Chapter 7 - The Turning Point

This chapter again seems to channel Schumpeter's creative destruction - "Conflict over institutiosn and the distribution of resources has been pervasive throughout history."(184)

The authors go on to examine England, the Glorious Revolution and the Industrial Revolution as an illustration of a "turning point" from extractive to inclusive institutions. I think of Joel Moykr's work on technology and the industrial evolution and wonder to what extent the analysis in this chapter holds up. That is, the answer to Why England? sees to remain an open question and the institutional response presented in this chapter is one of a number of alternatives rather than the conclusion.

In any event, the overview in this chapter does connect political change and technological change in an interesting manner.

Chapter 5 - I've seen the future and it works

This chapter echoes Schumpeter's Creative Destruction and makes, for me, a valuable distinction between growth under extractive institutions v growth under inclusive institutions.

I look forward to our discussion of an assertion made by the authors early in the chapter:

". . .sustained growth requires technological change,"(124)

While this is an intutively attractive cause/effect relation, I wonder to what extent has it been reflected in the literature and in empirical work. That is, the Solow model of growth, Romer's growth model and other models assign differing weights to the role of technology in the complex process of change. So, I wonder to what extent this assertion is useful.

That said, the discussion of growth under extractive institutions is very helpful for understanding the hurdles faced when a society facing transition. There are a number of players in extractive societies that do in fact earn rents and, in the short run, provide some level of growth to the entire society. "Extractive institutions are so common in history because they have a powerful logic: they can generate some limited prosperity while at the same time distributing it into the hands of a small elite. For this growth to happen, there must be political centralization."(149)

So, here is a dilemna, previous the authors argue that some degree of political centralization is necessary for the development of inclusive institutions. But here, in chapter 5, they recognize that political centralization is necessary for extractive institutions to emerge and persist. Is it a matter of degree? That is, how does the "proper" level of centralization emerge and persist?

On page 131 the authors further assert: "It [growth] had been done by government command, which could solve some basic economic problems."

I have an issue with the idea that any systme can "solve" problems. Economic systems set up incentives that motivate activity that can address problems, create problems and provide alternatives to existing responses to problems.

That said, I would have liked to know which economic problems are solved by command economic systems.

Creative destruction

A former student writes:

"I was hoping to get an interview with an economics professor who would be able to give me an educated opinion for my article. The topic is streaming movies vs. DVDs. Huge companies like Blockbuster have declared bankruptcy following the creation of companies like Netflix and Hulu."

While I have very little familiarity with delivery of entertainment (beyond that of an occasional user) I do have familiarity with the work of Joseph Schumpeter. It seems to be that the above question asks for an opinion on the role that entrepreneurship, innovation and discovery play in the process of economic change.

My thinking begins with the costs and benefits of economic change. The evolution or more rapid revolution of change that Schumpeter labeled the gale of creative destruction creates first and foremost anxiety and fear. Thinking about the impact that DVDs had on the marketplace at the time of their introduction I recall my worry about having to replace my small library of videos, replacing my VHS player with a DVD player (I selected a model that was a combo VHS/DVD player) and my concern about all my family videos that were recorded on VHS. I thought to myself, how much will this new technology cost me in terms of time, money and angst. Click here for a 1999 blog posting on this topic. And I am only a small part of the demand side of the market. Think about the supply side - manufacturers of VHS tapes, suppliers of materials to these manufacturers, marketing and distribution.

The example above is a classic one that illustrates creative destruction and the costs and benefits. Schumpeter recognized that often the benefits of an innovation were in the future (in 1999 most of the DVD use and benefit lay before us) while the costs were immediate.

Thinking about the current transformation in delivery of entertainment from a physical media to a delivered media (a process currently underway) it is worth reflecting on the current costs, future benefits and incentives for further evolution or revolution in the delivery of entertainment.

