Category: Innovation

Schumptoberfest Mark VII, The Gales of Creative Destruction

In the second post here, I will simply concentrate on Chapter VII of Capitalism, Socialism, and Democracy, and try to tie together some themes for the weekend.  For our purposes, I have numbered the paragraphs 1-13.

As we proceed into this chapter, it is probably useful to keep in mind that at the time of this writing, the national income accounts and measurement of economic output were even more primitive than they are today.  So, one question is how did economists in 1942 think about “growth” and “output”?

The null hypothesis is immediately stated in the opening sentence of the chapter — that there is some question that “capitalist reality” stifles economic growth.  I take “capitalist reality” to mean the consolidation of firms and increasing concentration of industries as they mature.  This is going to get at the essence of a “Schumpeterian Hypothesis,” (see the last sentence of paragraph two for a germination of this idea — “big business may have had more to do with creating that standard of life than keeping it down.” We’ll get to the efficiency implications of this in a bit, but for the moment note that he offers two possible rationales for the antagonism toward large firms.   One is the idea that growth occurs despite the “managing bourgeoisie” (that is, monopolists restricting output and jacking prices).  The second is that this worked for a while, but it cannot proceed indefinitely.

Continue reading Schumptoberfest Mark VII, The Gales of Creative Destruction

Introduction to Schumptoberfest

This is a first in a series of short posts to guide the Schumptoberfest readings.  I included these readings literally to give you an introduction to Schumpeter and the “Schumpeterian Hypotheses.”

These introductory readings shouldn’t take terribly long to read — perhaps an hour.  I will carefully go through Chapter VII of Capitalism, Socialism, and Democracy in my next post.

Paul J. McNulty “Austrian Competition,” From The New Palgrave Dictionary of Economics, 2nd edition

The first reading from Paul McNulty on how Austrian economists view competition immediately invokes Schumpeter as a critic of the model of perfect competition.  As many of you know, the model of perfect competition that I love and teach in price theory, is essentially an equilibrium construct.  That is, we expect to be moving toward a long run competitive equilibrium, where price = average costs for the marginal firm in the industry.  (Incidentally, the way that firms compete in the fourth paragraph is largely what Industrial Organization is all about).  Schumpeter, in contrast, espouses a “disequilibrium” theory, and argues that competition isn’t about allocative efficiency as much as it’s about, that’s right, creative destruction.

Continue reading Introduction to Schumptoberfest

Review of “Where Good Ideas Come From”

The Atlantic Monthly‘s economics blogger, Megan McCardle, reviews Steven Johnson’s “Where Good Ideas Come From” in today’s Wall Street Journal.

Mr. Johnson himself has a big idea, but it’s not a particularly incisive one: He proposes that competition and market forces are less important to innovation than openness and inspiration.

McCardle packs a lot of review into a short space, and it is probably worth thinking about, especially for the Schumptoberfesters…

Yes, I just wrote that.

Where Do Good Ideas Come From?

I’m not sure, because Steven Johnson’s Where Good Ideas Come From isn’t out for a few weeks, and all I have is this four-minute video.  Well, actually, I also have this longer video from over at TED (the new Harvard, I’m told).  But as I’ve often said, movie, shmoovie, I’ll wait for the book.

Schumptoberfest IS Coming

As an addition to the burgeoning I&E program, the inaugural Schumptoberfest is coming to Björklunden over reading period weekend, October 22-24.  If interested, you need to sign up with Professor Gerard.

What is Schumptoberfest ?  In short, it is a celebration of the ideas of economist Joseph Schumpeter, the subject of our first I&E Reading Group earlier this year.  Through reading and discussion, we will develop a better understanding of innovation and entrepreneurship generally, and particularly the importance of economic organization fomenting or retarding entrepreneurial activities.  Of course, we also hope to develop a rapport among the students and faculty interested in these topics.

To encourage and reward participation, we are offering a two-credit independent study.  The expectations for the IS are as follows:

  • Complete the required readings.
  • Travel to Björklunden over reading period (Friday evening until Sunday afternoon) and participate in our workshop.
  • Produce a short response paper (3-5 pages) to material and ideas discussed over the weekend.*

The target audience for Schumptoberfest is students who have a firm grasp of micro theory and have an interest in the scholarship on innovation and entrepreneurship. The course should be an exceptionally good fit for students who have taken or are planning to take Industrial Organization and The Economics of the Firm.

Those interested need to sign up with Professor Gerard as soon as possible.  Those interested in receiving the two independent study credits need to sign up with him by Friday, September 24.  We expect 10-15 students and 3-5 faculty members to participate.

