Ireland’s Paradise Lost

For an American tourist weaned on Gaelic kitsch and screenings of “The Quiet Man,” the landscape of contemporary Ireland comes as something of a shock. Drive from Dublin to the western coast and back, as I did two months ago, and you’ll still find all the thatched-roof farmhouses, winding stone walls and placid sheep that the postcards would lead you to expect. But round every green hill, there’s a swath of miniature McMansions. Past every tumble-down castle, a cascade of condominiums. In sleepy fishing villages that date to the days of Grace O’Malley, Ireland’s Pirate Queen (she was the Sarah Palin of the 16th century), half the houses look the part — but the rest could have been thrown up by the Toll brothers.

It’s as if there were only two eras in Irish history: the Middle Ages and the housing bubble.

This actually isn’t a bad way of thinking about Ireland’s 20th century. The island spent decade after decade isolated, premodern and rural — and then in just a few short years, boom, modernity! The Irish sometimes say that their 1960s didn’t happen until the 1990s, when secularization and the sexual revolution finally began in earnest in what had been one of the most conservative and Catholic countries in the world. But Ireland caught up fast: the kind of social and economic change that took 50 years or more in many places was compressed into a single revolutionary burst.

There was a time, not so very long ago, when everyone wanted to take credit for this transformation. Free-market conservatives hailed Ireland’s rapid growth as an example of the miracles that free trade, tax cuts and deregulation can accomplish. (In 1990, Ireland ranked near the bottom of European Union nations in G.D.P. per capita. In 2005, it ranked second.)

Progressives and secularists suggested that Ireland was thriving because it had finally escaped the Catholic Church’s repressive grip, which kept horizons narrow and families large, and limited female economic opportunity. (An academic paper on this theme, “Contraception and the Celtic Tiger,” earned the Malcolm Gladwell treatment in the pages of The New Yorker.) The European elite regarded Ireland as a case study in the benefits of E.U. integration, since the more tightly the Irish bound themselves to Continental institutions, the faster their gross domestic product rose.

Nobody tells those kinds of stories anymore. The Celtic housing bubble was more inflated than America’s (a lot of those McMansions are half-finished and abandoned), the Celtic banking industry was more reckless in its bets, and Ireland’s debts, private and public, make our budget woes look manageable by comparison. The Irish economy is on everybody’s mind again these days, but that’s because the government has just been forced to apply for a bailout from the E.U., lest Ireland become the green thread that unravels the European quilt.

If the bailout does its work and the Irish situation stabilizes, the world’s attention will move on to the next E.U. country on the brink, whether it’s Portugal, Spain or Greece (again). But when the story of the Great Recession is remembered, Ireland will offer the most potent cautionary tale. Nowhere did the imaginations of utopians run so rampant, and nowhere did they receive a more stinging rebuke.

To the utopians of capitalism, the Irish experience should be a reminder that the biggest booms can produce the biggest busts, and that debt and ruin always shadow prosperity and growth. To the utopians of secularism, the Irish experience should be a reminder that the waning of a powerful religious tradition can breed decadence as well as liberation. (“Ireland found riches a good substitute for its traditional culture,” Christopher Caldwell noted, but now “we may be about to discover what happens when a traditionally poor country returns to poverty without its culture.”)

But it’s the utopians of European integration who should learn the hardest lessons from the Irish story. The continent-wide ripples from Ireland’s banking crisis have vindicated the Euroskeptics who argued that the E.U. was expanded too hastily, and that a single currency couldn’t accommodate such a wide diversity of nations. And the Irish government’s hat-in-hand pilgrimages to Brussels have vindicated every nationalist who feared that economic union would eventually mean political subjugation. The yoke of the European Union is lighter than the yoke of the British Empire, but Ireland has returned to a kind of vassal status all the same.

As for the Irish themselves, their idyllic initiation into global capitalism is over, and now they probably understand the nature of modernity a little better. At times, it can seem to deliver everything you ever wanted, and wealth beyond your dreams. But you always have to pay for it.

Ross Douthat, New York Times

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Full article: http://www.nytimes.com/2010/11/22/opinion/22douthat.html

The loan arranger

AMAZON.COM says soon you will be allowed to lend out electronic books purchased from the Kindle Store. For a whole 14 days. Just once, ever, per title. If the publisher allows it. Not mentioned is the necessity to hop on one foot whilst reciting the Gettysburg Address in a falsetto. An oversight, I’m sure. Barnes & Noble’s Nook has offered the same capability with identical limits since last year. Both lending schemes are bullet points in a marketing presentation, so Amazon is adding its feature to keep parity.

Allowing such ersatz lending is a pretence by booksellers. They wish you to engage in two separate hallucinations. First, that their limited licence to read a work on a device or within software of their choosing is equivalent to the purchase of a physical item. Second, that the vast majority of e-books are persistent objects rather than disposable culture.

If you own a physical book, in much of the world you may sell it, lend it—even burn or bury it. You may also keep the book forever. Each of those characteristics is littered with footnotes and exceptions for e-books. We are granted an illusion of ownership, but may read only within the ecosystem of hardware and software supported by the bookseller with sometimes additional limitations imposed by publishers. Witness Amazon’s remote deletion—since abjured—of improperly sold copies of George Orwell’s “1984” and “Animal Farm” in 2009. This Babbage recalls an Apple executive, Phil Schiller, extolling to him in 2003 the virtues of purchasing downloadable music when that company’s iTunes Store launched, and the dominant model was for recurring subscriptions. Mr Schiller described buying a song as owning it. Asked if one could therefore sell the song, Mr Schiller said no. He explained:

I do think of it as ownership, and it really does fit the definition of legal ownership. [There are] certain boundaries on your rights, just as on everything I own. I can own a car but that doesn’t give me the right to speed 100mph in it.

That was as tendentious then as it is now, and applies just as directly to Apple’s current e-book offerings. True, Apple removed digital rights management (DRM) protection from its music when the recording industry decided its best tool to fight Apple’s near-total ownership of digital downloads was to make it possible for music to be played on devices other than iPods. But the licensing terms for music didn’t change, and books and video remain locked down, however ineffective such protection is.