Douglass North explored the nature of change which he called non-ergodic (a fancy word for unpredictable) and I would suggest that considerations of the current and future emergence of delivery of entertainment keep this unpredictability in mind. The pace of change is accelerating - "the cloud", "googlization", and "artificial intelligence" are manifestations of emergent and continual change - the gale of creative destruction that Schumpeter associated with dynamic, liberal society. Larry Page, the quintessential big thinker, sees the day when we will all expand our horizons and knowledge through technology, if a chip can be implanted in our pets to maintain their security and location, Page reasons, why not a chip in humans that connects to the power of information and "wisdom" on the web.

My opinion - innovation and the accompanying change are processes that have costs and benefits, create temporary winners and losers and, most often but not uniformly lead to progress in the future. Entertainment in the 1910s in the US centered around black and white silent film, phonographs, live plays, novels and literature, conversation, and contemplation. Today, many of these modes of entertainment have been replaced by processes such as streaming media. Clearly there are costs and benefits to this gale of creative destruction and, most observers, would agree that the benefits have outweighed the costs and the gains to winners in this evolutionary process outweigh the losses to the losers. That said, we can be confident that our children and grandchildren will not by using current streaming technology for their entertainment, at least in current form.

Relevant works

Cox, W. Michael and Richard Alm. Concise Encyclopedia of Economics: Creative Destruction

Levy, Stephen. In The Plex: How Google Thinks, Works, and Shapes Our Lives

North, Douglass Understanding the Process of Economic Change

Roberts, Russell (EconTalk podcast) http://www.econtalk.org/archives/2007/10/mccraw_on_schum.html

Resolving current fiscal imbalances in the US

Boyes points to one of the approaches that could be used to bring about current US federal fiscal balance - tax policy. The related approach is government spending. The third approach is to monetarize the imbalance through inflation.

The current fiscal imbalance has been decades in the making. Beginning with the Great Society, politicans of both parties followed the predictable path of reaping current benefit (reelection via expansion of the social welfare state) while deferring inevitable costs related to the benefit. One might well argue that the acceleration of the imbalance took place on the Republican watch, but the real issue is, assuming sincere commitment to changing the imbalance, what actions can be taken?

I would argue that before considering scenarios for reducing the imbalance it is incumbent to keep in mind the forces that public choice reveals - politically "easy" actions will take place before politically "dangerous" actions. And secondly, it is obvious that an imbalance that accumulated over a 50 year period will not be significantly reduced in a single year or single term of Congress.

That said, I would also suggest that if I read Douglass North and his colleagues correctly, the informal institutional matrix of beliefs, norms and conventions shape the formal institutional matrix. That being the case, public policy, particularly on an issue as important as taxes, government spending and the value of the dollar cannot run contrary to public opinion.

This being the case, the vast majority of the American public supports the social welfare state as it exists in the US and would oppose significant change to social security, medicare and medicaid. The Pew Foundation survey of public opinion revealed that Americans prefer tax increases to spending cuts.

The conundrum for policy makers, interested observers and economists is what to do in the face of this constraint. If the survey is correct and is a representation of the informal institutional framework of society, efforts that conflict with this set of beliefs will be unsuccessful.

The least worse option, it seems to me, is to align federal spending and taxes rather than to use inflation to monetarize the deficit. In plan English, tax increases are preferable to inflation.

I write this not advocating tax increases, rather from my belief that there is virtually no support for the alternative - steep reductions in social security, medicare and medicaid. A back of the envelope analysis confirms that, the cuts necessary in these 3 programs to reduce the deficit significantly are so large as to both be unacceptable to the public and to be disruptive (think Greece) to social stability.

In thinking about this one might attach consequences to various future courses of action:

Scenario 1 - no meaningful action toward fiscal balance using the budget. If no significant changes are made to tax and spending at the federal level this leaves only the action of inflation to resolve the imbalance.

Scenario 2 - meaningful government spending cuts to all categories of the federal budget without a change in taxes. As Boyes points out, the regime uncertainty resulting from state action has a tendency to cast a long and dangerous shadow over government activity. Given the track record in Washington, I wonder how long this scenario would need to continue in order to overcome the uncertainty that seems institutionalized in government activity. Certainly more that one policial cycle would need to transpire to provide authentic belief by the players in the US economy - both domestic and international.

