Innovation Economics and Creative Destruction

In an earlier post I talked about a NYT article and excerpted a couple of paragraphs. The piece included a criticism of Amar Bhide by Robert Atkinson at ITIF. Now Atkinson has a piece in Fast Company devoted to Bhide's book, The Venturesome Economy, one of the best books of 2008. Atkinson writes:

Where we disagree with Bhidé is that we believe he presents a false choice between the importance of innovation production and innovation consumption, for there is no reason why the United States should not seek global leader­ship in both the upstream development of new tech­nologies and inventions by scientists and engineers and the downstream activities that realize effective com­mercialization of innovations. To simply write-off leadership in innovation production as opposed to its application is to miss the point; innovation production remains at least as important as innovation consumption. In fact, there’s more than a passing relationship between innovation production and innovation consumption. It is not coincidental that the United States leads the world in use of information technology and also its innovation of it. The twain are not mutually exclusive, and in fact operate complimentarily.

Ultimately, Bhidé—and others who view the increasing technological competitiveness of foreign workforces and countries as an unalloyed positive development for American prosperity, even if it means a loss of U.S. jobs—fails to recognize that there is a difference between creative destruction and simply destruction. Their neoclassical-like view holds that if Boeing, for example, goes out of business, as long as America maintains flexible labor and capital markets, these resources will flow into other industries, including into expanding or new firms and sectors. In such a market environment, policies are needed only to facilitate resources from losing to winning companies.

The first paragraph contains many good and fair points. The next paragraph worries me, however. The danger in not letting bad firms fail is that resources will not be directed where they are most useful and the role of prices in a market economy breaks down. I had a long discussion with one of Atkinson's staff about the proposals to bail out GM and the other American auto companies. You can make an argument that during a severe recession, like we're in now, the economy can't handle another negative shock and the accompanying loss of jobs and confidence.

However, I instead got a lecture on innovation economics and increasing returns. I'm no expert but I see nothing in Paul Romer's work that would merit assistance. Bankruptcy for the big three would be very difficult, but they would be stronger in the end, at least those that survived. So when Atkinson warns that sometimes we just have destruction and no creation, we should take him seriously. But be careful what others say, since this argument can quickly degenerate into a push for industrial policy, and the government's never been good at picking winners.

Best Books on Business and Innovation for 2008

Several lists abound, here are a few:

• The Economist's Books of the Year (Economist)
• BusinessWeek's 10 Best Books on Innovation and Design (BW)
• Business Pundit's 10 Best Business Books of 2008 (BP)
• Amazon's Best Science and Business Books of 2008
  

I do not understand why Nudge was not on everyone's list. In fact, it should probably be at the top of everyone's list, almost irrespective of category. Also, Richard Florida's Who's Your City came out in 2008 and certainly was one of the most important and best books of the year. It seems like a particularly egregious mistake to leave it off these lists. Amazon has Scott Shane's latest on their business list, but in general it did not receive enough attention. What other books were missing but deserved to be included?

Also of note, Thomas Friedman's latest, Hot, Flat, and Crowded is number one on Foreign Affairs bestseller list, but was snubbed on all of these lists. I don't have a problem with that, but it's interesting that something he wrote wasn't automatically hailed as a work of genius.

Pulled From Twitter

"This whole shoe-throwing incident with Bush. How do we know it is not a guerrilla marketing stunt by Zappos.com?" by Joel Warady.

Thanks Joel, that was great.

Knowledge Management

GMU recently allowed its license to EndNote to expire. For those of us that rely on bibliography software, this was a big loss. Finding the right citation management program is something every academic grapples with, but we tend to keep our own methods to ourselves. But Ryan helpfully pointed out that Zotero is a great replacement and it is what our library is now suggesting we use.

Zotero was developed by George Mason's Center for History and New Media, which has developed several other interesting programs as well. Zotero is an extension to firefox and you can read more about it and download the extension here. The NY Times recently reviewed it, along with the Mac only Papers. The review was positive, but the author preferred Papers for organizing downloaded papers. Interested readers might also like this post by Rachel Leow, author of the blog A Historian's Craft, about DevonThink, another Mac only program. Does anyone have any other programs they would recommend?

I use a pc for most of my work so now I am relying on Zotero, but am open to alternatives. One lesson I've learned is that it's best to pick one platform, stick with it, and spend your time writing rather than worrying about managing academic citations. Push comes to shove, I can throw together a bibliography for an article much faster than the article itself, so I spend my time accordingly.

Here's the product info for Zotero:

Zotero is a free, easy-to-use, open source research tool that runs in the Firefox web browser and helps scholars gather and organize, annotate, organize, and share the results of their research. It includes the best parts of older reference manager software (like EndNote)—the ability to store full reference information in author, title, and publication fields and to export that as formatted references—and the best parts of modern software such as del.icio.us or iTunes, like the ability to sort, tag, and search in advanced ways. Using its unique ability to sense when you are viewing a book, article, or other resource on the web, Zotero will—on many major research sites—find and automatically save the full reference information for you in the correct fields. Visit CHNM's Zotero site for further information.

McKinsey Interview with Richard Foster

Foster, a former McKinsey director and author of Creative Destruction: Why Companies That Are Built to Last Underperform the Market—and How to Successfully Transform Them discusses the aftermath of the financial crisis and what it will mean for the capitalist system. One answer (McKinsey):

In the financial-services sector, the upheaval will create a new generation of leaders. Fifty years ago, we didn’t have 8,000 hedge fund managers. Then somebody said, “We can go short as well as long; we have much better information than people did in the 1930s, and the information comes to us instantaneously rather than days after the event. We can make a lot of money modeling and leveraging that information.” So the hedge funds were born. How many of those guys had been successful at mutual-fund management? I don’t think any. They might have been commodity traders, but few were mutual-fund managers. Today, other kinds of people with no experience or expertise will challenge incumbents from outside the industry, and there will be a lot of them. Most of the challengers will fail, but a few will succeed, and they’ll become the heroes of the next generation. If you had to bet on anything, that’s it because that’s what has happened in the past.

