Archive for the ‘Economy and Business’ Category

Formulas for success

June 19, 2014
Clayton Christiansen

Clayton Christensen

If there ever was an undiscovered formula for business success, it would be sure to work only for the first person who tried it.  By the time the 10th or the 100th person adopted it, it would be at best a minimum requirement and at worst a waste of time because it would have been superseded by a new formula.

I may have been over-hasty in dismissing Jill Lepore’s article in the New Yorker about the flaws in Clayton Christensen’s theory of “disruptive innovation.”  To the extent that Christensen and others make this idea a one-size-fits-all formula for success, they are foolish.

What I got from Clayton Christensen’s writings is a warning not to be blindsided through neglect of basic skills and low-end activities.  I think his warning is true and important, and is as valuable for individuals as for organizations.

But Christensen’s ideas are being treated as a magic formula, and “disruptive innovation” is being used as a buzzword to justify mere disruption.  Lepore is absolutely right in her harsh criticism of “disruptive innovation” as the latest business fad.

[Update 6/20/14].  Here’s another critique of Christensen.

[Update 6/21/14]  Christensen’s reply to Jill Lepore.

[Update 6/24/14]  Here’s a balanced assessment of Christensen.

Reflections on Piketty’s inequality argument

June 14, 2014

 

The novels of Jane Austen, Honore de Balzac or Henry James, in which civilized life was confined to a small percentage of the population and the only way most people could acquire significant wealth was to inherit it or marry it.

According to Thomas Piketty’s Capital in the Twenty-First Century, there is nothing to stop that kind of world from coming back.

1_percent_decomposed_2.png.CROP.promovar-mediumlargePiketty’s basic argument goes as follows:
•    If the rate of return on investment is a higher percentage than the rate of economic growth, which he expresses as r > g,  the owners of investment property will get an ever-larger share of national income.
•    R > g is the normal state of affairs.
•    Ownership of wealth is distributed even more unequally than income.   The higher the share of income that comes from wealth, the more unequal it will be.
•    The larger the amount of wealth you own, the faster it is likely to compound.   So not only do the rich become richer at a faster rate than ordinary people, the super-rich become richer at a faster rate than the ordinary rich.
•    At some point the process levels off, but the leveling-off point may not come until inequality reaches a point that we associate with 18th century Europe or the Third World

The economic prosperity and relative equality during 1945-1975 were made possible by the destruction of capital during the Great Depression and the two World Wars, according to Piketty.   Of course war and depression left everybody worse off, not just rich people, but when economic growth resumed, a lesser share went to the economic elite.

Piketty’s conclusions are backed up by archival research that traces income and wealth distribution in France, Britain and the USA for two centuries and many other countries for shorter periods of time.  That research shows that r > g is the typical state of affairs in most countries and most periods of history for which information is available.

One striking finding is that there is just as much inequality among the elite as there is among the public at large.  In the USA, the top 10 percent have about half the wealth, the top 1 percent have about half the wealth of the top 10 percent, and the top 0.1 percent have about half the wealth of the top 1 percent.

Another finding, based on comparisons of American university endowment funds, is that the larger the amount of wealth you have to invest, the higher your rate of return is likely to be.   This is probably because the richer you are, the better financial managers you can hire, the better able you are to diversify your investments and the better cushion you have when you make high-risk, high-return investments.

chart_2.png.CROP.promovar-mediumlargePiketty proposes to deal with inequality by means of a graduated tax on wealth to go along with graduated taxes on inheritance and income.  But there are other ways.

You could figure out ways to increase the rate of economic growth, for example.  Or you could figure out ways to achieve a wider distribution of wealth, such as through employee stock-ownership plans or worker-owned enterprises.   Or you could strengthen labor unions, increase minimum wage or take other measures to increase the incomes of the middle class, working people and the poor.

It’s important to keep in mind that Piketty only deals with one specific issue, the concentration of income and wealth in a small elite—an important issue, but not the only one.   Piketty does not tell us how to raise people out of dire poverty, nor how to achieve better productivity, or economic growth, or better education, or a cleaner environment, or any other goal.

And taking money away from the economic elite will not in and of itself make anyone any better off.   A lot of financial wealth was destroyed during the Great Depression and and a lot of tangible wealth was destroyed during World War Two, but this did help anybody at the bottom of the economic scale.  Piketty thinks that destruction of wealth cleared the way for the prosperity of the 1950s and 1960s, but I don’t think anybody who lived through the 1930s and 1940s would have said it was worth it.

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Tesla’s electric car patents are opened to all

June 13, 2014

Elon Musk, the CEO of Tesla Motors, announced that Tesla is making its electric car patents available to all free of charge—a decision that, as Tyler Cowen remarked on his Marginal Revolution blog, could be as important as Henry Ford’s 1914 decision to pay auto workers the hitherto-unheard-of wage of $5 a day.