*Professor Gerard will provide the readings and reading guides over the course of the next few weeks.  We will set the parameters of the writing assignment during the retreat.

Schumptoberfest design by K. Richter

Art Mart

We're #1!

Although economists as a whole are a pretty imperialistic bunch, the economic analysis of the art world has been a rather undeveloped field of inquiry.  One notable exception is Northwestern’s David Galenson, who has published widely on the topic, and even developed a ranking system for the greatest art work based on “visual citations” (number 1 is Picasso’s “Les Demoiselles d’Avignon.”)

Some of Galenson’s recent work examines how artists have earned a living over time and how that has shaped both the nature and creativity of their work.  The New York Times piece cited above summarizes this argument:

To Mr. Galenson markets are what make the 20th century completely different from other eras for art. In earlier periods artists created works for rich patrons generally in the court or the church, which functioned as a monopoly. Only in the 20th century did art enter the marketplace and become a commodity, like a stick of butter or an Hermès bag. In this system, he said, breaking the rules became the most valued attribute. The greatest rewards went to conceptual innovators who frequently changed styles and invented genres. For the first time the idea behind the work of art became more important than the physical object itself.

It’s an interesting topic, especially for those interested in innovation and the arts.  You might consider checking out Galenson’s book, Conceptual Revolutions in Twentieth-Century Art (available at The Mudd), for a fuller explication.  You can read a summation of his argument over at my favorite clearinghouse, VoxEu, or yesterday’s piece in The American.

This might be a good I&E Reading Group selection or a building block for an independent study.

Nathan Myrhvold is Really Cooking

"The cake can rise about that much, max"

Some of you may recall my earlier post on Nathan Myrhvold, one of the great renaissance men geniuses of our age.  I follow that here with a tip to check out his TED talk on what he’s been up to of late.  His topics range from animal photography of spawning whales to digging up dinosaurs to cooking up some world-class barbecue.  (As an aside, the first few minutes on penguins is scatologically hilarious).

Mr. Myrhvold is back in the news for his new $500 cookbook that looks absolutely fantastic. As one of my friends puts it, “It’s exactly the kind of cookbook you’d expect the CTO of Microsoft to write.” The cookbook stems from a long-running interest in cooking, including taking a leave of absence from Microsoft to go to chef school if France. In his TED talk, he shows a picture of the cooker he’s engineered that he claims is more complicated than the nuclear reactor he designed.

If the cookbook is $500, I wonder what the oven goes for?  And, is there anyone other than Myrhvold that can repair it?

Manufacturing is the Answer But to Which Question

Recently, Andrew Grove (former CEO of Intel) and a number of policy makers have claimed that we need to keep our manufacturing sector vibrant as a way to sustain national economic security. In today’s Financial Times, Columbia University economist, and perennial Nobel Prize candidate, Jagdish Bhagwati contests that claim, and notes that we already subsidize American manufacturing in many ways.  Furthermore, he argues that such efforts have not been good value nor have they been the best way to increase employment or innovation.  He concludes as follows:

“In policy, sometimes Gresham’s Law operates – with bad policies driving away good ones. With no good argument in its favour, a preoccupation with manufacturing industries threatens yet one more example of such a perverse outcome. By promoting manufacturing of all kinds (as can be expected as the sector’s lobbies get down to work) at the expense of more innovative and dynamic service sectors, precisely when America is faltering in its recovery from the crisis, this unhelpful fascination promises to inflict gratuitous damage on an economy that can ill afford new wounds.”

Going Mobile

During the recent oil price spike in 2008, one of my mates suggested that our generation will be the last to enjoy relative ease in air travel.  A large number of people, even those with decidedly middle class incomes, have the means to travel extensively and find their way to every nook and cranny the world has to offer. A sustained oil crunch, absent a viable fuel substitute, could indeed cripple the airline industry and leave globetrotting to the relatively affluent.

Taking it a step further, Brian Ladd extends the thought experiment to automotive travel.  I’m not sure I endorse his argument, but I certainly like the thought experiment.  One passage pertaining to industrial production caught my eye:

Economists who blithely assume that pre-2008 automobile sales are “normal,” because Americans “need” their cars, misunderstand the nature of the automobile market. Enormous cars, long commutes, and vast parking lots do have their advantages, but we could manage to live without them.

I am inclined to think that economists would be the last group to assume such a thing based on “need.” In fact, I would think that we would be in the opposite camp, arguing that price signals will lead to adjustments both on the demand side (fewer miles, more fuel-efficient vehicles, shorter commutes, maybe even public transportation) and the supply side (improved fuel efficiency, alternate fuel source).

