbrook on NPR spoke with UK Professors Pickett and Wilkinson, authors of The Spirit Level: Why Greater Equality Makes Societies Stronger. The book is based on research that shows, the authors claim, that more equal societies always do better in a number of ways, including overall population health. They argue that more equal societies are even more innovative, contrary to what Schumpeter might say about the importance of incentives in driving progress. As Professor Gerard has pointed out, economists do think about inequality and its consequences, and this book may add evidence to one or both sides. One member of the Schumpeter Roundtable argued that there is so much inequality in the US today, that most people are too discouraged to try hard to reach the top. This book seems to support that argument. Contrast that with Adam Smith’s view that the great driving force of economic development is the extraordinary effort of “[t]he poor man’s son, whom heaven in its anger has visited with ambition,” struggling to attain riches in the (erroneous) belief that money can buy happiness.
Carl Schramm, in a current blog entry in Forbes magazine, argues that job growth comes from the creation of new firms. Schramm is the president of the Kauffman Foundation and a strong advocate for the education of as well as the creation of an economy that encourages entrepreneurs. We have many politicians arguing for job creation but few who understand where jobs come from.
Brandenberger and Galambos strike again. This via the Faculty & Grants Fellowships Newsletter:
This summer, the In Pursuit of Innovation course — co-taught by Professors John Brandenberger (Physics) and Adam Galambos (Economics) — received a two-year $23,000 grant from the National Collegiate Inventors and Innovators Alliance substantially to enhance the support for student projects and to fund guest speakers. Team projects play a central role in the course, and the NCIIA grant will allow students to dream bigger and to go further in pursuing their chosen innovations. It is expected that some teams will go beyond producing a prototype and will bring their idea close to being commercialized. The Innovation course, to be offered for the third time in Winter 2011, is one of the core courses of the Innovation & Entrepreneurship program, which is Lawrence University‘s model for integrating innovation and entrepreneurship into liberal arts education.
The program currently features three core courses that are to be complemented by additional topical courses dealing with environmental issues, politics, economic development, and other subjects that reflect interests of participating faculty. As a result of the program, several courses in economics as well as several courses in the arts will have newly added entrepreneurial components for the first time this year.
Invited experts also play critical roles in the program‘s core courses, including Innovation. These experts also help the program grow, expanding opportunities for students to engage in real-world entrepreneurship and innovation, through structured practical opportunities to take their course-based projects to commercialization, or internships in businesses or nonprofits that foster entrepreneurship or innovation. The NCIIA grant will help pay for travel expenses of several highly regarded experts who will contribute to the next offering of the Innovation course. The expectation is that students who take I&E courses will gain knowledge and cognitive skills that will equip them to be “change agents.” Combined with LU‘s emphasis on critical thought and information synthesis, the conceptual and practical knowledge gained through these courses will prepare students to undertake imaginative and ambitious innovative and entrepreneurial activities.
I have finally started reading Capitalism, Socialism, and Democracy by Joseph Schumpeter. And now I simply can’t put it down. This has not happened to me with an economics book since I read The Road to Serfdom by Hayek. Schumpeter’s work is pure gold, prescient, wise, analytically crystal clear, and beautifully written (yes, every so often one must reread a paragraph-long sentence). I can’t wait to discuss the details in our CS&D reading groups.
The second part of the book is on capitalism, and Schumpeter make some arguments that seem decidedly Marxian, resembling conclusions that Marx “reached.” Which is probably why Schumpeter found it important to start the book with a first part on Marx’s work. Schumpeter’s critique of Marx is balanced, even generous, but penetrating. I have read before that Schumpeter succeeded best by far in putting Marx’s work in perspective, and now I can see how. (Not that I have much expertise on Marx.) Yes, Schumpeter says, I reach some similar conclusions, but make no mistake, dear reader: there is a world of difference between how Marx got there and how Schumpeter did. And there is a world of difference between the implications of Marx’s “analysis” and Schumpeter’s.