But the reason for restricting lending, even with the sham of offering it in Amazon’s or Barnes & Noble’s form, is to distract people from the fact that buyers are spending real money to buy a book they may read just once. To judge from the information Amazon provides, the long tail applies to e-books as it does everywhere else. Many different titles are flogged, but the most disposable and ephemeral have the lion’s share of units sold. Dan Brown’s epics are rarely re-read, judging by how many copies are available for one penny or given away in free book bins weeks after release. Allowing the loan of “The Lost Symbol” by any purchaser to any other e-book hardware or software user worldwide turns each buyer into a one-person lending library. Publishers don’t much like libraries, either, despite the chin-wagging otherwise. (In the US, the public lending right or remuneration right doesn’t hold; the first-sale doctrine allows library lending of physical media without additional fees.)

With a physical book, the afterlife of a disposable read is to hand it off to another party: a library sale, a friend or relative, or the free bin outside a used bookstore. Such books are also purchased in the millions and sold for one penny plus shipping online partly as a marketing effort by booksellers who can then include their own catalogs with each sale. An e-book, however, lives in limbo. Neither moving on to the next life, nor returning to this one, it can never be freed.

That will change. Just as with music, DRM will be cracked. As more people possess portable reading devices, the demand and availability for pirated content will also rise. (Many popular e-books can now be found easily on file-sharing sites, something that was not the case even a few months ago, as Adrian Hon recently pointed out.) The end-game is unclear. Authors can’t turn to touring to obtain revenue in the way musicians can, though some can charge steep speaking fees. Nor can authors produce their work in 3D, only readable in certain special theaters. (McSweeney’s has a proposal in that regard.)

All is not lost, however. Despite fewer adults reading fewer books, billions are still sold worldwide each year, with an increasing portion being digital. Publishers and booksellers need to get non-readers to pick up a device and buy books, and existing readers to read more. Lowering the risk of purchasing a book that a reader may not like would reduce the friction between considering a title and clicking the buy button.

In fact, Barnes & Noble and Starbucks are experimenting with a sort of loan in their bricks-and-mortar shops. The bookseller allows its Nook hardware owners to read books willy-nilly on its stores’ Wi-Fi networks for up to an hour a day. Starbucks has partnered with several publishers to allow full access to some titles, but only while a browser is in the store. Barnes & Noble’s effort is a year old and Starbucks’ was launched just a few days ago.

In other words, they are finally doing with digital books what they have long practised with the printed sort. After all, most bookshops nowadays let you pick a book off the shelf and read it at your leisure, sometimes providing comfy armchairs. Cafés have been making books and newspapers available to patrons for centuries, to entice them to stick around for another cuppa.

The college-textbook market provides another replicable business model. Students pay through their noses for new textbooks at the start of term only to resell them at the end to other students or back to the original bookshop at a discount. Alternatively, they rent books for a fee while leaving a deposit which is returned when the book comes back to the shop. Creating a legitimate digital resale market along similar lines ought to be possible. If, that is, publishers can be convinced to let what are in effect mint-condition digital copies to go at a lower price.

Introducing either de facto rental (purchase and resell at prices set by the bookseller) or the actual sort (read a book in a set period of time for a lower fee) would expand general and specialist readership alike, while discouraging a turn to piracy by breaking the appearance of immutable, high prices. At the same time, it would enable publishers, booksellers and authors to sidestep the first-sale doctrine of physical media, and to rake in revenue each time a “used” digital copy passes from hand to hand.

The music and film industries fought a decade-long losing battle for the digital realm that only put them at odds with their best customers. The book business may yet be able to avoid recapitulating all that pain and disruption, not least by pinching ideas from the off-line world.

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Full article and photo: http://www.economist.com/blogs/babbage/2010/11/steal_book

Which MBA?

Pirate copy

What managers can learn from Somali pirates 

PURVEYORS of management-speak are fond of quoting cod insights from military strategists. According to David James, a professor at Henley Business School, they would do better studying the management styles of some of those the armed forces are fighting, such as Somali pirates. Alongside Paul Kearney, a lieutenant-colonel in the Royal Marines, Professor James has been studying the operations of the pirates, as well as insurgents in Afghanistan and Iraq, to see if they have anything to teach legitimate firms. 

The threat to life and liberty aside, Somali pirates’ business model is impressive. According to the professor, each raid costs the pirates around $30,000. On average one raid in three is successful. The reward for a triumphant venture, however, can be in the millions. 

The organisation behind the pirates would be familiar to many ordinary businesses. For a start, they have a similar backend—including the kind of streamlined logistics and operations controls that would be the envy of most companies. Their success has even prompted one village to open a pirate “stock exchange”, where locals can buy shares in up to 70 maritime companies planning raids.

But Professor James believes that the most important lesson firms can learn is one of strategy. He teaches his MBA class that one reason for the pirates’ success is that they avoid “symmetrical” conflict—challenging their targets head on by, for example, lining up against the Western navies patrolling the waters—battles they would surely lose. Instead, they use stealth and surprise, attacking targets at their weakest point. In this way, with only a dozen-or-so sailors, they wrest control of huge assets, in the form of oil tankers.

This is a lesson that serves smaller companies well as they look to take bites out of larger rivals. It might be foolish, for example, for a start-up to take on one of the traditional banks head-to-head—only another large bank could afford the pyrrhic battle that would ensue from it protecting its market. But by picking a small, localised fight a start-up can make an impression before a bank has had time to react. An example, says Professor James, is wonga.com. It has taken market share by attacking banks’ inflexible lending policies by offering loans for the exact amount and length of time the customer wants. It processes the loans extremely quickly and customers can even get immediate approval using an iPhone app. 

Sometimes such an asymmetrical strike can shift the centre of gravity in an industry. Nintendo, a computer-games firm, was competing, and failing, against two much better-resourced rivals—Sony and Microsoft—in a sector where it seemed the only way to be successful was to win an arms race of processing power and ever more sophisticated technology. Nintendo opened a new avenue of attack based on the idea that consumers would enjoy getting physically involved in video games, using a motion-sensitive controller to control the on-screen action. So, using relatively cheap technology, it invented the Wii, in the process opening up a whole new market for previous non-gamers. 