I've made the claim that this crisis might facilitate the rise of peer-to-peer lending (see here and here) but we'll have to see.

Entrepreneurship in India

The Economist has an article about a business competition to find the country's hottest startup (HT). They are a talented group, and the article says 75% are first time entrepreneurs. Also:

Two-thirds of the final 30 have masters degrees. In short, they have plenty of options. Their enthusiasm for entrepreneurship represents a growing willingness on the part of highly educated Indians to turn their backs on careers in brand-name companies and strike out on their own. “In my early years, your business card was very important,” says Kanwal Singh, one of the competition’s advisers.

The story is here, and while most of the entries are computer based, the article focuses on one entrepreneur who is remaking the rickshaw world.

This is a healthy, though surprising development. India is among the worst for ease of starting a business and is ranked 121 on the World Bank's 2009 Doing Business Survey. Even worse, in 2008 it was 114 so generally it's nice to see some indication that not everything in India is moving in the wrong direction.

A Fear of Not Changing

What strikes me most regarding Apple’s abandonment of Macworld Expo is the thought that Steve Jobs seems deeply suspicious of, perhaps even outright antagonistic toward, traditions of any sort.

A big part of what makes Apple so fascinating is that they’re so utterly unlike other companies of similar size and stature. It’s hard to imagine any other company abandoning something like Apple’s traditional role at Macworld Expo.

[...] Traditions are comforting. But comfort, I think, tends not to breed innovation. It can be hard to tell whether you’re staying the course because it’s the right direction, or because you’ve dug yourself into a deep rut.

That last paragraph is great. Whatever you think of Apple, you have to admit that most CEOs are more concerned with maintaining the status quo. That's John Gruber at Daring Fireball, by the way.

American Innovation and Competitiveness

Now and then the Economist has a truly thought provoking piece. In late November they ran this article that touches on many of the themes of this blog. It starts bleakly:

Even before the financial crunch began, many businessmen were worried that America was losing its lead in innovation to India and China. They were particularly upset that Asian rivals had been investing with more gusto in teaching young people mathematics and science, and in advanced scientific research. America’s National Academy of Engineering even issued a report last year, “Rising Above the Gathering Storm”, arguing that America’s “economic and strategic security” was in question because of lack of investment.

The cries are growing louder. The Council on Competitiveness, an influential group of American company bosses, university presidents and labour leaders, issued a terse report on the matter on November 11th and demanded that Barack Obama “take bold action to recapture America’s competitiveness” in his first 100 days in office.

The Economist then turns to Amar Bhide:

So does the relative decline of America as a technology powerhouse really amount to a threat to its prosperity? Nonsense, insists Amar Bhidé of Columbia Business School. In “The Venturesome Economy”, a provocative new book, he explains why he thinks this gloomy thesis misunderstands innovation in several fundamental ways.

There is much more and I will return to these topics in my next few posts. I've been meaning to talk about the Gathering Storm report for a while now.

What Bloggers Can Learn From Journalists

Anita Bruzzese, a syndicated columnist for Gannett and USA Today offers ten 10 suggestions. Though I try hard, I am often guilty of number 3. For example, in my last post I forgot to attribute the link to The Schumpeter Club to Jeff Cornwall. When I realized the error I went back and fixed it, before even reading Anita's column, but still, it's an error that is made too often on the web and it is simple to avoid.

The Schumpeter Club

James Pethokoukis writes:

Consider this the inaugural post of The Schumpeter Club. Joseph Schumpeter was the noted Austrian economist who analyzed the critical role of innovation in generating long-term economic growth. (The transformational effect on business from innovation he termed "creative destruction.")

For my purposes, members of the Schumpeter Club are those folks who believe a crucial way to strengthen the floundering American economy is by unleashing our free-market, entrepreneurial, innovative dynamism through lower taxes. Now this doesn't mean you can't also be for smart infrastructure investments or selected capital injections into our banking system or a federal homeowners refinancing plan. You can even also be a carbon-tax-loving member of the Pigou Club. But Schumpeterarians understand that reinvigorating private enterprise needs to be key to any pro-growth economic recovery plan. (Not bailouts. Not government spending. Not quantitative easing by the Fed.)

Via the Entrepreneurial Mind. How can this site, dedicated to the insights of Schumpeter, not belong to the club? And how did we not think to start it? Poor ability to spot opportunity on my part. Sorry Phil.

Of course, low tax rates are just one component of an entrepreneurial economy, but it is an important place to start.

Let me be the first to nominate Phil's article from The American Interest, Schumpeter's Century, to be the club's manifesto.

Revolutions and Innovative Organizations

Jessica Flannery, co-founder of Kiva, reviews Kuhn's The Structure of Scientific Revolutions in the Winter Issue of the Stanford Social Innovation Review. I thought this bit was good:

Thankfully, anomalies happen. We get shaken up, surprised, or just baffled by life. We get hints that the world might be different from what we'd thought. It's easy to shun these inklings and to tell ourselves, "No, that can't be true," or "I must be crazy," or "But that's just not the way things work." Sometimes, however, the anomalies are true, and we're nor crazy, and we've gotten a glimpse of something that could actually redefine the way things work. A well-timed, powerful new insight has the potential to shape an entirely new paradigm around it-shifting the scope of possibility in the world!

When I became an MBA student at the Stanford Graduate School of Business, Kuhn's ideas melded with my studies of innovative organizations and how these organizations create new products, new markets, and in a way, entirely new paradigms. Many begin with a bold, fresh insight about how things could be better-a kind of prescriptive anomaly. They then build themselves around this vision. Sitting in one of Professor Bill Barnett's strategy courses one day, I realized that this was happening with Kiva, then only a year old: We had seen before us the enormous untapped potential of entrepreneurs' stories to form connections and inspire action, and we had then used technology and microfinance to build the company around this insight.

The article is subscription only, but here is the current link anyway.