I particularly enjoyed Schumpeter’s analogy between Marxism and religion. I have read others who make the same point, but Schumpeter makes it so much better. Marxism is not just a theory of economic change, but a theory of the world. And so it gives followers a lens through which they can see and interpret everything. The Witness is a Hungarian cult movie from the sixties on the Soviet system. In one scene, the head of the state secret police says, “whether you eat baked potatoes or pork roast, the class struggle is intensifying!” People quoted this phrase for decades to come in an ironical voice in comments on the political and economic situation. Yes, it is possible to see everything as a manifestation of class struggle. And once you see everything that way, it is difficult to think outside that system. Though I grew up in the last stages of goulash communism, I was to some extent exposed to that world view, partly in a very personal way. My great-uncle was a true believer in Marxism well before it was fashionable in Hungary. In fact, his own father was in and out of jail in the 1920s for being a communist. (At that time, right-wing Hungary’s police stations had copies of a thick black book—a list of undesirable, suspicious people to watch out for. My great-uncle’s father was listed as guilty of being a Communist and a Jew.) My uncle, after he came back from Auschwitz, got to work in helping build the communist future. He taught Marxism in evening classes to those who needed to be “educated.” And even though he lived through the many failures of that system, he remained a believer to some extent till the end of his life. Yes, Marxism offers a theory of why things are bad, who’s to blame, and hope for inevitable salvation.
For those of you interested in an extra unit or two, this term we are offering an independent study / tutorial reading Joseph Schumpeter’s classic, Capitalism, Socialism, and Democracy. For those of you unfamiliar with the book, here is a review by Schumpeter biographer, Thomas McCraw.
This is a thick book, so you might think about your time commitments before you complete the registration. The likely trajectory for this is for us to set up a weekly discussion time beginning the week of January 10 or 17. Right now I have three hands raised that want to participate.
I am thinking about requirements right now. The bulk of the effort will be focused on the reading, and there will be an attendant writing assignment as well.
As I prepare to pick up Steven Johnson’s Where Good Ideas Come From for a piece of holiday reading, I got a couple of emails talking about where some good ideas came from. The first was YouTube, which most of you have probably encountered at some point, which was originally conceived as a video version of Hot or Not?
Groupon negotiates huge discounts—usually 50-90% off—with popular businesses. We send the deals to thousands of subscribers in our free daily email, and we send the businesses a ton of new customers. That’s the Groupon magic.
Cracker and Camper Van Beethoven have a festival, The Campout. It’s rather remote and since we produce the small festival ourselves we take considerable financial risk. While the previous years had been marginally successful we were worried about the rapidly deteriorating economy (I believe Bear Stearns had just gone bankrupt). So I started a campaign to get a “break even” amount of CVB and Cracker fans to commit to attend the festival. In this way our fan’s promises to attend would become a sort of promissory note. no pun intended. While you couldn’t exactly peg it’s value, these collective promises to attend at some point seemed to be worth enough to go ahead and book the flights, PA, lights, and port-o-potties.
Other successful “campaigns” on The Point also involved similar commitments for group purchasing. It wasn’t long before The Point became Groupon.
That’s right, the brainchild behind my bargain-basement car detailing deal germinated long ago with the same geniuses that brought us “Pictures of Matchstick Men” and “Take the Skinheads Bowling.” And the idea is simple enough, over some range, marginal costs are pretty low, but you still have to cover your average costs:
[I]it had not gone unnoticed that most concerts have a lot of empty seats. And Groupon works best when the “incremental” cost of adding clients/patrons is very low. Adding concertgoers to a half full arena is a perfect example of low incremental costs. So concerts were seen as a natural fit for Groupon.
My editing of that clip does a bit of violence to the spirit of the post, so I suggest you go check it out for yourself. The lesson here might be that those punk rockers might be a bit sharper than they look. Or, perhaps this fits into Johnson’s hypothesis about innovation environments.
The answer depends on whether it manages to preserve its history of entrepreneurship, says Edward Glaeser in his piece Start-Up City in New York’s City Journal. He argues that the strength behind the spectacular economic development New York City has experienced in most of the past two hundred years grew out of entrepreneurship. Industries have come and gone, but the entrepreneurial spirit remained. But will this be the case after the Fall of Finance? Glaeser worries that the financial firms that have come to dominate the City aren’t small and entrepreneurial, but relatively large, possibly undermining that culture of entrepreneurship. Moreover, in several studies and surveys New York state and New York City show up as one of the worst places to do business in the US. One other piece of this picture that I think deserves more attention than Glaeser is granting is the constant influx of immigrants that New York has experienced for a long time. See this paper by Waldinger on immigrants and the famous New York garment industry, or this study by the Kauffman Foundation on immigration and technology entrepreneurs in particular. Of course when great numbers of immigrants became entrepreneurs in NYC, it was in small-scale manufacturing industries such as the garment industry, where no knowledge of English and no higher education were required. My great-uncle has several childhood friends who successfully became such entrepreneurs in the US, and spoke rather limited English to the day they died. It is doubtful that such a mechanism of low-skilled immigrant entrepreneurship could function today. But, as the aforementioned study suggests, technology may be the new garment industry.