For an excellent discussion, I recommend the classic James Hamilton blog post on “How to Talk to an Economist about Peak Oil.”  I’ll go through that in a future post.

Moneyball at The Academy

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

The State of Federal Regulation

With the financial meltdown and the increasingly-disturbing oil spill, the efficacy of federal regulation is very much in question.  The New Yorker‘s James Surowiecki sees it as a “good government gone bad” problem.

These failures weren’t accidents. They were the all too predictable result of the deregulationary fervor that has gripped Washington in recent years, pushing the message that most regulation is unnecessary at best and downright harmful at worst. The result is that agencies have often been led by people skeptical of their own duties. This gave us the worst of both worlds: too little supervision encouraged corporate recklessness, while the existence of these agencies encouraged public complacency.

I’m pretty sure he uses the word “deregulation” incorrectly here, at least in a conventional sense. His argument is more along the lines that enforcement of (some) regulations has become more relaxed. Of course, economists of the public choice stripe would probably point to the coziness between regulators and the regulated as a predictable result of the political process.

Drawing partly on Daniel Carpenter’s epic new book, Surowiecki points to the FDA as an example of a “consistently effective.” Of course, many economists have pointed at FDA as an example of an agency that exercises too much caution.

Whether that is accurate or not, Megan McArdle has an interesting article in the most recent Atlantic Monthly discussing why the number of drugs coming to market has been going down.  The McArdle piece is especially discouraging with the backdrop of a New York Times piece on the failure of the human genome project to reveal breakthroughs in treatment.

And then there’s this just in.

Q: How do we regulate in the face of rapid, complex technological innovation?

Use back of page to answer if necessary.

The question for today is what do the recent spill and the financial crash have in common? Kenneth Rogoff has an opinion piece about the difficulty of regulation amid rapid technological advance.

The parallels between the oil spill and the recent financial crisis are all too painful: the promise of innovation, unfathomable complexity, and lack of transparency…  Wealthy and politically powerful lobbies put enormous pressure on even the most robust governance structures.

And it doesn’t stop there at all.

The basic problem of complexity, technology, and regulation extends to many other areas of modern life. Nanotechnology and innovation in developing artificial organisms offer a huge potential boon to mankind, promising development of new materials, medicines, and treatment techniques. Yet, with all of these exciting technologies, it is extremely difficult to strike a balance between managing “tail risk” – a very small risk of a very large disaster – and supporting innovation.

So in a world of rapid technological advance, what is the role in public policy in capturing the benefits while also mitigating the risks? Is “the market” best left to its own devices? Certainly, we have addressed this question in other forms.

I don’t have any answers, and you aren’t likely to find any either. But the point of a lot of what we do on Briggs 2nd is to try to frame and analyze problems, understand what the issues are, the potential winners and losers, and have a discussion about how to proceed.  I hope this helps.

Rogoff’s column is here.

He is also the author of This Time Is Different: Eight Centuries of Financial Folly. You can find a paper version here and the book here.

Coming to an HBS Case Near You

A few months ago I had a series of posts on the Amazon-Macmillian-Apple fracas, related to publishing and sale of e-books.  A recent New Yorker piece provides a very nice discussion of the role of technological innovation and competition in reordering the publishing business, with Apple, Amazon, and Google all playing major roles.  One of the more interesting aspects is the blurring of the lines as firms integrate, disintegrate, or just try to make money.  My favorite line in the piece is this:

In (Amazon’s Russ) Grandinetti’s view, book publishers—like executives in other media—are making the same mistake the railroad companies made more than a century ago: thinking they were in the train business rather than the transportation business.

I’m not sure I have much to add to the article at this point, except to say that I recommend it.  And that you will probably be reading some version of this story as a business school case if you happen down the MBA route.

In fact, you will probably be discussing this in an Industrial Organizations course if you aren’t careful.

The Capitalist & The Entrepreneur

Professor Klein explaining the difference between "Austrians" and "Australians"

The Capitalist & The Entrepreneur is a new book that contains some of the collected works of Austrian economist and Oliver Williamson student, Peter Klein.  Professor Klein is the source of some of our juiciest material — define juiciest how you will — on the nature of the relationship between the entrepreneurship and the theory of the firm.

This could be your lucky summer if you happen to be a fan of Professor Klein, as he is teaching a course, Entrepreneurship in a Capitalist Economy. The course meets every Tuesday night beginning June 7 and running into September.

Where?

On the internets, of course.

For those of you with interest in the course or the book, both Professor Galambos and I have copies for your perusal.

Are Patents the Engine of Growth?

Great post by Richard Langlois at the Organizations and Markets blog about the extent to which “James Watt’s steam-engine patents retarded innovation in steam technology and slowed the British industrial revolution.”

