Langlois Personal Capitalism Part II

In this second post on Chapter 2 "Personal Capitalism" of "The Dynamics of Industrial Capitalism" Professor Richard N. Langlois documents four centuries of the history of the Swiss watch making industry. I highly recommend you download the book and read Chapter 3 for an understanding of how the Swiss watch industry evolved in the face of many unseen dangers. The key break-through in this post is the role of the large organization in making People, Ideas & Objects and the Community of Independent Service Providers real. There are many contradictions in this post, none more contradictory then myself reflecting on the positive role of the bureaucracy.

This positive role that the bureaucracy can provide is based on the realization that change can be a top down decision. In this post Langlois argues there are two alternatives for change. Through charismatic authority or as a top down decision. For the bureaucracy to fall on its sword seems to be a tall order, however, other miracles have allegedly happened. Funding of this project is the step that would need to be taken in order to initiate top down change. I'm not holding my breath.

That leaves us with charismatic authority as Langlois describes it.

This is so because charismatic authority solves a coordination problem in a situation of “chaos” in which rights, roles, and responsibilities are in flux. All participants would prefer some structure or constitution; but the costs of coordination are high, as each is willing to constrain himself or herself to a new order only if many others simultaneously agree to do so. Charismatic authority cuts through these costs and establishes a structure, which then presumably evolves in a Weberian way as stability is achieved. p. 37

People, Ideas & Objects have published the Draft Specification as the structure for participants in this project. This is the beginning vision of how the energy industry could be structured to facilitate innovation and speed. The ideas contained within the vision enable people to see their potential rights, roles and responsibilities in the industry. From there they will be able to build the systems they will need to do their jobs in this new environment. If cutting down on the costs of coordination is the objective, I can see how this vision enables the people to begin working constructively towards fulfilling that vision.

I am appreciative of Langlois' point about "as each is willing to constrain himself or herself to a new order only if many others simultaneously agree to do so". It would be difficult without the Internet to organize the volume of people needed within these communities. I've always assumed that the numbers of people wanting to contribute would only do so when it was deemed safe to do so. The bureaucracies are particularly difficult towards people who are willing to be the first to step into an "unauthorized" area. Protection from the bureaucracies actions are our first priority.

By using the Joint Operating Committee as the key organizational construct of the innovative oil and gas producer. We align the firms ERP systems with the legal, financial, operational decision making, cultural and communication frameworks of the global oil and gas industry. Therefore the Draft Specification resonates with the ways and means that the industry operates naturally. This natural way provides People, Ideas & Objects with an advantage in that people can see that the vision of the Draft Specification provides what Langlois calls "cognitive leadership".

The “constitution” in demand in a world of change is a cognitive one. Those who need to cooperate in such a world need to share a cognitive frame or system of interpretation in order to orient themselves toward one another’s goal’s and actions. The entrepreneur provides this orientation through what Witt calls cognitive leadership. p. 37

In addition, much of the Draft Specification provides new metaphors for how the system will integrate with the natural way of the industry. Metaphors such "marketplace" modules and the Military Command & Control Metaphor provide the users with an understanding of what is being created. These are the primary reasons that these developments should be funded.

Oil and gas is based on the partnerships that are created to manage oil and gas assets. These Joint Operating Committees are systemic the world over and are an inherent part of the nature of the business. Multiple ownership is a necessity derived from the desire to reduce risk and the aerial extent of physical assets. Operational decision making is determined based on each contracts "Operating Procedure" which is a codification in the regions culture. It is here that Langlois brings up an interesting point regarding the decision rights in incomplete contracts.

More recent economists tell a similar tale. In the work of Oliver Hart (1989), the necessary incompleteness of contracts in an uncertain world requires the existence of a residual right of control — that is, a right to make decisions in circumstances unforeseen. The ownership structure of production turns on whose possession of that right minimizes the sum of production and transaction costs. p. 39

In a separate post I noted that we will use the technologies that are available to us to make these operational decisions better and faster. Having each of the companies representatives on the JOC participate in an interactive video conference to determine the decisions that need to be made is part of the Draft Specification. Since we are providing the oil and gas industry with a much needed software development capability. These decisions being made can be documented and implemented during the conference in real time with the appropriate AFE's or work-orders being dispatched based on the voting and decisions being made. This is one of the key areas where I see the performance of the producers being able to make the decisions in the time frame in which they are expected.

I want to turn now to the last point in Chapter 3 "Personal Capitalism" and discuss the fact that innovation requires that firms take on characteristics of marketplaces. In this next quote, Langlois reflects on the impact that American watch manufacturer Waltham posed to Swiss manufacturers. Waltham was able to increase the quantity and quality of American watches to a point where they seriously challenged the Swiss manufacturers. The key point is highlighted in italics.