That smaller, nimble competitors make stealth attacks on larger rivals is a well-known phenomenon. Nonetheless, the way that larger companies can defend themselves against attack is a matter of much debate. Professor James says that the key is to quicken decision making. In his analogy, by the time the captain of an oil tanker has spotted the pirates’ inflatables it is too late; big ships take a long time to turn around. Similarly, once a large business has gone through the traditional process of observing an attack, orientating itself, deciding what to do about it and then acting (what Colonel John Boyd, an American military strategist, called an OODA loop) it is too late, the competition is upon it.

To help companies understand the best way to speed up their reaction times, the professor turned to another unpalatable source: insurgents in Afghanistan. Despite stressing that he believes the outcomes of their strategies to be repugnant, he nonetheless says that he admires the management structures that makes them successful. 

One of the main lessons he learned, and which he teaches companies on his executive-education programme, Corporate Insurgency, is that insurgent leaders don’t micro-manage. Leaders of such movements are, in Professor James’s words, “brand agnostic”—they allow their brand to be adopted by autonomous local cells with little central control. The mistake big business makes is to try to protect the brand by making decisions from its headquarters; better, he says, to allow local managers to respond quickly to local events.

He even goes as far as to suggest that companies set up “commando” forces; small units which work outside the traditional command structure of the company and which have a level of autonomy—“not holding the long committee meetings, not having the extended approval and budgeting process”. If a big business as a whole cannot act as a small, nimble player, these business units can.

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Full article and photo: http://www.economist.com/whichmba/somali-pirates

An Age of Creative Destruction

‘Gentlemen: You have undertaken to cheat me. I won’t sue you, for law takes too long. I will ruin you.” Thus Cornelius Vanderbilt writing to business partners who had exploited his absence to gain control of one of his companies. He was as good as his word.

The nature of both ruin and success is the subject of “American Colossus,” H.W. Brands’s account of, as the subtitle has it, “The Triumph of Capitalism” during the period 1865-1900. Mr. Brands paints a vivid portrait of both this understudied age and those industrialists still introduced by high-school teachers as “robber barons”—Vanderbilt, Andrew Carnegie, John D. Rockefeller and J.P. Morgan. Together these men of the 19th century laid the foundations that would allow the use of innovations that we think of as modern, such as trains and automobiles, on a massive scale in the 20th century.

“Colossus” also reminds us of something more subtle: the terrifying difficulty of remaining at the top once one has arrived. Vanderbilt, for example, seemed doomed to be sidelined during his lifetime. He was a “water man” and remained devoted to the steamship even as railroads threatened to relegate river transport to the status of the fax. His hostility to trains was so great he referred to them simply as “them things that go on land.” But the Commodore eventually admitted to himself the looming obsolescence of the river highway—just in time to corner the stock of the New York & Harlem Railroad in the 1860s. Thus did he postpone—albeit only for a few decades—the decline of the great Vanderbilt empire.

Rails to riches: An 1870 cartoon depicting James Fisk’s attempt to stop Cornelius Vanderbilt from gaining control of the Erie Railroad Company

As Mr. Brands relates the tycoons’ stories, he drops some anecdotes wonderfully relevant today. Many Americans these days are buying their first gold shares—but with a certain ambivalence, all too aware that the metal’s price can move suddenly. Mr. Brands reminds us just how suddenly with a description of gold’s gyrations on Friday, Sept. 24, 1869, the day the Treasury signaled the Grant administration’s intention to combat rising gold prices by putting a supply worth $4 million on the market. That day, before Treasury’s move, gold shot to $162 an ounce from $143. Then the government’s gold came online. “As the bells of Trinity pealed forth the hour of noon,” reported the Herald Tribune, “the gold on the indicator stood at 160. Just a moment later, and before the echoes died away, gold fell to 138.”

“Colossus” also reminds us just how colossally wrong bets can be. When New York’s first apartment building, on East 18th Street, was planned in 1869, the reception it received was as cold as a February wind off the Hudson. New Yorkers reckoned that “cohabitation,” as apartment life was called, would fail and that gentlemen would never live “on shelves.”

For all the pleasure that “Colossus” offers in the way of anecdote, two flaws undermine its attractions. First, Mr. Brands frames the book—and indeed all of American history—as a contest between capitalism and democracy. Democracy depends on equality, the author claims, while capitalism needs inequality to function. “In accomplishing its revolution, capitalism threatened to eclipse American democracy,” he writes.

The author’s attachment to a sweeping theme like the democracy-capitalism clash is understandable: It’s the sort of duel that Will and Ariel Durant and other producers of pageant-style history have featured to unify their multivolume works.

Still, this “wasn’t it grand?” mode of writing is imprecise. Mr. Brands laments that capitalism’s triumph in the late 19th century created a disparity between the “wealthy class” and the common man that dwarfs any difference of income in our modern distribution tables. But this pitting of capitalism against democracy will not hold. When the word “class” crops up in economic discussions, watch out: it implies a perception of society held in thrall to a static economy of rigid social tiers. Capitalism might indeed preclude democracy if capitalism meant that rich people really were a permanent class, always able to keep the money they amass and collect an ever greater share. But Americans are an unruly bunch and do not stay in their classes. The lesson of the late 19th century is that genuine capitalism is a force of creative destruction, just as Joseph Schumpeter later recognized. Snapshots of rich versus poor cannot capture the more important dynamic, which occurs over time.

One capitalist idea (the railroad, say) brutally supplants another (the shipping canal). Within a few generations—and in thoroughly democratic fashion—this supplanting knocks some families out of the top tier and elevates others to it. Some poor families vault to the middle class, others drop out. If Mr. Brands were right, and the “triumph of capitalism” had deadened democracy and created a permanent overclass, Forbes’s 2010 list of billionaires would today be populated by Rockefellers, Morgans and Carnegies. The main legacy of titans, former or current, is that the innovations they support will produce social benefits, from the steel-making to the Internet.