Typically, we teach that the patent is an imperfect solution to the “appopriability” or “positive externality” problem, where individuals and firms are reluctant to innovate because they cannot capture the full value of their efforts due to competitors copying the innovation.  The patent offers temporary monopoly power in exchange for the inventor disclosing technical information to the public. Watt certainly benefited from that protection.

In this case, however, some say the patents were so broad in scope that they allowed Watt to stifle competitors altogether.  There is an on-going discussion in the innovation world about this “strategic patenting,” and the Langlois piece is a nice introduction if you are interested.

Rumor has it that Professor Langlois’ book, The Dynamics of Industrial Capitalism, will be featured in this fall’s I&E Reading Group.  Watch this space.

Review of Invention of Enterprise

GerardoA few weeks ago, despite its substantial girth, I added the new Kaufmann Foundation volume, Invention of Enterprise: Entrepreneurship from Ancient Mesopotamia to Modern Times to the black hole that is my reading list.  The reason for my excitement was the extra-ordinary group of volume editors.  David Landes is a pioneer in entrepreneurship and development, having written the highly-regarded The Wealth and Poverty of Nations. Joel Moykr is the author of a classic in the economic history of technology, The Lever of Riches. And William Baumol has written the seminal article on productive and unproductive entrepreneurship, as well as The Free Market Innovation Machine. Those of you embroiled in our burgeoning I&E curriculum will certainly hear from these gentlemen.

So, with these three pulling together a volume on entrepreneurship for the Kaufmann Foundation, this seemed like a can’t-miss deal.

But, according to Reuven Brenner, it missed.

It doesn’t take much time for him to find fault, either.  He starts out:

Carl Schramm, who wrote the Foreword to this book, and who, through the Kauffman Foundation, paid for it, states clearly that the book is about “entrepreneurship” as people — entrepreneurs in particular — understand the term: Someone who creates a business that, in some respects, differs from existing ones.

Yet, just two pages later, William Baumol writes in his Preface that the book is about both “redistributive” and “productive” entrepreneurship, the former covering warfare, crime, bribes, lobbying — any innovative ideas. Since this covers just about everything from Napoleon and his Code to Robin Hood, and from Muhammad, the merchant and one of the very few of Heavens’ intermediaries on this Earth to 35,000 registered lobbyists in Washington — it is little wonder that most of the 18 chapters, written by 18 different academics are all over the map, and provide little illumination on Schramm’s targeted subject matter.

Continue reading Review of Invention of Enterprise

More on Financial Reform and Start Ups

Craig Pirrong at the Organizations & Markets blog weighs in on the quizzical financial constraints placed on start ups under proposed financial reform legislation.

Here’s Pirrong:

The most fascinating question is the political economy one: whose interest is served by this provision? The most likely explanation is that incumbents — including, no doubt, one-time startups — having made theirs prefer to make it harder for others to displace them.  They liked creative destruction on the way up, but the idea of being swept away in some future gale is far less appealing. So hobble potential future competitors, future creative destroyers, by increasing the costs startups incur to raise capital. This pernicious provision also gives advantages to big investors, venture capitalists, and existing companies who would face less competition in supplying capital to potential startups.

I’m not sure I buy that — who is this group of now-successful former start ups banding together to create barriers to entry?   On the other hand, I don’t have a better explanation.

Anyone?

Thomas Friedman Touts the Start Up

A few months ago in this space, we pointed you to a speech by Robert Litan of the Kaufmann Foundation on the importance of start ups in job creation.  The remarkable conclusion was this:

Since 1980 until the recession, all net new jobs—net meaning gross jobs minus layoffs — have been created by firms under five years old.

Not to be outdone by the Lawrence Economics Blog, New York Times columnist Thomas Friedman trots out the same data in his column this past Saturday.   Friedman argues that the U.S. needs to foster innovation, promote start ups, and relax its, um, restrictive immigration policies.

This week’s SpecialTea: Fresh Ideas in Innovation

Our weekly EconTeaBA will get an intellectual boost from physicist and in-house innovation expert Professor Brandenberger on Monday. As this post noted a few days ago, he recharged and refreshed his thinking on innovation at a conference in Berkeley, where the world’s top thinkers on innovation gathered two weeks ago. The conference was organized by The Economist, and the list of speakers included Amar Bhidé, Robert Reich, Clayton Christensen, David Kelley, Michael Porter, Jared Diamond, Ray Kurzweil… and the list goes on. Professor Brandenberger will tell us about what these great minds had to say about the future, about innovation, and how that has changed his views on the subject. And there will be cookies, tea, coffee.