Update: For those that want to know more about Kiva, check out my earlier post about the other co-founder, Matt Flannery, Jessica's husband. My earlier post has a link to a piece about Kiva that Matt wrote for Innovations Journal. That article, Kiva and the Birth of Person-to-Person Microfinance is here.

Been Thinking About a Startup?

Jason Cohen, guestblogging at GetEntrepreneurial, offers up six reasons why it makes sense to start a company in this current economy. The first is the flipside of my last post and something that any economist would love: low opportunity costs! Jason writes:

Most companies aren't hiring; many are laying off. Salaries are low, bonuses are suspended, stock options are as worthless as a vote for Pat Buchanan.

So if the alternative is working for low pay without job security, why not work for yourself and build your startup? You'll be investing your time and energy into something with more potential upside in future. If you're talented and have always toyed with the idea of a startup, financially it makes sense to do it now.

You can see more of Jason's posts at asmartbear.

Opportunity Amid Uncertainty

With consumer prices plummeting, if you're not one of the nearly 2 million people to have become unemployed this year, and if you have some job security, this holiday season could be very good for you, since there are lots of great deals out there.

Likewise, while many businesses, of all sizes, are suffering, those that have so far weathered the storm stand to clean up, since there is a growing reservoir of cheap and talented labor actively searching for work. BusinessWeek has picked up on this theme in a recent piece about how small businesses can prosper in this environment (BW):

Still, despite the overall gloomy forecasts, the downturn also presents hiring opportunities for small businesses. For starters, there is a huge wealth of talented applicants in search of work at the moment. "If you want to hire someone today, it is like buying a car or house," says Dunkelberg. "Employees are cheap, good, and readily available. Nobody is complaining about the quality of applicants. The choices you have now are much improved." For instance, the NFIB's survey also found that 14% of business owners reported that they had positions they were unable to fill, down from 24% in January. "If you are a buyer of labor, this is a buyer's market."

[...] The major job cuts at large corporations also translates into a boon for small business owners who have the resources to hire workers who were perhaps unattainable previously.

Educated Guesses: What's Ahead for 2009?

Via Newswise:

What’s ahead for 2009? Anxiety and depression will threaten Americans’ mental health, the U.S. will pull out of Iraq, 100 more banks will fail and healthy eating will fall by the wayside, according to the 28th edition of “Educated Guesses,” a series of annual predictions offered by University of Alabama faculty.

New President, same anxiety and depression. More information is available at the UA website.

The A to Z Problem

James Rickards, the former general counsel at Long Term Capital Management, spends his days worrying about catastrophic risks:

Rickards calls it the "A to Z" problem: What are the threats that could make the U.S. economy look less like America and more like Zimbabwe? He sees them everywhere – in the Chinese ownership of vast amounts of American debt, in Russia’s increased centralization of its economy, in Al Qaeda’s long-established fascination with damaging the U.S. economy.

His lecture comes as part of an annual "Rethinking Seminar" produced by the Johns Hopkins University Applied Physics Laboratory. Rickards argues that government is not doing nearly enough to prepare for the worst. "Here’s the policy problem for the United States," he said in an interview. "We have experts in defense and intelligence, and huge depth in capital markets experience at the Fed and at Treasury." But they’re separated by the Potomac River. And they’re not talking to each other.

From an excellent article in Politico. The article talks about 4 really, really bad scenarios. Here's more information on tonight's seminar.

David Brooks Reviews Outliers

Brooks disagrees with the notion that people are a result of the social forces around them, apparently a theme Gladwell pushes hard. I have not read the book, so I cannot say. Nonetheless, this part caught my eye (NYT):

Control of attention is the ultimate individual power. People who can do that are not prisoners of the stimuli around them. They can choose from the patterns in the world and lengthen their time horizons. This individual power leads to others. It leads to self-control, the ability to formulate strategies in order to resist impulses. If forced to choose, we would all rather our children be poor with self-control than rich without it.

It leads to resilience, the ability to persevere with an idea even when all the influences in the world say it can’t be done. A common story among entrepreneurs is that people told them they were too stupid to do something, and they set out to prove the jerks wrong. [emphasis added]

Today's Fed Action

Today the Federal Reserve reacted to weakness in the economy and labor markets by cutting its main policy tool, the Federal Funds Rate from 100 basis points to a new target range between 0 and 25. This reflects the range where the effective Fed funds rate has been trading recently. I particularly liked this commentary from the WSJ's Real Time Economics blog:

Today’s FOMC statement will go down in the annals of Fed history along with Paul Volcker’s Saturday announcement going to reserve targeting in 1979. Volcker’s press conference was called the “Saturday Night Massacre.” I nominate this one to be called the “Who Could Ask for Anything More?” statement. The Fed is throwing everything in its arsenal at the economic/financial situation. –Stephen Stanley, RBS Greenwich Capital

Check out how other economists react at the RTE blog.

Bankrupt?

The DC Examiner says so:

The United States of America is bankrupt. Don’t believe it? Consider this: Federal obligations now exceed the collective net worth of all Americans, according to the New York-based Peter G. Peterson Foundation. Washington politicians and bureaucrats have essentially mortgaged everything We the People own so they can keep spending our tax dollars like there’s no tomorrow.

The foundation’s grim calculations are based on Sept. 30 consolidated federal statements, which showed that Americans’ total household net worth, diminished by falling stock prices and home equity, is $56.5 trillion. But rising costs for unfunded social programs like Medicare, Medicaid and Social Security increased to $56.4 trillion – and that was before the more recent stock market crash, $700 billion bank bailout, and monster federal deficits chalked up in October and November.