Elon Musk

Elon Musk

Musk decided that it is more important to grow the market for electric cars than to use Tesla’s patents to dominate that market.   I hope that decision pays off for Tesla as Henry Ford’s decision did for Ford, because it removes an obstacle to technological progress.

The original purpose of patents was to give inventors an incentive to share their secrets, in return for temporary monopolies on their inventions.  But in recent years, the scope of patent protection has been extended by law to the extent that it stifles competition and economic growth.   Maybe Musk’s business model will change that.  I hope so.   Good for him for trying!

LINKS

All Our Patents Are Belong to You,” the announcement by Tesla Motors CEO Elon Musk.

Tesla Making Patents ‘Open Source’ to Boost Electric Cars by Alan Ohsman for Bloomberg.

Amazon is bad for writers and book lovers

June 12, 2014

 Amazon’s tactics against the book publisher Hachette are not just bad for publishers.  They are bad for writers.   And, in the long run, they are bad for lovers of books.

What’s going on is part of a familiar pattern.   A powerful company uses its power to squeeze the profit margins of weaker companies.   This means the weaker companies can’t afford decent pay for the people who produce the work.   But the producers can’t get at the powerful company because it is buffered by the intermediaries.

That is how it works with fast-food franchisers such as McConald’s, their franchisees and low-wage fast-food workers.   That is how it works with electronics companies such as Apple and Sony, their sub-contractors in Asia, and the low-paid sweatshop workers.  That is how it works with Walmart, its suppliers and their low-paid employees (aside from what Walmart pays its own employees)

Hachette Amazon LogoAnd this is how, apparently, it is going to work with Amazon, book publishers and authors.

Jeff Bezos of Amazon refuses to provide good service to buyers of Hachette books unless the publisher submits to his terms for distributing their books.  In an earlier dispute with the publisher Macmillian, he simply deleted the “buy” button from all Macmillan books listed on Amazon.

One of my favorite authors, Charles Stross, who is published by Hachette, explained what is at stake.

Amazon’s strategy … is to squat on the distribution channel, artificially subsidize the price of e-books “dumping” or predatory pricing to get consumers hooked, rely on DRM on the walled garden of the Kindle store to lock consumers onto their platform, and then to use their monopsony buying power to grab the publishers’ share of the profits.  If you’re a consumer, in the short term this is good news: it means you get cheap books.

But if you’re a reader, you probably like to read new books.  By driving down the unit revenue, Amazon makes it really hard for publishers—who are a proxy for authors—to turn a profit.  Eventually they go out of business, leaving just Amazon as a monopoly distribution channel retailing the output of an atomized cloud of highly vulnerable self-employed piece-workers like myself.

At which point the screws can be tightened indefinitely.  And after a while, there will be no more Charlie Stross novels because I will be unable to earn a living and will have to go find a paying job.

via Charlie’s Diary.

There is an old tradeoff:  Speed.  Price.  Quality.  Pick any two.  The business model being pushed by Jeff Bezos would pressure publishers into signing up authors who are prolific and cheap.  That literature has a value in and of itself doesn’t enter into his thinking.  As Stross said:

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David Cay Johnson on the roots of U.S. inequality

June 7, 2014

Half an hour is a long time to watch anything on a computer screen, but David Cay Johnson is an interesting talker and a clear explainer, and his interview is a good survey of what’s wrong with the U.S. economy.

The U.S. jobs market has recovered (or has it?)

June 7, 2014

jobs.recovery.am

The number of Americans with jobs has at long last gotten back to where it was before the state of the recession.

As the chart above shows, this has taken much longer than after any previous recession since World War Two.

But this doesn’t mean the U.S. economy is back to normal.  The population has grown since then, and so we still have a higher number of Americans than before who are out of work.

Economists define a recession as two quarters of a year in which GDP (output of goods and services) has fallen, and a recovery as two quarters in which GDP has risen again.

In theory this would automatically mean an increase in jobs.  If the output of goods and services is increasing, then supposedly more people are being put to work to produce these goods and services.  But this time around, there is a disconnect.

The percentage of working-age Americans with jobs is far below pre-recession levels.  Most Americans, based on their personal experience, think the United States is still in a recession.

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Financialization at home and abroad

May 25, 2014

Financialization is a word used to describe the process by which a capitalist economy shifts away from investment, which increases the productivity of the real economy, to usury, which extracts wealth from the many for the benefit of the few.

My e-mail pen pal Bill Harvey sent me links to an article and interviews on financialization by a Marxist economist named Costas Lapavistas.  He shows that the process of financialization is going on not just in the USA, but also in the UK, Germany and Japan.

