Business and management
Schumpeter's notebook
The euro-zone crisis
by Schumpeter
WE HAVE read plenty about Greece's dismal public finances and risible public book-keeping. But if the country is to have any chance of recovering in the long-term it needs to rethink its approach to entrepreneurialism, which is one of the most hostile in the world. A New York Times article makes this point forcefully by telling the story of one entrepreneur's brave attempt to establish a soft-drinks business in his home country:
DEMETRI POLITOPOULOS says he has suffered countless indignities in his 12-year battle to build a microbrewery and wrest a sliver of the Greek beer market from the Dutch colossus, Heineken.
His tires have been slashed and his products vandalized by unknown parties, he says, and his brewery has received threatening phone calls. And he says he has had to endure regular taunts—you left Manhattan to start up a beer factory in northern Greece?—not to mention the pain of losing 5.3 million euros.
Bad as all that has been, nothing prepared him for this reality: He would be breaking the law if he tried to fulfill his latest—and, he thinks, greatest—entrepreneurial dream. It is to have his brewery produce and export bottles of a Snapple-like beverage made from herbal tea, which he is cultivating in the mountains that surround this lush pocket of the country.
An obscure edict requires that brewers in Greece produce beer—and nothing else. Mr. Politopoulos has spent the better part of the last year trying fruitlessly to persuade the Greek government to strike it. “It’s probably a law that goes back to King Otto,” said Mr. Politopoulos with a grim chuckle, referring to the Bavarian-born king of Greece who introduced beer to the country around 1850.
The whole thing is worth reading if you want to understand just how messed up the country is, and how little the European Union has done to promote structural reforms in its member states.
More on beards
Brain power versus beard power
Feb 2nd 2011, 14:35 by Schumpeter
IN HIS special report on the global elite my esteemed colleague argued that "brains bring ever larger rewards". This is true enough, but I think that he missed an important wrinkle in the argument. The more productive economies become, powered, no doubt, by the cognitive elite, the more people can be rewarded for all sorts of talents, not just intelligence. Beards, as well as brains, can provide people with a livelihood, of a sort. From today's New York Times:
Jack Passion knows a thing or two about beards. With his orange-red “waterfall of hot lava,” as he called it, spilling from his chin, he is the country’s only full-time professional beard grower. It is not a lucrative job, really, but between the worldwide contests he wins and the book he wrote about beard growing, he can be considered an expert on the subject.
Economists and conflicts of interest
Jan 27th 2011, 0:05 by Schumpeter
ECONOMISTS have recently been debating whether to adopt a code of ethics, to deal with widespread worries about conflicts of interest. But dubious behaviour has a long history in a profession that is, by its nature, a magnet to people who are preoccupied by money. David Warsh recounts one of Paul Samuelson's favourite stories about David Ricardo and the huge profits he reaped after the Battle of Waterloo:
The bond trader had an observer stationed near the battle. Once the outcome was clear, he galloped quickly to where a packet ship was waiting. So Ricardo in London received the early news, and conveyed it to the British government.
Then he went down to his customary chair at the Exchange – and sold! Other traders, suspecting the worst, sold too, the prices of Treasuries tumbling, until at last, Ricardo reversed course and bought and bought and made a killing, his greatest coup ever, one that put even the Rothschild brothers in the shade.
“If not illegal, an ethical purist would have to fault Ricardo for in effect profiting from his own spreading false rumors,” Samuelson wrote. “In this millennium that might be something to criticize or even to litigate.” Even so, the ploy was not unheard of in the present day, he would confide, given that new news, not yet digested, was what sent markets spinning.
Emerging markets
The rise of emerging-market think-tanks
Jan 26th 2011, 18:00 by Schumpeter
THE rise of new economic powers is inexorably bringing the rise of new intellectual powers, too. For decades American think-tanks have ruled the world. They have the finest facilities, the cleverest scholars and the best lunches. They have defined the terms of the global debate and provided America's hard power with a halo of soft power.