Trouble in Magazine Publishing

New York magazine is announcing layoffs, as are a bunch of others, including Scientific America. Entertainment Weekly might stop publishing its weekly mag altogether. Apparently the good scholars at the Max Planck Institute saw this coming and decided to spice up the latest issue of their journal. From The Independent (HT):

There were red faces on the editorial board of one of Germany's top scientific institutions, the Max Planck Institute, after it ran the text of a handbill for a Macau strip club on the front page of its latest journal. Editors had hoped to find an elegant Chinese poem to grace the cover of a special issue, focusing on China, of the MaxPlanckForschung journal, but instead of poetry they ran a text effectively proclaiming "Hot Housewives in action!" on the front of the third-quarter edition. Their "enchanting and coquettish performance" was highly recommended.

What's Your Calling?

Michael Lewis writes:

The distinction is artificial but worth drawing. A job will never satisfy you all by itself, but it will afford you security and the chance to pursue an exciting and fulfilling life outside of your work. A calling is an activity you find so compelling that you wind up organizing your entire self around it -- often to the detriment of your life outside of it. There’s no shame in either. Each has costs and benefits. There is no reason to make a fetish of your career. There are activities other than work in which to find meaning and pleasure and even a sense of self-importance -- you just need to learn how to look. [emphasis added]

[...] So which is it: job or calling? You can answer the question directly, or allow time to answer it for you. Either way, I think you’d be happier if you stopped thinking of what the world had to offer you, and started thinking a bit more about what you had to offer the world. Real excitement isn’t just in whatever you happen to be doing, but in what you bring to it.

Bloomberg. (HT).

Stages of Risk Management

Phil made this point and it's worth covering here. He broke risk management into three stages:

1. Counting: This is simply adding up resources, expenditures and what not. What does the firm posses?
2. Accounting: This is simply making some sense of what it is they posses, in a systematic way. It is a measure of value.
   
3. Accountability: This is generally defined as responsibility, liability, etc. It goes beyond accounting for what happened and implies that someone or some group is ultimately responsible for some set of actions.
   

With the recent problems in financial and credit markets, and now with our auto companies, it is clear that firms at most get to stage 2. Perhaps a CEO or two gets fired or demoted to a $1 salary, but there is no real accountability. Earlier in the financial crisis there was considerable uncertainty as to what banks even had on their balance sheets, which indicates a failure at point 1, which is a very bad sign. Resilient companies understand all three points and are able to adapt to shocks and may even prosper from them. Companies that do not get to stage 3 have little hope and it is becoming clear that the taxpayers are now the ones that must bear the burden.

Cultivating Leaders in Virtual Worlds

The abstract for a report, Virtual Worlds, Real Leaders, by IBM:

Management fads and business leadership books come and go. But the Internet, and the changes it is forcing upon business managers of all stripes, is here to stay. The days of closely knit teams working on long-term strategy in close quarters are gone, replaced by virtual teams that constantly reinvent the business in multiple time zones the world over. And the business world is in desperate need of a new model for leadership befitting the Internet Age.

Fortunately there is already a window into this rapidly changing world. In the realm of online games, specifically massively multiplayer online role playing games (MMORPGs), leaders emerge that deftly navigate the motivational, emotional and social needs of their direct reports in a highly competitive, distributed, virtual environment. And there are many lessons to be learned.

That's why IBM partnered with Seriosity Inc., a software company that develops enterprise products and services inspired by online games, to study how leaders operate in these increasingly popular games. Together with experts from Stanford University and MIT, the team captured 50 hours of online game play, surveyed hundreds of gamers, and conducted several interviews of gaming leaders. The objective of the study was twofold: 1.) to better understand how successful leaders behave in online games and 2.) to learn what aspects of game environments leaders leverage to be more effective.

The results are fascinating. Among other things, we learned that the transparent environments created in online games made leadership easier to assume. And that leadership in online games is more temporary and flexible than it is in the business world. And finally, online games give leaders the freedom to fail, and experiment with different approaches and techniques, something that any Fortune 500 company that hopes to innovate needs to understand.

Immigrant Networks and Innovation

A paper in the fourth quarter issue of the Chicago Fed publication, Economic Perspectives has an article titled: Do ethnic enclaves and networks promote immigrant self-employment? From the introduction:

Immigrants have a high tendency to be self-employed. I estimate that in the United States, the number of immigrant businesses rose from 2.7 million in 1997 to 3.3 million in 2002—an annual increase of 4 percent (compared with 2 percent yearly growth for all U.S. frms). According to the Ewing Marion Kauffman Foundation, immigrants outpaced native-born Americans in new business start-ups: Immigrants had an entrepreneurial index activity rate that increased from 0.37 percent in 2006 to 0.46 percent in 2007, while that of the native born remained constant at 0.27 percent over the same period.

Immigrants’ businesses tend to be clustered in distinct neighborhoods, and they have become an integral and growing aspect of the vitality of metropolitan areas throughout the U.S. Scholars from various fields have studied the geographical concentration of immigrants in distinct locations across the U.S., as well as how this concentration affects immigrants’ integration and assimilation into American society (Bartel, 1989). In this article, I focus on the relation between ethnic geographical concentration and the propensity for self-employment among immigrants to the U.S. I ask whether ethnic enclaves (geographical concentrations of an ethnic group) and ethnic networks (social or business networks among people of the same ethnicity, not necessarily living in proximity to one another) influence the decision by immigrants to be self-employed.

The author finds that being part of an ethnic network increases the probability an immigrant chooses self-employment rather than wage labor. But there is no clear evidence that geography has an influence.

Law and Economics 2.0

Fortune has an article about the Kauffman Foundation's new initiative, "Law, Innovation and Growth." It includes lots of questions with Bob Litan, Kauffman's VP of Research and Policy. From the article:

In Litan’s view, the law-and-economics movement to date has focused on the issue of achieving “static efficiency” — in essence, how best to allocate the existing pie of wealth — while giving insufficient attention to dynamic efficiency, i.e., the need to ensure that the pie keeps growing. For example, a raging issue lawyers are wrestling with today, he notes, is the question of how to reform the current patent and copyright laws to ensure that they spur entrepreneurship and invention, rather than stifle them. This is the type of issue that is right smack in the new initiative’s wheelhouse.

Via Growthology, which should have more coverage in coming days.

