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June 21, 2009

Economist's View - 4 new articles

Productivity and the Internet

What do you think of Robert Waldmann's theory?:

The Internet and the Productivity Speedup, Angry Bear: The unexpected increase in US productivity growth in the 90's and naughties is an economic puzzle. At the time it was widely argued that investments in information and communications technology had finally finally paid off, that computers and the internet allowed vastly improved corporation wide inventory control and the increased output given inputs reflected lower work in progress inventories. ... hmmmm maybe. ...

I ... think it has to do with office workers and, in particular, middle management. ...[M]iddle managers and affiliated secretaries and janitors and such count in the denominator of labor productivity. In the 90s there was a wave of downsizing and delayering. Basically top management in many firms decided to thin the ranks of middle management on the grounds that middle managers weren't doing anything useful. The outcome says that the top managers were ruthless and right.

To me the key figure is the almost completely forgotten and hated by the few who know who he is Phillip Caldwell. He's the guy who replaced Henry Ford II as CEO of Ford about the time Ford president Lee Iacocca was fired went off to save Chrystler. Iaccoca was very famous for a while, the guy after Caldwell -- Donald Peterson -- was a corporate hero for a while. Caldwell was a subject that the business press preferred to avoid. When he arrived, he laid of 30,000 people from Ford headquarters staff. He totally disrupted the lives of hard working people who were doing the jobs they were assigned and who had no responsibility for any strategic mistakes (made by various actual human Fords and Mr Iacocca). What a total jerk.

However, no one noticed a decline in the contribution of Ford headquarters to Ford, and, by the way, Ford is not bankrupt.

An even earlier example was the ruthless Jack "the ripper" Welch at GE. Ruthless layoffs in his first years, record profits later.

Basically I think the story is simple -- Parkinson's law -- bureaucracies naturally grow without limit. That includes the management of large corporations. Everyone knows that middle managers are mainly making work for other middle managers writing memos and calling meetings and stuff, but top management does not want to lay people off and especially not managers who are sort of like them instead of production workers who are sort of like equipment.

Before the productivity speed up there was the takeover wave. Corporate predators who converted huge amounts of equity to debt had to be ruthless to survive. Current top management decided they had to do what a predator would do after a takeover to avoid a takeover. They discovered that it was actually quite easy (middle managers don't riot or even strike) and very very profitable. The Drexel Burnham Lambert turned out to have roots as solid as Burham woods, junk bonds turned out to be junk, gambling S&L's went bankrupt and the takeover wave ended.

But CEOs had found a source of huge flows of profits -- slash middle management, and decided to keep the money for themselves paying themselves monster compensation for their ruthlessness.

That's my theory. ...

"How Activists Make or Break Radical Innovations"

Tom Slee reviews Hayagreeva Rao's Market Rebels: How Activists Make or Break Radical Innovations:

Review: Market Rebels, by Hayagreeva Rao, Whimsley: For decades, economists have extended their intellectual reach ... in an attempt to encompass all the social sciences in their analytical framework. But now the boot is on the other foot and it looks like even core economic observations may be better explained by other social sciences. Robert Solow apparently said that attempts to explain differences in economic growth across countries typically end in "a blaze of amateur sociology". The focus on psychology in explanations of the banking crash shows that growth is not the only area of economics where the discipline runs out of steam before reaching its destination. The rise of behavioural economics, surely a last-gasp attempt by economists to match their models to the real world without changing departments, suggests that the condition goes deep.

Despite its title, Hayagreeva Rao's Market Rebels (Open Library link, publisher's page) challenges the economic analysis of innovations. At 180 pages and full of case studies ... Rao does not hammer the reader over the head with the implications of his case studies, but for me as a non-sociologist and non-economist the implications are huge and I'll be thinking about the book for a long time.

The case studies are diverse, but are centered around a single claim: the "joined hands of activists" play an important part in the creation, diffusion, and blocking of innovations. Collective action matters. Rao describes how hobbyists were key to the cultural acceptance of the car and the development of the personal computer; how microbrewers brought diversity back to beer; how nouvelle cuisine grew from the rebellious student movements of Paris 1968; how shareholder activism has pushed large companies to change behaviours; how community activists attempted to stall the spread of chain stores and then of big-box stores; how the green movement blocked the development of biotechnology in Europe. ...

The book is not strong on systematic analysis. ...

For someone who has spent most of their non-fiction reading time reading economics and economics-inspired books in recent years, Rao's is a welcome and refreshing change. Economic analysis too-often reduces the political left-right split to the false dichotomy of market vs state, but this reduction maps badly on to the real experience of political activism. Those who protest Monsanto's private-sector use of genetic engineering are often the same as those who protest state-driven wars. Many of those who oppose new Wal-Mart stores also oppose the extension of surveillance powers by the state. Where do such activists see themselves in a market vs state debate? For many, they don't: market vs state is not what it's about. So it's not surprising that economists have have a blind spot when it comes to social movements, and that the discipline systematically minimizes their impact. By putting social movements at the centre of his stories, Rao shows that they can and do have an influence, and that they deserve a place in any serious look at institutions that shape social change.