This is still largely the case. But emerging-market think-tanks are growing rapidly, promising to broaden the global debate. The big ideas of the future are increasingly likely to come from them. Journalists, wanting a comment on China or an op-ed on the balance of power, may well phone up somebody in São Paulo rather than Washington (or they should do, anwyay, if they are up to their job).
Every year the University of Pennsylvania provides a huge public service by compiling a list of the world's top think-tanks. America leads the world in absolute numbers, with 1816 think-tanks. It also leads the world in quality, with lots of American institutions in the top twenty and the Brookings Institution, rightly, ranked as number one. But China and India are making impressive strides, with 425 and 292 respectively. Argentina also puts in a strong performance, with 181 think-tanks. Journalists need to update their contacts lists.
An ombudsman's lament
The future of the Washington Post
Jan 26th 2011, 15:44 by Schumpeter
ANDREW ALEXANDER, the Washington Post's departing ombudsman, pens a lament about the state of his paper that should strike a chill into the heart of anybody who cares about the future of journalism, both as an industry and as a craft:
Staggering financial losses have required unrelenting expense reductions to restore profitability. The loss of newsroom talent, through forced buyouts and voluntary departures, has been breathtaking. Some of the most respected Post journalists have left, along with institutional knowledge and leadership so desperately needed during a period of radical change.
Mr Alexander is undoubtedly right about the harsh environment. But the Post has brought some of this on itself. The rise of Politico shows that the paper was failing to satisfy its core audience. The Post did far too little to upgrade its business coverage as the region—now the fastest growing in the country—was transformed by the rise of the Dulles corridor. And some of its decisions were inexplicable: its decision to give an op-ed slot to Marc Thiessen, perhaps the least talented writer on the right, and a man who has never had an interesting thought in his life, is particularly unforgivable.
Public-sector unions
Jan 26th 2011, 11:32 by Schumpeter
IN A well-informed article in the Wall Street Journal Fred Siegel points out that, far from being part of the natural order of industrial society, public-sector unions were created by deliberate political decisions, as the Democratic Party saw a treasure trove of votes in organised public-sector workers. What was created by political will can also be undone by it:
The turbulent years of the 1960s and '70s are best known by the headline-grabbing civil rights and women's rights movements. But there was another "rights" movement, largely overlooked, that has also had a profound effect on American life. The looming public-pension crisis that threatens to bankrupt city, county and state governments had its origins in those same years when public employees, already protected by civil-service rules, gained the right to bargain collectively.
Liberals were once skeptical of public-sector unionism. In the 1930s, New York Mayor Fiorello LaGuardia warned against it as an infringement on democratic freedoms that threatened the ability of government to represent the broad needs of the citizenry. And in a 1937 letter to the head of an organization of federal workers, FDR noted that "a strike of public employees manifests nothing less than an intent on their part to prevent or obstruct the operations of Government until their demands are satisfied. Such action, looking toward the paralysis of Government by those who have sworn to support it, is unthinkable and intolerable."
Interviewing Indians
Jan 21st 2011, 16:55 by Schumpeter | MUMBAI
I HAVE interviewed more than a dozen Tata executives over the past four days, and I am hungry for more. Western executives, and, I'm sad to say, particularly American ones, have become dreadful bores. They speak in management clichés (I feel like vomiting whenever I hear the phrase "walk the walk"). They are surrounded by plastic public-relations people who have managed to invent a language, PR-speak, that makes managementese sound like Shakespeare. Terrified of contradicting the company line, they all sing from the same dismal song-sheet.
Indians, or at least the ones I've been talking to, could not be more different. They speak proper English (although "synergy" and "core competences" make the occasional appearance). They litter their conversations with references to mythology, Indian political heroes, stories from the Raj, the Cambridge wrangler system and much else beside. Far from singing from the corporate hymn-sheet, they seem to be genuinely grappling with my questions, particularly those about the proper boundaries of the firm. A pity about all the cricket references, though, which quite escape me.