Book Clubs

We have a book club at my work and every once in a while I participate. I like the group and the selections are usually pretty good, but I am busy with school and work, and now this blog, so I rarely have time to get to the books with class in session. I still go to the meetings though. For the most part they run smoothly and we manage to agree on a book without much hassle. Last month we read Christopher Buckley's new book about the Supreme Court, Supreme Courtship - skip it. This month we are reading Against the Gods: Wendy's War - I'll say more about it in a future post.

The New York Times had an article about book clubs last week that a good friend passed along. I thought I would say a bit about it (NYT). The article discusses why people often have a hard time agreeing on what to read and also about the power structure of the clubs. This bit sums it up:

One member may push for John Updike, while everyone else is set on John Grisham. One person wants to have a glass of wine and talk about the book, while everyone else wants to get drunk and talk about their spouses. “There are all these power struggles about what book gets chosen,” Ms. Burg said. Then come the complaints: “It’s too long, it’s too short, it’s not literary enough, it’s too literary ... ”

The signaling effect is one reason book clubs often have trouble. Some people pick the right books in order to look smart and sophisticated even if they have no intention of reading the books. The goal here is to show that you are superior in some way, even if it is just your knowledge of 1960s Chilean authors.

This is also part of the reason people buy books without ever reading them. Some books just look good on the shelf and convey information. The most well known example of this is Stephen Hawking's A Brief History of Time. Supposedly something like 95% of the people that buy the book never read it. But it conveys information about taste that may be important in attracting others. The BBC reports on a new study about the signaling effect of books (BBC):

About four in 10 of the 1,500 said they had lied about what they had read to impress friends or potential partners - 46% of men and 33% of women.

Among teenagers, the figure rose to 74%, with most saying they would pretend to have read social networking pages or song lyrics.

One in five adults said they would read their chosen material whilst waiting for their date to arrive in the hope of making a good first impression.

A few thoughts. If you do participate in a book club with the intention of finding new authors or rediscovering old masters, make sure that your new friends don't all track the same sources you do. You want to use the group as an extension of your own book-finding algorithm. You may be very happy with a group that just reads Oprah's recommendations, but you can do that on your own and you must really value the social aspect to get much out of the club. If so, fine. But if not you should be wary of such groups.

Also be wary of groups that read the same authors. This was our 4th book by Buckley and many good recommendations (ahem, mine) were shot down. I recommended The Savage Detectives, among others, and despite wonderful reviews no one seemed too interested. That's a bad sign. You want your fellow members to have an openness to new books and new ideas. Hopefully they'll be the ones suggesting books that you've never heard of. Some of that happens in our work club, but we still have room for improvement.

At any rate, I'm off to dust off my copy of Hawking's book. I of course opted for his newer version, A Briefer History of Time, since his older version had too many pages and looked too hard.

Cupcakes

Apparently cupcakes are all the rage among entrepreneurs these days. A new shop recently opened up around the corner from my house. At $3 per sweet treat, I imagine they are doing quite well.

It turns out this is more than a local phenomenon. Time magazine just had a profile of Nicaraguan entrepreneur Freddy Antonio Castillo Luna (Time). The article is about how Kiva is helping Freddy expand his business and also how the article's author, Joel Stein, is not content to just donate money through Kiva. Stein is also helping out by lending genius (his words.) It's an entertaining story so do read it. Here's Luna's profile page on Kiva, if you are interested.

Virtual Worlds, Innovation, and Geography

One of the most downloaded articles from the journal Innovations is, "A Silicon Silicon Valley? (Virtual Innovation and Virtual Geography)," by Philip Evans. It is a case study of Second Life. There is no abstract but here is a snippet from the text:

[T]he literature on virtual worlds has focused largely on the remarkable and counterintuitive way that they replicate real-world institutions (most notably an economy), and on the low-cost of innovation within such worlds. While surely necessary, neither point is sufficient to make the case for virtual worlds as a platform for real-world innovation. Evidence that the Petri dish nurtures exotic flora is not proof that it will yield us penicillin.

What we really have is an hypothesis: the hope and expectation that because some preconditions known to be important for innovation in the real world can also be satisfied in the virtual, innovations will flourish there that are of value in the real. And there is an extraordinary amount of experimentation going on to test that hypothesis.

Here's the first page. You can download the rest of the pdf for free at that page as well. Do read it.

More on Virtual Worlds

Virtual worlds are mostly about fun, but gaming is a big business, so check out this recent article about Brock Pearce, a former child actor and founder of Internet Gaming Entertainment (IGE).

IGE is a services company that has created a market for gamers to purchase lots of in game upgrades, like new or better characters, or different weapons. Here is an article about gold farming, an area where IGE was a pioneer.

Virtual Worlds

The Athena Alliance released a new report, Virtual Worlds and the Transformation of Business: Impacts on the U.S. Economy, Jobs, and Industrial Competitiveness. From the introduction:

Here we argue that online social networking and Web 2.0 platforms are likely to transform core business operations and interactions with suppliers, customers, and supporting services. Virtual Worlds platforms that form the core of a new corporate operations ecosystem will not only allow for horizontal and vertical interactions but will expand the essential business, partner, and management linkages that enhance productivity over the long term.

Virtual World environments promote such changes by helping enterprises develop new products in concert with suppliers as well as with specialized "expert firms" or individual entrepreneurs. In these immersive, collaborative environments, corporate executives and other employees can bring computer simulations and robust databases into Virtual Worlds supported by high-speed, next-generation networks. This allows a wide range of businesses, manufacturing concerns, and services to see the results of business decisions in real time. For instance, banks can visualize analyses of equities data or of options prices and make rapid decisions about where to direct investments.

Second Life and other massive online games get most of the attention but the applications to business and social entrepreneurship have yet to be fully explored. Someday soon we'll be reading about value chain management in virtual worlds.

Ken Jarboe has more information at the Intangible Economy, the blog of the Athena Alliance, and there are a lot more resources at his page.