Last Friday and Saturday, I participated in a variety of activities related to the Chicago ACM program on Business, Entrepreneurship, and Society. Two current seniors, Alex Chee and Cuong Nguyen, are enrolled in the program and have fascinating internships that they will tell us about when they return in January.
We visited the Industrial Council of Nearwest Chicago (ICNC), which has been serving business start-ups for 40 years. The above building houses over 120 tenants that are in the early stages of business development. ICNC owns and manages this 410,000 square foot space and supports the resident entrepreneurs with a variety of services including counseling and technical assistance, advocacy, recruitment, funding, and employee training. We met with one firm (Souldier) that recycles automobile seatbelts into guitar straps (for famous and not so famous bands) and another (Aloft) that teaches how to do aerial acrobatics on silk ribbons hung from the rafters – an awe inspiring vision.
If you fancy yourself as an entrepreneur, seriously consider enrolling in this program. You will find out whether such a lifestyle is a perfect fit for you. If you have questions or seek more information about the program, come see me.
This three-day event features a number of entrepreneurs who share their experiences with about 1500 students from all over the country. We heard, among others, Jimmy John talk about his story. (His father lent him $25K to start a hot-dog stand, and said that if he makes it, Jimmy gets 52% of the company, father gets 48%; if he fails, he agrees to enlist. The threat of boot camp pushed Jimmy to succeed and buy out his father. How did he sell his first sandwiches? Well, he didn’t. After he opened his shop and not a soul showed up by 2pm, he grabbed a few sandwiches and went to the neighboring businesses to hand them out as samples.) Another interesting person I heard was Phillip Leslie. Formerly a Microsoft software engineer (mobiles apps division), Mr. Leslie just couldn’t help getting into the iPhone app gold rush when he was an MBA student at Chicago’s Booth School of Business. So he launched ProOnGo, a mobile expense reporting app. In the middle ages, when you went on a business trip, you came home with a pocketful of receipts, which you then meticulously recorded and submitted. With ProOnGo, when you get that receipt, you take a pic of it with your iPhone, or Blackberry, or whatever, and in a few seconds you are done. At the end of the trip, you click to submit your expenses in excel or pdf format. Huge hit. Mr. Leslie gave very good advice indeed on how to make it with an app. For example, do you know the three ways to make money with an app? Through ads, one-time sales, or subscription service. Sounds obvious, but, actually, he is one of the pioneers of the last of these: it was believed that subscription service just wouldn’t be viable for iPhone apps. And how much do you get per impression if you advertise on your free app? Well, between a tenth of a penny and a penny. He also encouraged students with economics and social science-type skills to pair up with computer science majors to produce an app. But be clear about one thing: is this a hobby (which will cost you money), or a business (which should make you money)?
The weather was not ideal for driving across Wisconsin, but the unusual conditions produced some amazing scenery.Before the Forum began, I had a chance to catch up with a friend, Daniel Barolsky, who was a Postdoctoral Fellow at Lawrence during the first year of the Fellows program. We all know that the first crop of Fellows was the best. I came in the second year of the program as a Fellow, so Daniel and I overlapped two years at LU. Anyway, we sat down in the Bushel and Peck’s, which is the center of activity in Beloit. It is a very interesting place–they have gourmet groceries, coffee, food, and ambience conducive to conversation. If you go, do stick to American coffee–that’s definitely their forte. If you get their bottomless cup, you will end up going through the art gallery in the back, which leads to the restroom. Oh, and the frozen chickens are stored back there, too.