Indian sojourn, continued
Three faces of India (and two faces of Tata)
Jan 21st 2011, 13:50 by Schumpeter | MUMBAI
I STARTED the day on Tuesday by visiting Tata's steelworks in Jamshedpur. I found it awe-inspiring. The scale is mind-blowing: 2.5 hectares of industrial muscle. Even more mind-blowing is the steelmaking process itself: the giant cauldrons of molten steel, the huge trains shifting raw materials about, the fashioning of the molten steel into iron sheets. Three things struck me in particular. First, the relatively small number of people involved. Though based in a relatively poor company, this is a high-tech, high-skill, highly mechanised process. Second, the intelligence and enthusiasm of the people I talked to. These people love to talk about steel! And they love to recite war stories from their visits to other steel mills! (I apologise if I lost the plot every now and again). And third, the smoothness of the organisation. Every process seemed to be perfectly choreographed, and everybody seemed to know their role. Tata Steel has reduced its workforce from 78,000 in the mid-1990s to 35,000 today, while quadrupling the amount of steel it produces. We need a similar revolution in the public sector.
I spent the afternoon on a whirlwind tour of Kolkata, and a somewhat eccentric one, owing to linguistic problems. It is hard for even the most hard-hearted anarcho-capitalist not to be shocked by the poverty, and discombobulated by the confusion. You come across inexplicable things all the time. I watched a cheerful-looking gentleman wash himself carefully in the river, covering himself with a soapy lather, only to empty a huge bag of rubbish into the water when he had finished. On the positive side, I was struck by the omnipresence of entrepreneurialism. Even the most desperate people were constantly busy. People sit at the side of the road sewing on their Singer sewing machines or cobbling shoes. Truck stops, of which there were an inordinate number, generate service economies, with people selling tea, food and, one suspects, a lot else besides. People also preserve their dignity among the squalor: many women are brightly dressed, and a striking number of children wear smart school uniforms. You would not find the same energy or sartorial dignity in a British inner city.
The queue to get through security at Kolkata airport was more than a thousand people long—a grumpy fellow-passenger blamed it on the city being run by success-hating, business-loathing, cretinous and corrupt Communists—but thereafter I was transported into a different India. The flight was on time. Mumbai airport was shiny and new. A driver was waiting. And he whisked me, via a new and almost traffic-free road, to the Taj Mahal Palace, which is about as close to heaven on earth as you can get. The beautiful people of the new India, who were pouring out of the hotel when I arrived, really are beautiful; and the Taj's reputation for hospitality is richly deserved.
All this obviously raises the question of what a single conglomerate is doing running steel mills and luxury hotels. But here is a conjecture, driven, admittedly, by Taj-induced goodwill. Peter Drucker argued that the first job of a company is to create a customer. Most Western bosses would probably say that the first job of a company is to create a profit. But in the emerging world—and particularly the emerging India where Tata Steel and the Taj Palace were created a century ago—the first job of a company is to create order amid chaos. In their different ways, the steelworks and the luxury hotel are fortresses against the surrounding madness.
Consumer goods
Jan 19th 2011, 18:01 by Schumpeter | JAMSHEDPUR
FORGET about Coke and Pepsi: the prize for the most ubiquitous advertisements in India seems to belong to cement. I have counted dozens of different types of cement, including Atlus, Power and Idea, that compete for consumers' attention with brightly coloured ads and banners. After cement comes steel (I'm told that Tata even brands individual steel bars so that consumers know that they are buying the real thing).
The reason for all this noise is that things like cement and steel are consumer goods in emerging markets (if anything, cement ads, particularly for Cemex, are even more ubiquitous in Mexico). People build their own houses, sometimes investing their life savings and years on end to the project, so cement, steel and all the things that go into constructing houses are among the most important things that they buy. This is yet another reason for thinking that Vijay Govindarajan's idea of a $300 house has revolutionary implications, for the industrial order as well as for individual consumers.
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