Bootstrapping

Bootstrapping is another way of saying "to pull one up by one's bootstraps." Here's Guy Kawasaki on the art of bootstrapping, which includes more detail on the definition.

If Guy inspires you to learn more, Jeff Cornwall has a new textbook that is now available for pre-order. The publisher has a short blurb for Bootstrapping:

With a focus on practical techniques, entrepreneurs learn how to stretch resources and thrive on lean budgets. The text focuses on bootstrapping techniques for a variety of ventures-from small, family-owned businesses to high-growth upstarts. While this book treats the subject of securing initial financing for the start-up venture, it also fully explores how entrepreneurs manage and sustain the business as it grows.

Cornwall has the table of contents on his excellent blog, The Entrepreneurial Mind.

Farm Subsidies

Yuck. From the Washington Post:

HIGHMORE, S.D. -- The ducks arrive in early April, zeroing in on thousands of shallow ponds fed by melting snow amid a vast prairie. As the pintails, mallards and blue-winged teal make nests in the grass and feed their young on abundant aquatic insects and freshwater shrimp, a 276,000-square-mile area reaching across five states and into Canada is transformed into one of the world's greatest habitats for migrating birds.

Now this swath, known as the Prairie Pothole Region because of the depressions formed long ago by retreating glaciers, is threatened by the steady advance of farming. Spurred by federal subsidies and two years of surging commodity prices, farmers increasingly are digging up the grass to plant crops, raising concerns among cattle ranchers, hunters and environmental groups about the future of land where Sioux hunters chased grazing buffalo a mere century and a half ago.

[...] With rainfall in this part of South Dakota averaging only 17 inches a year, conservation groups say most farmers would not risk the start-up costs of plowing and preparing the ground without crop insurance, on which the federal government pays close to 60 percent of the premium.

"If there was no insurance, you'd have to sit down and study it," acknowledged Kevin Baloun, who operates a large farm in Hyde County. "You might think twice about it."

Another Positive View of the Econobloggers

This time from the Boston Globe:

A fast-moving, highly informed economics blogosphere now tracks and critiques their every move. The result is that this may be the first national crisis to be hashed out by experts in full public view.

The blogs offer a rolling crash course in economics as authoritative as any textbook, but far more accessible. It's a conversation that's simultaneously esoteric and irreverent, combining technical discussions of liquidity traps and yield curves with profane putdowns and heckling headlines. In the process, the bloggers have helped to democratize policy making, throwing open the doors on the messy business of everything from declaring a recession to structuring the most expensive government bailout in history.

Late last month, Barry Ritholtz, who runs the financial blog The Big Picture, tried to convey to his readers the cost of the ongoing bailout of the financial system. Using inflation-adjusted numbers put together by a research group, he showed that the money spent (or pledged) thus far was larger than the combined cost of the Louisiana Purchase, the Marshall Plan, the New Deal, the Vietnam War, and the nation's entire space program. Within a week, readers of his blog had converted the data into pie charts and graphs. By then, his analysis had become part of the national conversation on the bailout, cited by everyone from conservative columnist David Brooks to liberal talk-show host Rachel Maddow.

A Negative View of Risk Management

Nassim Taleb, the author of The Black Swan, and Pablo Tiana write in the Financial Times:

Almost everyone in risk management knew that quantitative methods – like those used to measure and forecast exposures, value complex derivatives and assign credit ratings – did not work and could provide undue comfort by hiding risks. Few people would agree that the illusion of knowledge is a good thing. Almost everyone would accept that the failure in 1998 of Long Term Capital Management discredited the quantitative methods of the Nobel economists involved with it (Robert Merton and Myron Scholes) and their school of thought called “modern finance”. LTCM was just one in hundreds of such episodes.

Yet a method heavily grounded on those same quantitative and theoretical principles, called Value at Risk, continued to be widely used. It was this that was to blame for the crisis. Listening to us, risk management practitioners would often agree on every point. But they elected to take part in the system and to play bystanders. They tried to explain away their decision to partake in the vast diffusion of responsibility: “Lehman Brothers and Morgan Stanley use the model” or “it is on the CFA exam” or, the most potent argument, “modern finance and portfolio theory got Nobels”. Indeed, the same Nobel economists who helped blow up the system at least once, Professors Scholes and Merton, could be seen lecturing us on risk management, to the ire of one of the authors of this article. Most poignantly, the police itself may have participated in the murder. The regulators were using the same arguments. They, too, were responsible.

In an earlier post I wrote that the risk models seemed to have worked but were ignored. Taleb believes they didn't even work. He knows these models better than I do, so perhaps he is right. While we're on the subject I would recommend The Black Swan, just be forewarned that Taleb's ego consistently interferes with the material. Arrogance aside, the ideas are important.

On the same theme, here is Vikram Pandit, CEO of Citigroup on risk management:

Entrepreneurial Opportunity and the Economic Downturn

From Wired:

With the world's economies apparently snowballing into a deep recession, it feels uncomfortably Pollyannish to see signs of hope. But for the bravest inventors and entrepreneurs, conditions are ideal to pounce on a business opportunity. In periods of economic turmoil, people are hungry and work cheap, and entrenched companies often concentrate on in-house cost-cutting instead of exploring new markets, which can explode with the next turn of the business cycle.

[...] This doesn't mean that big new ideas emerge because of turmoil—in fact, the data shows no relationship between major breakthroughs and economic conditions. But the benefit of a global money drought is that competition tends to vaporize. And for some, the stress of tough times has an amazing way of concentrating the mind on the way forward. Bill Hewlett of HP committed to building the pocket calculator—at the time, a supposedly impossible task—during the 1969-70 recession; the 2001 dotcom-led downturn presented the perfect launching pad not just for risk-taking, fresh-thinking startups like discount airline JetBlue and blogging juggernaut Six Apart, but also for Apple's iPod-fueled resurgence.

We normally think of entrepreneurs as volatile types that shatter the status quo, but they can also help the economy move back into equilibrium by creating new jobs through the innovative use of slack resources.