BEA_Corporate_Profits_Finance_and_Manufacturing_Formatted-thumb-615x421-115012Households are taking on debt to an extent unknown in previous generations.  Business gets increasing amounts of its profits from finance rather than production; one of the most profitable parts of General Motors is GM Acceptance Corporation, which gives auto loans.  At the same time, individual savings are increasingly hostage to the fluctuations of the financial markets.

What’s going on?  It is not merely a new “greed is good” moral code.  Industrialists and financiers were just as greedy and out of control in the U.S. Gilded Age following the Civil War as they are now, and politicians were just as corrupt, yet out of that the United States became the leading industrial power in the world.

Maybe the advanced industrial nations are reaching limits to growth.   The cell phone revolution is not as big a deal as the automobile revolution, and investment in hydraulic fracturing for natural gas is not going to have the same payoff as the exploitation of the original natural gas fields.

Maybe capitalists have so much capital that there aren’t enough productive things to invest in.  That would be the Marxist explanation, as I understand it, although you don’t have to be a Marxist to think that this is so.

The French economist Thomas Piketty is getting a lot of attention with his book, Capital in the Twenty-First Century, and his simple formula that a tiny elite acquire an ever-larger share of wealth and income whenever R (the average annual rate of return on investment) exceeds G (the annual growth rate of the economy overall).  His extensive research documented that this has often been the case during the past two centuries, and is the case now, but he didn’t theorize as to why this is the case.

But the implications are obvious.  The way to prevent a takeover by a small oligarchy of wealth is to subject a couple of percentage points from R and/or add a couple of percentage points to G.   A financialized economy—an economy based on getting people into debt rather than on increasing the production of useful goods and services—will push R up and hold G down.

LINKS

Finance’s hold on our everyday life must be broken by Costas Lapavistas for The Guardian.

The Era of Financialization: An Interview With Costas Lapavistas Parts 1 and 2 by Dollars & Sense.

The Era of Financialization: An Interview With Costas Lapavistas Parts 3 and 4 by Dollars & Sense.

Cheap steel, free trade and U.S. jobs

May 22, 2014

The world steel industry is going through a shakeout.  The world’s steel industry is producing more steel than can be sold on the market, which means some steel producers are doomed to go out of business.

USW-Calls-for-Action-amid-Surge-in-Unfairly-Traded-ImportsThe question is: Which ones?  As things stand now, it is the U.S. industry that is at risk, according to the Economic Policy Institute, a pro-labor think tank.   They say that’s because the U.S. market is more open to imports than other countries’ economies, and more vulnerable to dumping.

This means the 125,000 jobs in the U.S. steel industry are at risk, plus, according the EPI, up to three times that many whose jobs indirectly depend on the steel industry.

Senators Sherrod Brown, D-Ohio, and Jeff Sessions, R-Alabama, have asked the U.S. Commerce Department for penalty tariffs against South Korea and other countries.   This may be necessary to enable the U.S. steel industry survive the current shakeout, but it is not a long-term solution to the industry’s problems.

It is an example of Robert B. Reich, writing more than 30 years ago, called industrial policy by historic preservation.   Reich, who later served as Secretary of Labor in the Clinton administration, said the U.S. government will spend money to rescue industries on the brink of failure, but not to help make these industries successful in the first place.

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Who will own the Ukrainian breadbasket?

May 19, 2014
economics

SMEs are “small and medium enterprises”

The rich black soil of Ukraine is the nation’s greatest asset.  The soil made Ukraine the breadbasket of Europe and Russia in an earlier era, and while nowadays Europeans import wheat from North America, the Ukrainian land is still a coveted prize.

Click to enlarge.

Note that none of this is certain.  Click to enlarge.

Investment in farmland by wealthy Ukrainians has tripled in the past five years, and the previous Ukrainian government discussed allowing foreigners to purchase Ukraine land.

There was even talk that the Chinese would lease an area larger than Massachusetts for 50 years.  I put this under the heading of “interesting if true.”  The fact that something is discussed doesn’t mean it will happen.  But Chinese have been buying up large amounts of farmland in Africa and Australia, so there is no reason why they wouldn’t be interested in Ukraine.

The conflict with Russia has disrupted both Ukrainian grain exports and the Ukrainian harvest, but this is temporary.  Analysts seek a great potential in Ukraine as a breadbasket, not for Europe and Russia, but for the rising middle class of Asia.

Who will own the breadbasket?  Ukraine has accepted a rescue package for the International Monetary Fund, which typically demands that countries open up their resources to foreign investment.  Presumably, in the current state of affairs, this would not include Russian investment.

The struggle in Ukraine is not only a conflict over language, ethnicity and political ideology; it is a struggle for control of resources.

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Thomas Piketty on democracy and capitalism

May 16, 2014


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