Although he says almost nothing about the Internet and digital collaboration,... Rao's analysis is a welcome alternative to the usual focus of widely-read writers like Yochai Benkler and Clay Shirky. These writers take the economics point of view and focus on issues such information as a public good, lowering transaction costs for online exchanges, and the vanishingly small marginal cost of reproduction of digital information. Rao's unspoken counterargument, which convinces me, is that group formation is not a problem of information, it's a problem of identity. If he is right then although we can expect to see many examples of successful groups in the online world, we won't see not a huge flowering of groupiness compared to the information-starved analogue world.

What's more, if Rao is right and initiatives such as Wikipedia, blogging and the Open Source movement really are social movements, then they may have a limited lifespan. Digital activist identity is a rebellious and anti-establishement stance, but such a stance can only be maintained while the movement is oppositional. ...

If there is an economics tie-in with Rao's analysis, it's with the analysis of identity pioneered by Rachel Kranton and Robert Akerlof... Rao does little to pick apart the concept of identity and it looks to me like the K&A analysis would have been helpful to him. For Kranton and Akerlof, identity is a set of social categories (car enthusiast, green activist), a set of prescriptions that go along with those categories, and a set of costs and benefits associated with following or not following these prescriptions. We each choose an identity from the range that society provides ("environmentalist", "conservative", etc). ... Once you have chosen an identity, you must affirm it by following the prescriptions associated with that identity (shopping at independent stores, eating nouvelle cuisine, etc) or you pay the price of dissonance if you take actions that go against those prescriptions (shopping at Wal-Mart, eating classical cuisine). Creating a strong set of such prescriptions ... serve[s] to maintain a sense of solidarity and identity among movement members.

One of the more common criticisms of No One Makes You Shop at Wal-Mart was that, although I argued in favour of collective action as a corrective force to free markets, I had little to say about what forms that action should take. It's a fair knock, and I'm happy that I can now point such readers to Rao's book. Not only does he take on several of the issues that I cover (Wal-Mart and big-box stores, biotechnology, real ale) but he takes far further than I could ever had done, and in a wonderfully specific and constructive way that provides concrete guidance to activists. I take my hat off to him.

Blinder: Why Inflation isn't the Danger

Alan Blinder isn't worried about inflation:

Why Inflation Isn't the Danger, by Alan S. Blinder, Economic View, NY Times: Some people with hypersensitive sniffers say the whiff of future inflation is in the air. ... Concluding that the Fed is leading us into inflation assumes a degree of incompetence that I simply don't buy. Let me explain.

First, the clear and present danger, both now and for the next year or two, is not inflation but deflation. ... Core inflation near zero, or even negative, is a live possibility for 2010 or 2011.

Ben S. Bernanke ... and his colleagues have been working overtime to dodge the deflation bullet. To this end, they cut the Fed funds rate to virtually zero last December and have since relied on a variety of extraordinary policies known as quantitative easing to restore the flow of credit. ... But quantitative easing is universally agreed to be weak medicine compared with cutting interest rates. So the Fed is administering a large dose — which is where all those reserves come from.

The mountain of reserves on banks' balance sheets has, in turn, filled the inflation hawks with apprehension. ... Will the Fed really withdraw all those reserves fast enough as the financial storm abates? If not, we could indeed experience inflation. Although the Fed is not infallible, I'd make three important points:

• The possibilities for error are two-sided. Yes, the Fed might err by withdrawing bank reserves too slowly, thereby leading to higher inflation. But it also might err by withdrawing reserves too quickly, thereby stunting the recovery and leading to deflation. I fail to see why advocates of price stability should worry about one sort of error but not the other.

• The Fed is well aware of the exit problem. It is planning for it... It might miss and produce, say, inflation of 3 percent or 4 percent at the end of the crisis — but not 8 or 10 percent.

• The Fed will start the exit process when the economy is still below full employment and inflation is below target. So some modest rise in inflation will be welcome. The Fed won't have to clamp down hard.

...But if the inflation outlook is so benign, why have Treasury borrowing rates skyrocketed in the last few months? Is it because markets fear that the Fed will lose control of inflation? I think not. Rising Treasury rates are mainly a return to normalcy.

In January, the markets were expecting about zero inflation over the coming five years, and only about 0.6 percent average inflation over the next decade. The difference between then and now is that markets were in a panicky state in January, braced for financial Armageddon; they have since calmed down.

My conclusion? The markets' extraordinarily low expected inflation in January was both aberrant and worrisome — not today's. As long as expected inflation doesn't rise much further, you should find something else to worry about. Unfortunately, choices abound.

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