The Forum itself started with a panel on Entrepreneurship and the Liberal Arts. Our own Prof. Finkler presented as part of a distinguished panel, describing the great many things we do in the name of I&E at Lawrence. He started with an image of the “Creative Instruction” cup that I presented to Prof. Gerard to signify his Chief of Schumptoberfest title. Prof. Finkler then summarized Schumptoberfest, In Pursuit of Innovation, Entrepreneurship and Finance, Entrepreneurship in the Arts and Society, and the many ways we build innovation and entrepreneurship into our courses at LU (including the upcoming Economics of Innovation course–watch this space for updates!) He also talked about the center we are developing, the Lawrence Innovation Bridge, where student ventures will have a space to grow. Robyne Hart from the ACM’s Chicago BES program also presented, outlining the indisputable advantages of being in Chicago, a hub of innovation and entrepreneurship. Consider making that a part of your Lawrence experience. From Wake Forest University, Betsy Gatewood presented on education, entrepreneurship and the liberal arts. She should know, being the Director of their Office of Entrepreneurship and Liberal Arts. They have an astounding variety of courses in all disciplines that relate to Entrepreneurship–take a look and let everyone at Lawrence know that you’d like to see more of that stuff here, too. Finally, Beloit’s own Jerry Gustafson gave an eloquent, entertaining, erudite, evocative and overall excellent monologue on entrepreneurship and education. We’ll see if we can make that available to you somehow. Finally Israel Kirzner himself reacted to what had been said. He thanked the panelists for all he had learned from their talks, pointing out that much of it was “refreshingly new” to him. Then he went on to make a distinction between studying the role of entrepreneurs in the economy (what he has done) and studying entrepreneurship, what makes an entrepreneur, etc.
Prof. Kirzner reiterated that distinction in the evening panel discussion on his work. The participants were (from left to right in the pic) Roger Koppl, Deirdre McCloskey, Virgil Storr, and Israel Kirzner. Much was said about expertise, entrepreneurship, piracy and shipwrecking, but to me the most interesting comments came from McCloskey, who started by describing, in the way of a confessional, here transformation from Chicago-school Samuelsonian anti-entrepreneurship economist to a fan of Kirzner. Max U, the protagonist of price theory, is a sociopath, says McCloskey, and we need a much better model of Human Action than that. Of course she has done much to round out our view of human action in her several books, the most recent of which is Bourgeois Dignity: Why Economics Can’t Explain the Modern World . She went on to reiterate the argument that some of us know from Schumptoberfest: Samuelsonian equilibrium economics has no place for the entrepreneur, because equilibrium looks at what happens after the entrepreneur’s work is done. As Jerry Gustafson put it, “by the time the theorist arrives on the scene, the entrepreneur has vanished.” There was much talk about what exactly Kirzner meant by “alertness.” He himself put it as “knowing what is around the corner,” and reminded us that by definition it cannot be taught. Apparently that comment (it is not possible to teach entrepreneurship) was made to him by Baumol many years ago. In response, Jerry Gustafson and others made the argument that neither is it possible to teach someone how to be a virtuoso violinist or pianist–but it certainly is possible to enhance one’s innate abilities in those areas. So it is with entrepreneurship: the true entrepreneur is born, not made, but we can certainly enhance those aptitudes through education. Perhaps more importantly, having entrepreneurship programs opens students’ minds (alerts them to) to the possibility of pursuing an entrepreneurial life. Gustafson added that having an entrepreneurship center like CELEB gives students an opportunity to try their hand at entrepreneurship in a safe place, where failure is not catastrophic and there is friendly help that makes starting a venture a learning experience. Our own dreams of the Lawrence Innovation Bridge go along these lines, too.
If you have any questions or comments about any of this stuff, click below and comment, or talk to us.
Following up on Chapter VII of Capitalism, Socialism, & Democracy from last time, we move on to some rather more modern treatments of the economics of innovation. We start with Professor Galambos’ and a slightly modified version of the primer he gives to his students in his excellent course, In Pursuit of Innovation(coming this winter).
Galambos wades through some basics of innovation policy and the industrial enlightenment before arriving at the question of allocative efficiency on pages 4 and 5. Again, the conventional treatment is that there is a tradeoff between the promise of monopoly profits and the efficiency properties of competitive industries. And, recall, this is a tradeoff that Schumpeter explicitly rejects.