The second failing of “Colossus” is its perpetuation of the robber-baron myth. Years ago, historian Burton Folsom noted the difference between what he labeled political entrepreneurs and market entrepreneurs. The political entrepreneur tends to compete over finite assets—or even to steal them—and therefore deserves the “robber baron” moniker. An example that Mr. Folsom provided: the ferry magnate Robert Fulton, who operated successfully on the Hudson thanks to a 30-year exclusive concession from the New York state legislature. Russia’s petrocrats nowadays enjoy similar protections. Neither Fulton nor the petrocrats qualify as true capitalists.

Market entrepreneurs, by contrast, vanquish the competition by overtaking it. On some days Cornelius Vanderbilt was a political entrepreneur—perhaps when he ruined those traitorous partners, for instance. But most days Vanderbilt typified the market entrepreneur, ruining Fulton’s monopoly in the 1820s with lower fares, the innovative and cost-saving tubular boiler and a splendid advertising logo: “New Jersey Must Be Free.” With market entrepreneurship, a third party also wins: the consumer. Market entrepreneurs are not true robbers, for their ruining serves the common good.

Mr. Brands appreciates the distinction between political entrepreneurs and market entrepreneurs, but he chooses not to highlight it. Thus he misses an opportunity to emphasize a truth about the late 19th century that rings down to our own rocky times: The best growth is spurred by the right kind of ruin.

Miss Shlaes, a senior fellow at the Council on Foreign Relations, is writing a biography of Calvin Coolidge.

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Full article and photo: http://online.wsj.com/article/SB10001424052748704380504575530332139071998.html

The Non-Economist’s Economist

John Kenneth Galbraith avoided technical jargon and wrote witty prose—too bad he got so much wrong

The Dow Jones Industrials spent 25 years in the wilderness after the 1929 Crash. Not until 1954 did the disgraced 30-stock average regain its Sept. 3, 1929, high. And then, its penance complete, it soared. In March 1955, the U.S. Senate Banking and Currency Committee, J. William Fulbright of Arkansas, presiding, opened hearings to determine what dangers lurked in this new bull market. Was it 1929 all over again?

John Kenneth Galbraith (1908-2006), photographed by Richard Avedon in Boston in 1993

One of the witnesses, John Kenneth Galbraith, a 46-year-old Harvard economics professor, seemed especially well-credentialed. His new history of the event that still transfixed America, “The Great Crash, 1929” was on its way to the bookstores and to what would prove to be a commercial triumph. An alumnus of Ontario Agricultural College and the holder of a doctorate in agricultural economics from the University of California at Berkeley, Galbraith had written articles for Fortune magazine and speeches for Adlai Stevenson, the defeated 1952 Democratic presidential candidate. He was a World War II price controller and the author of “American Capitalism: The Concept of Countervailing Power.” When he stepped into a crowded elevator, strangers tried not to stare: he stood 6 feet 8 inches tall.

On the one hand, Galbraith observed, the stock market was not so speculatively charged in 1955 as it had been in 1929 On the other, he insisted, there were worrying signs of excess. Stocks were not so cheap as they had been in the slack and demoralized market of 1953 (though, at 4%, they still outyielded corporate bonds). “The relation of share prices to book value is showing some of the same tendencies as in 1929,” Galbraith went on. “And while it would be a gross exaggeration to say that there has been the same escape from reality that there was in 1929, it does seem to me that enough has happened to indicate that we haven’t yet lost our capacity for speculative self-delusion.”

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Reading List: If Not Galbraith, Who?

Maury Klein tells a great story in “Rainbow’s End: The Crash of 1929” (Oxford, 2001), but he also attempts to answer the great question: What went wrong? For the financial specialist in search of a tree-by-tree history of the forest of the Depression, look no further than Barrie A. Wigmore’s “The Crash and Its Aftermath: A History of the Securities Markets in the United States, 1929-33” (Greenwood Press, 1985).

In the quality of certitude, the libertarian Murray Rothbard yielded to no economist. His revisionist history, “America’s Great Depression” (available through the website of the Mises Institute), contends that it was the meddling Hoover administration that turned recession into calamity. Amity Shlaes draws up a persuasive indictment of the New Deal in her “The Forgotten Man” (HarperCollins, 2007).

“Economics and the Public Welfare” by Benjamin Anderson (Liberty Press, 1979) is in strong contention for the lamest title ever fastened by a publisher on a deserving book. Better, the subtitle: “A Financial and Economic History of the United States: 1914-1946.”

“Where are the Customers’ Yachts? Or A Good Hard Look at Wall Street,” by Fred Schwed Jr. (Simon & Schuster, 1940) is the perfect antidote for any who imagine that the reduced salaries and status of today’s financiers is anything new. Page for page, Schwed’s unassuming survey of the financial field might be the best investment book ever written. Hands-down, it’s the funniest.

An unfunny but essential contribution to the literature of the Federal Reserve is the long-neglected “Theory and Practice of Central Banking” (Harper, 1936) by Henry Parker Willis, the first secretary of the Federal Reserve Board. Willis wrote to protest the against the central bank’s reinvention of itself, quite against the intentions of its founders, as a kind of infernal economic planning machine. He should see it now.

Freeman Tilden’s “A World in Debt” (privately printed, 1983) is a quirky, elegant, long out-of-print treatise by a non-economist on an all-too-timely subject. “The world,” wrote Tilden in 1936, “has several times, and perhaps many times, squandered itself into a position where a total deflation of debt was imperative and unavoidable. We may be entering one more such receivership of civilization.”

If the Obama economic program leaves you cold, puzzled or hot under the collar, turn to Hunter Lewis’s “Where Keynes Went Wrong” (Axios Press, 2009) or “The Critics of Keynesian Economics,” edited by Henry Hazlitt (Arlington House, 1977).

—James Grant

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Re-reading Galbraith is like watching black-and-white footage of the 1955 World Series. The Brooklyn Dodgers are gone—and so is much of the economy over which Galbraith lavished so much of his eviscerating wit. In 1955, “globalization” was a word yet uncoined. Imports and exports each represented only about 4% of GDP, compared with 16.1% and 12.5%, respectively, today. In 1955, regulation was constricting (this feature of the Eisenhower-era economy seems to be making a reappearance) and unions were powerful. There was a lingering, Depression-era suspicion of business and, especially, of Wall Street. The sleep of corporate managements was yet undisturbed by the threat of a hostile takeover financed with junk bonds.

