Tag: Innovation

Via the Faculty & Grants Newsletter

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.

Schumpeter and the Fashion Industry

Today we are treated to a discussion of the fashion industry from Ms. Richter & Ms. Li.   The first from the Schumptoberfest collection.  Enjoy!

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“The evolution of the capitalist style of life could be easily – and perhaps most tellingly – described in terms of the genesis of the modern Lounge Suit.” -Joseph Schumpeter

Creative destruction saturates the fashion industry; you must be the trend-setter otherwise the “foundation of your very life” will be in jeopardy. Large firms enjoy an advantage in spreading risk over many projects (e.g. inventions that never “catch” as a trend) and have the resources and brand power to set trends, thus helping their inventions turn into successful innovations, driving the fashion cycle forward through induced obsolescence. Due to lack of IP laws, large firms do not enjoy the monopolistic protectionism that IP rights provide, but they have other means justifying their investments. Schumpeter’s hypothesis suggests that large firms foment innovation for factors other than scale economies, and in the fashion industry, and the fashion cycle is a key example of this phenomenon.

The fashion industry, a $200 billion industry in the United States alone, is comprised of nearly 150,000 establishments, ranging in size from large fashion houses to smaller start-ups. Although there are a large number of firms competing in the industry, according to the 2002 Census, five percent of firms in the clothing industry accounted for twenty percent of total revenue and sales. These large firms, , also play an important role in the diffusion of new design trends and the continuation of induced obsolescence, the dynamic force driving the fashion cycle forward; the influence of large firms contributes to the top-down structure of the industry.

Consumers are not strictly motivated by price, but also pay attention to  brand, quality, design differentiation, or trendiness (flocking). Because of complex consumer decision-making, product differentiation and new designs are essential to driving the industry forward Raustiala and Sprigman (2009) argue that  induced obsolescence is the process by which designs, through copying and diffusion into mainstream fashion, become obsolete and therefore undesirable to fashion-forward consumers. These fashion-forward people then demand new designs, which are invented by top firms and diffused downward through trends, again, through copying. This process is called the fashion cycle. This cycle is very rapid and is completed each season.

Continue reading Schumpeter and the Fashion Industry

New Ideas: The Good, The Bad, and The Uggos

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?

What’s Hot or Not? you say?  PC World calls it like it sees it:

YouTube’s original goal, its founders have said, was to build a video version of HOTorNOT.com — you know, the site where you look at a bunch of uggos and rate just how repulsive they actually are.

According to the Wikipedia page, the early incarnation of Facebook had similarly lofty ambitions.

It’s not clear what type of sharp conclusions to draw from those episodes, so moving on to our second example, today we have a 64% discount on a platinum detail package at Tender Car, courtesy of your friendly neighborhood Milwaukee GroupOn.  For those of you not familiar with the GroupOn concept, here’s the gist:

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.

So where did this idea come from?  Well, according to this bit by David Lowery (of Camper Van Beethoven fame) the basic idea germinated with a couple of indie rock bands looking to limit their financial risks.

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.

More on this one later.

Capitalism, Socialism, & Democracy Group Read

For those of you interested in an extra unit or two, next 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 if you are interested, I would recommend that you pick up a copy and start in on it over break. The likely trajectory for this is for us to set up a weekly discussion time, and for each student to provide a review essay.   See Professor Gerard or Galambos for details.

Will NYC prosper?

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.

Schumptoberfest Readings: Galambos, Teece, and Blaug

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.

Continue reading Schumptoberfest Readings: Galambos, Teece, and Blaug

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.

Global Competitiveness

The U.S. is number 4 according to the  global competitiveness survey just released by the World Economic Forum.  It dropped from second to fourth in the past year.  Switzerland, Sweden, and Singapore (is there something about S?) lie above the US.  What’s behind these rankings?  Should anyone care?  See today’s Financial Times Lex column for both an editorial opinion on the survey and for a link to the full report.  The website for the report contains profiles of each country as well as informative commentary about its meaning.

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?

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

Should the Government Target Specific Industries?

Since at least the era of Alexander Hamilton and Thomas Jefferson, economists and policy makers have debated about the appropriate role for industrial policy; that is, the use of subsidy, tax, and regulatory policy to allocate capital.  The alleged “success” of Japan’s Ministry of Industrial Trade and Industry in the 1950s and 1960s found many advocates for government directed allocation of capital and funding.  Most recently, Andy Grove, former CEO of Intel,  strongly advocated a targeted focus on manufacturing.  Many others, and the vast majority of economists, argue that  governments are not better than markets at allocating capital and that subsidies for some require higher taxes for others.  They also argue that entrepreneurial efforts are channeled at attracting politicians rather than producing new products and attracting customers.

The Economist recently completed an open debate on this subject.  I encourage all to read the two sides and see which you find most persuasive.

Didje See that Dean Pertl Article?

Speaking of careers in business, Dean of the Conservatory, Brian Pertl, poses the question, “What on earth could playing a Mozart symphony have to do with leading a budget proposal meeting?”

Plenty is his response at the Entrepreneur The Arts blog.

Coming on the heels of the successful Entrepreneurship in the Arts and Society class this past term, this is a very encouraging message indeed.  And especially so for those of us who believe in the mission and the viability of the liberal arts.

Don’t forget, former Fed Chair Alan Greenspan was a clarinet student at Julliard before dropping out to tour with Stan Getz. Is that why they called him Maestro?

A Prescription for Innovation

A Sign of the Times

ANYONE who thinks it would be easy to get rich selling marijuana in a state where it’s legal should spend an hour with Ravi Respeto, manager of the Farmacy, an upscale dispensary here that offers Strawberry Haze, Hawaiian Skunk and other strains of Cannabis sativa at up to $16 a gram.

The illicit drug market seems to me to be an excellent place to think about the nature of markets and competition (e.g., how much does it dampen demand? How do suppliers emerge and compete? What is the effect of a major bust on industry-wide prices and profits?). And, as we all know, many of those folks make very tall dollars.

But what what would if those drugs were suddenly legal? As the above quotation, taken from a New York Times article on medical marijuana in Colorado, suggests, competition has a funny way of making it hard to make money. So, I suspect that liberalization of drug laws will make for a fascinating route to explore market processes, including the role of innovation and entrepreneurship in these markets. There is also a an excellent piece from The New Yorker on “how medical marijuana is transforming the pot industry” in California.

We’ll be on the lookout for how this all shakes out.

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.