Distributed Intelligence

True believers in Saturn insist the concept behind the division, which stressed respect, teamwork and communication from the factory floor to the auto showroom, could have kept G.M. from losing nearly half the market share it held when the first Saturns went on sale 18 years ago.

New York Times via Ken Jarboe. This is more along the lines of the Toyota collaboration network we discussed below. The article argues that the Saturn project was never fully accepted by the CEO's that followed Roger Smith.

Life Entrepreneurship

CHRISSY CARTER, a former equities sales trader, has many traits of a successful entrepreneur. With a mind she calls “a giant calendar,” the 30-year-old from Jersey City plans ahead, keeps appointments and puts in long hours on marketing plans and e-mail lists. She promotes her enterprise through newsletters and a Web site.

Ms. Carter’s business? She’s a yoga instructor.

Like others who have traded life as “a suit” for life in a track suit (or its breathable yogic equivalent), Ms. Carter finds herself using skills she learned in the corporate world. And, like others, she knows the change can require a pay cut. Her annual income fell to about $20,000 from six figures when she started teaching full time in 2004. While business has “grown tremendously” since, Ms. Carter said, it will never match her finance-industry earnings.

Link. This spirit, dedication, and love is what will get us through our current problems. Read the whole thing, entrepreneurship is not only about high technology.

Wal-Mart, Competition, and Social Capital

Art Carden, an economist and blogger at Division of Labour has a forthcoming article in Public Choice titled, "Does Wal-Mart Reduce Social Capital?" The abstract (DoL):

Social capital has attracted increasing attention in recent years. We use county level and individual survey data to study how Wal-Mart affects social capital. Estimates using several proxies for social capital—such as club membership, religious activity, time with friends, and other measures—do not support the thesis that “Wal-Mart destroys communities” by reducing social capital.We measure exposure toWal-Mart two ways:Wal-Marts per 10,000 residents and Wal-Marts per 10,000 residents aggregated over the years since 1979 to capture a more cumulative “Wal-Mart Effect.”We find that the coefficients on Wal-Mart’s presence are statistically insignificant in most specifications.

On a related note, All about Cities has a great post about the creative destruction that occurs when Wal-Mart arrives in a new city. Rather than decimating local competitors, some research suggests that firms that adapt do better than they did previously. Some die of course, but that does not automatically mean that consumers are worse off.

Funding Basic Research

The globalization of science and technology research, Mr. Bhidé added, should actually work to the advantage of the United States economy, so long as America remains the best place to commercialize inventions. As the rest of the world becomes a richer source of inventions, there is less need for the United States to come up with such a large share itself — and policy, he says, should reflect that reality.

“I’m not arguing for reductions in research spending in the United States,” he said. “But in a world where investment in high-level science and technology is increasing, there is no compelling reason to invest a lot more.”

The flaw in Mr. Bhidé’s thesis is that it amounts to a “false choice,” said Robert D. Atkinson, president of the Information Technology and Innovation Foundation, a nonpartisan research group. Most of the economic gains from technology, Mr. Atkinson agrees, do come from its innovative use. “But that doesn’t mean that the basic research is not critical,” he said.

In fast-moving fields, Mr. Atkinson said, there are immense benefits from the knowledge produced in research projects quickly spilling over into ventures that become powerhouses in new industries. Google, which grew out of a digital library project funded by the National Science Foundation, is among a host of such examples. Where the invention is done, Mr. Atkinson notes, is often vital.

This is from a much cited New York Times article from last week (NYT). Here's Atkinson's vision of innovation economics and here is ITIF's agenda for the new administration. I've already covered Bhide's work in a number of different posts.

Risk Management

Last month there was quite a stir when Michael Alix was hired by the New York Fed to help supervise banks. Alix was the former chief risk officer for Bear Stearns. Here's a bit about Alix and risk management from a 2006 BusinessWeek article:

Yet for all the risks they're taking on, banks insist they're safer than ever. They've hired many of the greatest mathematical minds in the world to create impossibly complex risk models... "Right now everything on my screen is flashing red," said Michael Alix, chief risk officer at Bear, Stearns & Co., on May 11, the day after Federal Reserve Chairman Ben S. Bernanke raised interest rates, sending the market gauges he was looking at tumbling. But "that doesn't make me nervous," says Alix. The bank has built such powerful computing systems that Alix can reevaluate every day the risks of thousands of positions across the firm's trading businesses under various stressful scenarios to be sure the firm doesn't hold too much of any risky investment at any one time. That type of analysis used to take a week to complete. "The machine works," he says.

This quote is cited in a great post by curious capitalist Justin Fox. People are rightly skeptical of risk management models, but I think their criticisms miss the mark. From what I can tell the models seemed to work just fine, but the problem was human error caused when people like Alix and his superiors dismissed the risk. This could be legitimate, since there is a tradeoff between risk and return, but as we've seen the potential spillover effects were never included in their analysis. Or they were simply ignored.

We had a fascinating conversation about this in class last night and Phil made the excellent point that a firm can only lose up to the value of the firm, even though they were leveraged to many times that value. Taxpayers were left holding the bag in order to limit systemic risk. I don't know what the answer is to this problem, but I do think we should be focusing on the incentive problems and not simply blaming technology.

Organization Models

Alfred Sloan was a true innovator and transformed General Motors into the largest car company in the world, quickly eclipsing Ford. Henry Ford was famous for eschewing organization models whereas Sloan transformed GM through his management practices. However, his successors haven't carried on his legacy. Instead of innovation we've gotten stagnation. Philip Evans of Boston Consulting Group has two amazing graphs that perfectly capture GM's current problems. The collaboration networks are from Beyond Startup: The Shifting Focus of Innovation:

versus upstart Toyota:

It's not just a coincidence that Toyota's collaboration model looks just like a brain, it really is smarter.