Half a century ago, the “conventional wisdom,” in Galbraith’s familiar phrase, was statism. In “American Capitalism,” the professor heaped scorn on the CEOs and Chamber of Commerce presidents and Republican statesmen who protested against federal regimentation. “In the United States at this time,” noted the critic Lionel Trilling in 1950, “liberalism is not only the dominant but even the sole intellectual tradition.” William F. Buckley’s upstart conservative magazine, National Review, made its debut in 1955 with the now-famous opening line that it “stands athwart history, yelling Stop.” Galbraith seemed not to have noticed that history and he were arm in arm. His was the conventional wisdom.

Concerning the emphatic Milton Friedman, someone once borrowed the Victorian-era quip, “I wish I was as sure of anything as he is of everything.” Galbraith and the author of “Capitalism and Freedom” were oil and water, but they did share certitude. To Galbraith, “free-market capitalism” was an empty Rotary slogan. It didn’t exist and, in Eisenhower-era America, couldn’t. Industrial oligopolies had rendered it obsolete.

Only in the introductory economics textbooks, he believed, did the free interplay between supply and demand determine price. Fortune 500 companies set their own prices. They chaffered with their vendors and customers, who themselves were big enough to throw their weight around in the market. As a system of decentralized decision-making, there was something to be said for capitalism, Galbraith allowed. As a network of oligopolistic fiefdoms, however, it needed federal direction. The day of Adam Smith’s “invisible hand” was over or ending. “Countervailing power,” in the Galbraith formulation, was the new idea.

Corporate bureaucrats—collectively, the “technostructure”—had pushed aside the entrepreneurs, proposed Galbraith channeling Thorstein Veblen. While, under the robber baron model, the firm existed to make profits, the modern behemoth exists to perpetuate itself in power while incidentally earning a profit. Planning is what the technostructure does best—it seems to hate surprises. “This planning,” wrote Galbraith, in “The New Industrial State,” “replaces prices that are established by the market with prices that are established by the firm. The firm, in tacit collaboration with the other firms in the industry, has wholly sufficient power to set and maintain minimum prices.” What was to be done? “The market having been abandoned in favor of planning of prices and demand,” he prescribed, “there is no hope that it will supply [the] last missing element of restraint. All that remains is the state.” It was fine with the former price controller of the Office of Price Administration.

As for the stockholder, he or she was as much a cipher as the manipulated consumer. “He (or she) is a passive and functionless figure, remarkable only on his capacity to share, without effort or even without appreciable risk, in the gains from the growth by which the technostructure measures its success,” according to Galbraith. “No grant of feudal privilege has ever equaled, for effortless return, that of the grandparents who bought and endowed his descendants with a thousand shares of General Motors or General Electric or IBM.” Galbraith was writing near the top of the bull market he had failed to anticipate in 1955. Shareholders were about to re-learn (if they had forgotten) the lessons of “risk.”

In its way, “The New Industrial State” was as mistimed as “The Great Crash.” In 1968, a year after the appearance of the first edition, the planning wheels started to turn at Leasco Data Processing Corp., Great Neck, N.Y. But Leasco’s “planning” took the distinctly un- Galbraithian turn of an unsolicited bid for control of the blue-blooded Chemical Bank of New York. Here was something new under the sun. Saul Steinberg, would-be revolutionary at the head of Leasco, ultimately surrendered before the massed opposition of the New York banking community. (“I always knew there was an Establishment,” Mr. Steinberg mused—”I just used to think I was a part of it.”) But the important thing was the example Mr. Steinberg had set by trying. The barbarians were beginning to form at the corporate gates.

The cosseted, self-perpetuating corporate bureaucracy that Galbraith described in “The New Industrial State” was in for a rude awakening. Deregulation became a Washington watchword under President Carter, capitalism got back its good name under President Reagan and trade barriers fell under President Clinton. Presently came the junk-bond revolution and the growth in an American market for corporate control. Hedge funds and private equity funds prowled for under- and mismanaged public companies to take over, resuscitate and—to be sure, all too often—to overload with debt. The collapse of communism and the rise of digital technology opened up vast new fields of competitive enterprise. Hundreds of millions of eager new hands joined the world labor force, putting downward pressure on costs, prices and profit margins. Wal-Mart delivered everyday low, and lower, prices, and MCI knocked AT&T off its monopolistic pedestal. The technostructure must have been astounded.

Galbraith in his home in Cambridge, Mass., in 1981

Here are the opening lines of “American Capitalism”: “It is told that such are the aerodynamics and wing-loading of the bumblebee that, in principle, it cannot fly. It does, and the knowledge that it defied the august authority of Isaac Newton and Orville Wright must keep the bee in constant fear of a crack-up.” You keep reading because of the promise of more in the same delightful vein. And, indeed, there is much more, including a charming annotated chronology of Galbraith’s life by his son and the editor of this volume, James K. Galbraith.

John F. Kennedy’s ambassador to India, muse to the Democratic left, two-time recipient of the Presidential Medal of Freedom, celebrity author, Galbraith in life was even larger than his towering height. His “A Theory of Price Control,” which was published in 1952 to favorable reviews but infinitesimal sales, was his one and only contribution to the purely professional economics literature. Thereafter this most acerbic critic of free markets prospered by giving the market what it wanted.

Now comes the test of whether his popular writings will endure longer than the memory of his celebrity and the pleasure of his prose. “The Great Crash” has a fighting chance, because of its very lack of analytical pretense. “History that reads like a poem,” raved Mark Van Doren in his review of the 1929 book. Or, he might have judged, that eats like whipped cream.

But the other books in this volume seem destined for only that kind of immortality conferred on amusing period pieces. When, for example, Galbraith complains in “The Affluent Society” that governments can’t borrow enough, or that the Federal Reserve is powerless to resist inflation, you wonder what country he was writing about, or even what planet he was living on.