Scenario 3 - a repeat of the recent past.

I have made consist efforts to find optimism in my view of our emergent order in the US, the evolution of the government and the financial imbalances that seem to be a consequence of Leviathan seem, in the past, to have generated sufficient innovation that the resulting creative destruction is Schumpeterian rather than Marxian. That said, I wonder what the future holds.

Borders and creative destruction

Creative destruction - this article is a nice illustration of Joseph Schumpeter's insight.

Douglass North writes about the importance of adaptive efficiency to the process of economic change. This flexibility or lack thereof is an essential ingredient in the path of economic growth, improving economic welfare and progress. Trial and error and the associated willingness to embrace risk and uncertainty is on of the foundations of an institutional framework that allows for liberty and responsibility.

So, unlike the US auto and financial services industry, we can see in the retail book industry a nice view of the forces of creative desctruction.

The Washington Post observes:

Borders, they know, is struggling to survive. It recently suspended payments to book publishers. Dozens of its stores across the country, including several in the Washington area, have closed. For many in the industry - and for this group of Borders regulars - the question is not whether the chain will go under, but when.

"How many record stores are there these days?" Minor said after the meeting, resigned to the eventual end.

A Borders spokeswoman declined to comment or make

North reminds us that the process of change is ubiquitous and that efforts to slow down, derail, or prevent change lead to very perverse and often unintended outcomes. We are in a positive to view this in the US auto and financial services industries.

However, retail books allows us to see the alternative - creative destruction at play with relative little effort by outside forces - the government, labor unions, NGOs to slow down, derail, or prevent the changes that are sweeping though individual behavior in dealing with information and thought.

Michael Rosenwlad writes:

Borders, which helped a generation of readers learn the pleasure of diving into a book for hours at a stretch, now competes for the attention of readers who dip into a few pages on an iPad, open Facebook, read some more, then tweet random thoughts. Printed books don't need a power outlet or a data plan, yet for some people, their utility seems to be fading.

Here is the essense of emergent and evolutionary orders, at times the speed of evolution accelerates at a dizzying rate. And we see this in retail books, and perhaps a wide swath of retailing in general.

The key is the end of the above quote - utility changes. As time moves on individuals see fulfillment, satisfaction, happiness and information in a variety of new ways. Our lives are infinitely improved due to digitalization and this poses huge benefits to consumers and huge threats to producers.

I see the future of technology as a force that drives middlemen (Borders between the author and the reader) to explore new, creative, alternative, innovative ways to improve individual utility and to make lives better.

Thankfully the government, labor unions or NGOs (among some of the myriad rent seeking, centralized organizations) have overlooked this powerfully positive process.

Rosenwald writes about his process

It started with Amazon. Launched in 1995 by Jeffrey Bezos, the company aimed to be the biggest bookstore on the planet, and it shipped books anywhere at prices so cheap that it lost money on many sales. The jokes came fast: Amazon dot bomb, some people called it. Amazon dot gone, others said.

But it turned out that Amazon knew what it was doing, building an infrastructure that eventually displaced Borders - then known as the more bookish of the chains - as the preferred way to get the right book into the hands of the right customer. Amazon built software that suggested other books to customers, based on their orders. As Amazon got better at such tactics, "Borders lost that patina they had, that special place of a bookstore, and they became just another discount retailer," said Albert Greco, senior researcher at the Institute for Publishing Research.


So, while entreprenuars like Steve Jobs and Jeff Bezos are forward thinking trying to identify the future utility patterns of consumers (a risky, uncertain process that is at the heart of a trial and error society) Borders was slow to react. And, as Bill Gates titled one of his books - Business at the Speed of Light - the rate of change in many if not most areas of live does not allow much forgiveness for organizations that are slow on the uptake. This is also true for workers - in the event an individual fails to anticipate future needs their employment is endangered. For example, book clerks in retail stores might be advised to consider updating their skill sets or examining their talents for alternative types of jobs.