The Unemployment Report

Today the Bureau of Labor Statistics reported that the unemployment rate increased to 6.7% from 6.5% and that the number of jobs decreased by 533,000 in November. This was the largest decrease since December, 1974. Let's put this in perspective. In last month's report the job loss numbers for October were reported as -240,000. Through the year it looked like the economy had lost just under 1.2 million jobs.

In this report, October's estimate was revised downward to -320,000 and if we add in September's revised estimate of -403,000 then the economy has lost more than 1.2 million jobs in the past three months alone (-1.256 million.) The chart below shows the quarterly change in employment. Keep in mind that the fourth quarter only contains two months at this point so this graph understates current problems.

The economy has lost more than 1.9 million jobs thus far in 2008. And employment is a lagging indicator that usually gets worse after the rest of the economy has recovered.

Copyright on Government Works

One interesting development in recent days is that President-elect Obama has now covered the change.gov site under a creative commons license. This is interesting because government works are generally immune from copyright laws. My email is frequently bombarded with offers to buy census data on cd, data that is freely available but is simply repackaged by a private company and resold without any royalty payments.

In fact, I wasn't even aware that you could copyright government works, if you wanted to. I had several publications as a Senate staffer and any of those articles could be freely republished by anyone. It might not be ethical, but it would be legal.

A good friend, who happens to be a lawyer, was puzzled by this as well. I could understand if the site was still change.org, but now that he is under the government umbrella with .gov, it seems the site should be in the public domain. Lawrence Lessig has more, and here is the creative commons page with some info.

Universal Health Care, Bit by Bit

Jonathan Gruber also has an article in the Fall 08 issue of the Journal of Economic Perspectives, which just came out. The abstract:

The latest wave of health care proposals and laws in the United Sates has been marked by what I call "incremental universalism"—that is, getting to universal health insurance coverage by filling the gaps in the existing system, rather than ripping up the system and starting over. In this paper, I provide an overview of "incremental universalism" as an approach to healthcare reform, explore the issues it raises, and examine how these issues are being addressed at the state level, focusing primarily on the healthcare reform plan enacted by Massachusetts in April 2006. This sweeping bill altered insurance markets, subsidized insurance coverage for a large swath of the population, introduced a new health insurance purchasing mechanism (the "Connector"), and mandated insurance coverage for almost all citizens. The Massachusetts experience has led to similar proposals in a number of states, including a major (but ultimately failed) effort in California. I am far from an objective observer in discussing the Massachusetts law. I was one of the architects of the law and since 2006 have been a member of the board overseeing its implementation. Despite this bias and the fact that the ambitious Massachusetts plan is still in relatively early stages of implementation, I can say that some early results point to major successes for this reform.

Here's the link. I can't find an ungated version.

Health Care Reform

Following up on my last post, here's Jonathan Gruber talking about how health care reform can fit into the broader goal of stimulating the economy (NYT):

Given the present need to address the economic crisis, many people say the government cannot afford a big investment in health care, that these plans are going nowhere fast. But this represents a false choice, because health care reform is good for our economy.

As the country slips into what is possibly the worst downturn since the Depression, nearly all experts agree that Washington should stimulate demand with new spending. And one of the most effective ways to spend would be to give states money to enroll more people in Medicaid and the State Children’s Health Insurance Plan. This would free up state money for rebuilding roads and bridges and other public works projects — spending that could create jobs.

Health care reform can be an engine of job growth in other ways, too. Most proposals call for investments in health information technology, including the computerization of patient medical records. During the campaign, for example, Mr. Obama proposed spending $50 billion on such technology. The hope is that computerized recordkeeping, and the improved sharing of information among doctors that it would enable, would improve the quality of patient care and perhaps also lower medical costs. More immediately, it would create jobs in the technology sector. After all, somebody would need to develop the computer systems and operate them for thousands of American health care providers.

Change, Change, Change

Brad Delong wonders how the Obama administration will cope with a very heavy agenda:

The Obama administration is going to be rebuilding and reconstructing five major sectors of the American t. It has no choice--there is no other option. It has to remake:

• Autos
• Housing finance
• High finance
• Energy
• And the big one—health care

On what principles and through what procedures is this extraordinary exercise in structural economic reform policy going to be accomplished? I get how to do the macroeconomics of Obama administration economic policy. I don’t get how to do the structural side…

What strikes me about this list is that the last two are clearly policy areas where PE Obama really wants to have a major impact. The other three items are merely things he will have to deal with and I don't think they are topics Obama ever wanted to get very familiar with. Of course, reforming any one of these three areas would be a huge undertaking on its own.

Getting health care reform done would have been a major accomplishment, regardless of how you feel about his proposals, but now he has to do that on top of everything else. (HT)

The Next Social Entrepreneurs

Nonprofits rely heavily on volunteers, but most CEOs do a poor job of managing them. As a result, more than one-third of those who volunteer one year do not donate their time the next year—at any nonprofit. That adds up to an estimated $38 billion in lost labor. To remedy this situation, nonprofit leaders must develop a more strategic approach to managing this overlooked and undervalued talent pool. The good news is that new waves of retiring baby boomers and energetic young people are ready to fill the gap.

This is the abstract for a new article in the Stanford Social Innovation Review. I have a lot more to say about this and will address it in a number of future posts. It's an important topic so be sure to check out the paper (free online!).

It's Hard Out Here for a...

Tax Lawyer, apparently, via tax prof blog:

Scary news from CNN Money and the ABA Journal: Andrew Magdy (J.D. 2007, Michigan State; LL.M. (Tax) 2008, Washington University) has $150,000 in student loans and has been unsuccessful in his search for a law firm tax job. He has sent out letters and CVs to 300 law firms but has received only one interview.

A Great Loss

I have been busy these past few days and only now checked one of my favorite blogs, Calculated Risk. I am very sorry to see that Doris Dungey (aka "Tanta") passed away Sunday morning (CR). She was only 47. Besides the obvious loss to friends and family, this is a huge loss for the blogosphere. The NYT has an obitituary in the Business section (NYT).