Not that the professor refused to learn. In the first edition of “The New Industrial State,” for instance, he writes confidently: “While there may be difficulties, and interim failures or retreats are possible and indeed probable, a system of wage and price restraint is inevitable in the industrial system.” A decade or so later, in the edition selected for this volume, that sentence is gone. In its place is another not quite so confident: “The history of controls, in some form or other and by some nomenclature, is still incomplete.”

At the 1955 stock-market hearings, Galbraith was followed at the witness table by the aging speculator and “adviser to presidents” Bernard M. Baruch. The committee wanted to know what the Wall Street legend thought of the learned economist. “I know nothing about him to his detriment,” Baruch replied. “I think economists as a rule—and it is not personal to him—take for granted they know a lot of things. If they really knew so much, they would have all of the money, and we would have none.”

Mr. Grant, the editor of Grant’s Interest Rate Observer, is the author, most recently, of “Mr. Market Miscalculates” (Axios, 2009)

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Full article and photos: http://online.wsj.com/article/SB10001424052748703556604575501883282762648.html

Homo administrans

The biology of business

Biologists have brought rigour to psychology, sociology and even economics. Now they are turning their attention to the softest science of all: management

SCURRYING around the corridors of the business school at the National University of Singapore (NUS) in his white lab coat last year, Michael Zyphur must have made an incongruous sight. Visitors to management schools usually expect the staff to sport suits and ties. Dr Zyphur’s garb was, however, no provocative fashion statement. It is de rigueur for anyone dealing with biological samples, and he routinely collects such samples as part of his research on, of all things, organisational hierarchies. He uses them to look for biological markers, in the form of hormones, that might either cause or reflect patterns of behaviour that are relevant to business.

Since its inception in the early 20th century, management science has been dominated by what Leda Cosmides and John Tooby, two evolutionary psychologists, refer to disparagingly as the standard social science model (SSSM). This assumes that most behavioural differences between individuals are explicable by culture and socialisation, with biology playing at best the softest of second fiddles. Dr Zyphur is part of an insurgency against this idea. What Dr Cosmides and Dr Tooby have done to psychology and sociology, and others have done to economics, he wants to do to management. Consultants often talk of the idea of “scientific” management. He, and others like him, want to make that term meaningful, by applying the rigour of biology.

To do so, they will need to weave together several disparate strands of the subject—genetics, endocrinology, molecular biology and even psychology. If that works, the resulting mixture may provide a new set of tools for the hard-pressed business manager.

To the management born

Say “biology” and “behaviour” in the same sentence, and most minds think of genetics and the vexed question of nature and nurture. In a business context such questions of heredity and environment are the realm of Scott Shane, a professor of management at Case Western Reserve University in Ohio. In a recent book*, Dr Shane proffers a review of the field. Many of his data come from studies of twins—a traditional tool of human geneticists, who are denied the possibility of experimental breeding enjoyed by their confrères who study other species, such as flies and mice.

Identical twins share all of their DNA. Non-identical twins share only half (like all other siblings). Despite a murky past involving the probable fabrication of data by one of the field’s pioneers, Sir Cyril Burt, the science of comparing identical with non-identical twins is still seen as a good way of distinguishing the effects of genes from those of upbringing.

The consensus from twin studies is that genes really do account for a substantial proportion of the differences between individuals—and that applies to business as much as it does to the rest of life. Dr Shane observes genetic influence over which jobs people choose (see chart), how satisfied they are with those jobs, how frequently they change jobs, how important work is to them and how well they perform (or strictly speaking, how poorly: genes account for over a third of variation between individuals in “censured job performance”, a measure that incorporates reprimands, probation and performance-related firings). Salary also depends on DNA. Around 40% of the variation between people’s incomes is attributable to genetics. Genes do not, however, operate in isolation. Environment is important, too. Part of the mistake made by supporters of the SSSM was to treat the two as independent variables when, in reality, they interact in subtle ways.

Richard Arvey, the head of the NUS business school’s department of management and organisation, has been looking into precisely how genes interact with different types of environment to create such things as entrepreneurial zeal and the ability to lead others. Previous research had shown that people exhibiting personality traits like sensation-seeking are more likely to become entrepreneurs than their less outgoing and more level-headed peers. Dr Arvey and his colleagues found the same effect for extroversion (of which sensation-seeking is but one facet). There was, however, an interesting twist. Their study—of 1,285 pairs of identical twins and 849 pairs of same-sex fraternal ones—suggests that genes help explain extroversion only in women. In men, this trait is instilled environmentally. Businesswomen, it seems, are born. But businessmen are made.

In a second twin study, this time just on men, Dr Arvey asked to what extent leaders are born, and to what extent they are made. Inborn leadership traits certainly do exist, but upbringing, he found, matters too. The influence of genes on leadership potential is weakest in boys brought up in rich, supportive families and strongest in those raised in harsher circumstances. The quip that the battle of Waterloo was won on the playing fields of Eton thus seems to have some truth.

Pathways to success

Twin studies such as these point the way, but they provide only superficial explanations of what is going on. To get at the nitty gritty it is necessary to dive into molecular biology. And that is the province of people like Song Zhaoli, who is also at the NUS.

One way genes affect behaviour is through the agency of neurotransmitters, the chemicals that carry messages between nerve cells. Among these chemicals, two of the most important are dopamine and serotonin. Dopamine controls feelings of pleasure and reward. Serotonin regulates mood. Some personality traits have been shown to depend on the amounts of these neurotransmitters that slosh around the junctions between nerve cells. Novelty-seeking, for example, is associated with lots of dopamine. A tendency to depression may mean too little serotonin. And the levels of both are regulated by genes, with different variants of the same underlying gene having different effects.

Recent years have seen a surge of research into the links between particular versions of neurotransmitter-related genes and behavioural outcomes, such as voter turnout, risk-aversion, personal popularity and sexual promiscuity. However, studies of work-related traits have hitherto been conspicuous by their absence.

Dr Song has tried to fill this gap. His team have gathered and analysed DNA from 123 Singaporean couples to see if it can be matched with a host of work-related variables, starting with job satisfaction.

In this case Dr Song first checked how prone each participant in the study was to the doldrums, in order to establish a baseline. He also asked whether they had experienced any particularly stressful events, like sustaining serious injury, getting the sack or losing a lot of money, within the previous year. Then he told participants to report moments of negative mood (anger, guilt, sadness or worry) and job satisfaction (measured on a seven-point scale) four times a day for a week, using a survey app installed on their mobile phones.

He knew from previous research that some forms of melancholia, such as seasonal affective disorder (or winter blues), have been linked to particular versions of a serotonin-receptor gene called HTR2A. When he collated the DNA and survey data from his volunteers, he found those with a particular variant of HTR2A were less likely than those carrying one of its two other possible variants to experience momentary negative mood, even if they had had a more stress-ridden year. Dr Song also found that when carriers of that same variant reported lower negative mood, they also tended to report higher job satisfaction—an effect which was absent among people who had inherited the remaining two versions of the gene.

This suggests that for people fortunate enough to come equipped with the pertinent version of HTR2A, stressful events are less likely to have a negative effect on transient mood. What is more, for these optimists, better mood turns out to be directly related to contentment with their job. In other words, it may be a particular genetic mutation of a serotonin-receptor gene, and not the employer’s incentives, say, that is making people happier with their work.

The hormonal balance-sheet

Neurotransmitters are not the only way an individual’s genetic make-up is translated into action. Hormones also play a part. For example, oxytocin, which is secreted by part of the brain called the hypothalamus, has been shown to promote trust—a crucial factor in all manner of business dealings. The stress hormone cortisol, meanwhile, affects the assessment of the time value of money.

That, at least, was the conclusion of a study by Taiki Takahashi of Hokkaido University in Japan. After taking saliva samples from 18 volunteers, Dr Takahashi asked them what minimum amount of money they would accept in a year’s time in order to forgo an immediate payout of ¥10,000 (around $90 at the time). He found those with a lower base level of the hormone tended to prefer immediate payment, even when the sum in question was piffling compared with the promised future compensation.

Then there is testosterone, the principal male sex hormone (though women make it too). The literature on this hormone’s behavioural effects is vast. High levels of the stuff have been correlated with risk tolerance, creativity and the creation of new ventures. But testosterone is principally about dominance and hierarchy. This is where Dr Zyphur’s mouth swabs come in.

When Dr Zyphur (who is now at the University of Melbourne) was at the NUS, he led a study of how testosterone is related to status and collective effectiveness in groups. He and his colleagues examined levels of the hormone in 92 mixed-sex groups of about half a dozen individuals. Surprisingly, a group member’s testosterone level did not predict his or her status within the group. What the researchers did discover, though, is that the greater the mismatch between testosterone and status, the less effectively a group’s members co-operate. In a corporate setting that lower productivity translates into lower income.

Testosterone crops up in another part of the business equation, too: sales. It appears, for instance, to be a by-product of conspicuous consumption. In an oft-cited study Gad Saad and John Vongas of Concordia University in Montreal found that men’s testosterone levels responded precisely to changes in how they perceived their status. Testosterone shot up, for example, when they got behind the wheel of a sexy sports car and fell when they were made to drive a clunky family saloon car. The researchers also reported that when a man’s status was threatened in the presence of a female by a display of wealth by a male acquaintance, his testosterone levels surged.

As Dr Saad and Dr Vongas point out, a better understanding of this mechanism could help explain many aspects both of marketing and of who makes a successful salesman. Car salesmen, for example, are stereotypically male and aggressive, which tends to indicate high levels of testosterone. Whether that is really the right approach with male customers is, in light of this research, a moot point.

Natural selection

Results such as these are preliminary. But they do offer the possibility of turning aspects of management science into a real science—and an applied science, to boot. Decisions based on an accurate picture of human nature have a better chance of succeeding than those that are not. For instance, if job satisfaction and leadership turn out to have large genetic components, greater emphasis might be placed on selection than on training.

Not everyone is convinced. One quibble is that many investigations of genetics and behaviour have relied on participants’ retrospective reports of their earlier psychological states, which are often inaccurate. This concern, however, is being allayed with the advent of techniques such as Dr Song’s mobile-sampling method.

Another worry is that, despite the fact that most twin studies have been extensively replicated, they may be subject to systematic flaws. If parents exhibit a tendency to treat identical twins more similarly than fraternal ones, for instance, then what researchers see as genetic factors could turn out to be environmental ones.

That particular problem can be examined by looking at twins who have been fostered or adopted apart, and thus raised in separate households. A more serious one, though, has emerged recently. This is that identical twins may not be as identical as appears at first sight. A process called epigenesis, which shuts down genes in response to environmental prompts, may make their effective genomes different from their actual ones.

Statistically, that would not matter too much if the amount of epigenesis were the same in identical and fraternal twins, but research published last year by Art Petronis of the Centre for Addiction and Mental Health in Toronto and his colleagues, suggests it is not. Instead, identical twins are epigenetically closer to each other than the fraternal sort. That means environmentally induced effects that are translated into action by this sort of epigenesis might be being confused by researchers with inherited ones.

Still, this and other concerns about the effectiveness of the new science should pass as more data are gathered. But a separate set of concerns may be increased by better data. These are those of an ethical nature, which pop up whenever scientists broach the nature-nurture nexus. Broadly, such concerns divide into three sorts.

The first involves the fear that genetic determinism cheapens human volition. But as Dr Shane is at pains to stress, researchers like him are by no means genetic fatalists. He draws an analogy with sports wagers. Knowing that you have the favourable version of a gene may shift the odds somewhat, but it no more guarantees that you will be satisfied with your job than knowing of a player’s injury ensures that you will cash in on his team’s loss. Indeed, it might be argued that a better understanding of humanity can help direct efforts to counteract those propensities viewed as detrimental or undesirable, thus ensuring people are less, rather than more, in thrall to their biology.

The second set of ethical worriers are those who fret that biological knowledge may be used to serve nefarious ends. Whenever biology meets behaviour the spectre of social Darwinism and eugenics looms menacingly in the background. Yet, just because genetic information can serve evil ends need not mean that it has to. Dr Shane observes that pretending DNA has no bearing on working life does not make those influences go away, it just makes everyone ignorant of what they are, “Everyone, that is, except those who want to misuse the information.”

The third ethical qualm involves the thorny issue of fairness. Ought employers to use genetic testing to select their workers? Will this not lead down a slippery slope to genetic segregation of the sort depicted in the genetic dystopias beloved of science-fiction?

This pass, however, has already been sold. Workers are already sometimes hired on the basis of personality tests that try to tease out the very genetic predispositions that biologists are looking for. The difference is that the hiring methods do this indirectly, and probably clumsily. Moreover, in a rare example of legislative foresight, politicians in many countries have anticipated the problem. In 2008, for example, America’s Congress passed the Genetic Information Nondiscrimination Act, banning the use of genetic information in job recruitment. Similar measures had previously been adopted in several European countries, including Denmark, Finland, France and Sweden.

Biohazard?

There is one other group of critics. These are those who worry that applying biology to business is dangerous not because it is powerful, but because it isn’t. To the extent they are genetic at all, behavioural outcomes are probably the result of the interaction of myriad genes in ways that are decades from being fully understood. That applies as much to business-related behaviour as to behaviour in any other facet of life.

Still, as Dr Zyphur is keen to note, not all academic work has to be about hard-nosed application in the here and now. Often, the practical applications of science are serendipitous—and may take a long time to arrive. And even if they never arrive, understanding human behaviour is just plain interesting for its own sake. “We in business schools often act like technicians in the way we conceptualise and teach our topics of study,” he laments. “This owes much to the fact that a business school is more like a trade school than it is a part of classic academia.” Now, largely as a result of efforts by Dr Zyphur and others like him, management science looks set for a thorough, biology-inspired overhaul. Expect plenty more lab coats in business-school corridors.

*“Born Entrepreneurs, Born Leaders. How Your Genes Affect Your Work Life”. Oxford University Press. $29.95

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Full article and photos: http://www.economist.com/node/17090697

Aren’t We Clever?

What a contrast. In a year that’s on track to be our planet’s hottest on record, America turned “climate change” into a four-letter word that many U.S. politicians won’t even dare utter in public. If this were just some parlor game, it wouldn’t matter. But the totally bogus “discrediting” of climate science has had serious implications. For starters, it helped scuttle Senate passage of the energy-climate bill needed to scale U.S.-made clean technologies, leaving America at a distinct disadvantage in the next great global industry. And that brings me to the contrast: While American Republicans were turning climate change into a wedge issue, the Chinese Communists were turning it into a work issue.

“There is really no debate about climate change in China,” said Peggy Liu, chairwoman of the Joint U.S.-China Collaboration on Clean Energy, a nonprofit group working to accelerate the greening of China. “China’s leaders are mostly engineers and scientists, so they don’t waste time questioning scientific data.” The push for green in China, she added, “is a practical discussion on health and wealth. There is no need to emphasize future consequences when people already see, eat and breathe pollution every day.”

And because runaway pollution in China means wasted lives, air, water, ecosystems and money — and wasted money means fewer jobs and more political instability — China’s leaders would never go a year (like we will) without energy legislation mandating new ways to do more with less. It’s a three-for-one shot for them. By becoming more energy efficient per unit of G.D.P., China saves money, takes the lead in the next great global industry and earns credit with the world for mitigating climate change.

So while America’s Republicans turned “climate change” into a four-letter word — J-O-K-E — China’s Communists also turned it into a four-letter word — J-O-B-S.

“China is changing from the factory of the world to the clean-tech laboratory of the world,” said Liu. “It has the unique ability to pit low-cost capital with large-scale experiments to find models that work.” China has designated and invested in pilot cities for electric vehicles, smart grids, LED lighting, rural biomass and low-carbon communities. “They’re able to quickly throw spaghetti on the wall to see what clean-tech models stick, and then have the political will to scale them quickly across the country,” Liu added. “This allows China to create jobs and learn quickly.”

But China’s capability limitations require that it reach out for partners. This is a great opportunity for U.S. clean-tech firms — if we nurture them. “While the U.S. is known for radical innovation, China is better at tweak-ovation.” said Liu. Chinese companies are good at making a billion widgets at a penny each but not good at complex system integration or customer service.

We (sort of) have those capabilities. At the World Economic Forum meeting here, I met Mike Biddle, founder of MBA Polymers, which has invented processes for separating plastic from piles of junked computers, appliances and cars and then recycling it into pellets to make new plastic using less than 10 percent of the energy required to make virgin plastic from crude oil. Biddle calls it “above-ground mining.” In the last three years, his company has mined 100 million pounds of new plastic from old plastic.

Biddle’s seed money was provided mostly by U.S. taxpayers through federal research grants, yet today only his tiny headquarters are in the U.S. His factories are in Austria, China and Britain. “I employ 25 people in California and 250 overseas,” he says. His dream is to have a factory in America that would repay all those research grants, but that would require a smart U.S. energy bill. Why?

Americans recycle about 25 percent of their plastic bottles. Most of the rest ends up in landfills or gets shipped to China to be recycled here. Getting people to recycle regularly is a hassle. To overcome that, the European Union, Japan, Taiwan and South Korea — and next year, China — have enacted producer-responsibility laws requiring that anything with a cord or battery — from an electric toothbrush to a laptop to a washing machine — has to be collected and recycled at the manufacturers’ cost. That gives Biddle the assured source of raw material he needs at a reasonable price. (Because recyclers now compete in these countries for junk, the cost to the manufacturers for collecting it is steadily falling.)

“I am in the E.U. and China because the above-ground plastic mines are there or are being created there,” said Biddle, who just won The Economist magazine’s 2010 Innovation Award for energy/environment. “I am not in the U.S. because there aren’t sufficient mines.”

Biddle had enough money to hire one lobbyist to try to persuade the U.S. Congress to copy the recycling regulations of Europe, Japan and China in our energy bill, but, in the end, there was no bill. So we educated him, we paid for his tech breakthroughs — and now Chinese and European workers will harvest his fruit. Aren’t we clever?

Thomas L. Friedman, New York Times

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Full article: http://www.nytimes.com/2010/09/19/opinion/19friedman.html