In the specific case of watchmaking, the fragmented Swiss industry responded quickly to the American threat. “In spite of some inevitable resistance,” Jequier (1991, p. 326) tells us, “the spirit of enterprise asserted itself”; and assemblers began building new factories and introducing the same kind of machinery as the Americans. In 1870, three quarters of the 35,000 employed in Swiss watchmaking worked at home; by 1905, only a quarter of the more than 50,000 workers did so (Jequier 1991, loc. cit.). Nonetheless, when Switzerland regained the technological and market lead toward the end of the nineteenth century, it remained far less vertically integrated than the American industry; relied far more on outwork; and comprised thousands of firms to the dozen or so in America (Landes 1983, p, 323). Meanwhile, Waltham’s highly integrated structure proved far less conducive to the routine administration of its operation than it had to bringing that operation into being, and the firm virtually collapsed under principal-agent problems (Landes 1983, pp. 329-334). Even its better-run competitors lost ground to the Swiss. Indeed, both Waltham and Elgin, Waltham’s long-time domestic rival, are now Swiss owned. p. 42

Key to the Draft Specification is the division of labor that is needed in order to increase the economic output of the oil and gas industry. The Military Command & Control Metaphor provides for a pooling of the resources from the firms represented in a JOC. Eliminating the redundancy built in each firms silo of technical capability. The eleven different modules of the specification provides for an enhanced division of labor. And finally, the division between "market" and "firm" is a further division of labor. Within this framework, the People, Ideas & Objects software development capability, and the Community of Independent Service Providers will be able to define ever greater divisions of labor for the producer firms that subscribe to this project.

The first, and most obvious, point is that it was an outside individual, not an organization, who was responsible for the reorganization of the industry. Lazonick is right in saying that genuine innovation involves reorganizing or planning (which may not be the same thing) the horizontal and vertical division of labor. But it was not in this case “organizational capabilities” that brought the reorganization about. It was an individual and not at all a “collective” vision, one that, however carefully thought out, was a cognitive leap beyond the existing paradigm. If SMH came to possess organizational capabilities, as it surely did, those capabilities were the result, not the cause, of the innovation. p. 46

It's this next quote that I find the variety of contradictions. The bureaucracies are all about centralization and we are talking about moving the majority of the industry into the market definition. This requires the bureaucracy to voluntarily say so long. Something that this projects history has shown, the bureaucracy won't do.

As I have argued elsewhere (Langlois 1992b), the benefit of centralization lies in the ability to bring about change, not in the ability to administer existing structures. p. 47

If the bureaucrats need further justification for their self selection, I recommend the following.

Nonetheless, innovativeness requires more than mechanistically searching for new routines. In Hamel and Prahalad, it essentially involves forcing the firm to take on more of the characteristics of a market: it must develop the kind of genetic diversity Friedrich Hayek praised. “In nature,” they write, “genetic variety comes from unexpected mutations. The corporate corollary is skunk works, intrapreneurship, spinoffs, and other forms of bottom-up innovation” (Hamel and Prahalad 1994, p. 61). In the end, however, they, like Crozier, realize that the most radical kind of change must come from the top down: it requires a Schumpeterian entrepreneurial vision. “Top management cannot abdicate its responsibility for developing, articulating, and sharing a point of view about the future. What is needed are not just skunk works and intrapreneurs, but senior managers who can escape the orthodoxies of the corporation’s current ‘concept of self’” (Hamel and Prahalad 1994, p. 87). Example? Nicolas Hayek’s “crazy” vision that the Swiss could manufacture cheap watches competitively with the Japanese (pp. 98-99). p. 49

and

Indeed, one might argue that, the farther an innovation is from the ken of existing firms, the more likely it is that the innovation will be instantiated in new organizations. p. 49

It's now 2010 and it feels like, as a result of the bureaucracy, that we will be arguing the same points in 2020. The deliberate nature of building organizations has to consider that we need to build the systems that define and support those organizations first. Without software, there is no change. Without cash, there is no software, and the bureaucracies are not going to fund these developments. And therefore, here we stand.

Whether Schumpeterian entrepreneurship operates from the top of an existing organization or in the creation of new ones, the same conclusion seems unavoidable. The charismatic authority and coherent vision of such entrepreneurship remains an inevitable part of capitalism, however modern. For reasons that have to do with the nature of cognition and with the structure of knowledge in organized society, some essential part of capitalism must always remain personal.

Our appeal should be based on these eight "Focused on" priorities and values of how better the oil and gas industry and its operations could be handled. They may not initially be the right way to go, but we are committed to working with the various communities to discover and ensure the right ones are. If your an enlightened producer, an oil and gas director, investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

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Langlois Personal Capitalism Part I

In Chapter 3 of Professor Langlois book "The Dynamics of Industrial Capitalism" we look at "Personal Capitalism". In this, and my next post, I want to highlight the role of the entrepreneur in making the changes in the oil and gas industry. The Community of Independent Service Providers (CISP), Industrial Districts (ID), Business Groups (BG) or Small Knowledge Intensive Enterprises (SKIE) being filled with individual entrepreneurs acting in innovative and value generating ways. What becomes clear in this chapter is that the evolutions an industry goes through are usually brought about by unseen changes. I think that the unseen changes that the oil and gas industry will soon be faced with is the prospective decline in deliverability. This may appear to be an industry problem, but I think it is more of a societal issue in that reducing our energy demand will be problematic.

The bureaucracies that are in power today are unwilling to address the overall deliverability issue as theirs. If a producers production profile declines, they see that as a remote possibility and that would qualify as an isolated single event. If there is a potential decline of overall industry production, producers are unwilling to comment on the probability and don't see that as their problem. If unseen dangers lead to changes in an industries makeup, oil and gas might be in for a shake-up.

Nonetheless a decline, if it should occur, will be difficult to stop and impossible to reverse based on the current performance of the oil and gas firms. Five years of static deliverability is an ominous pre-cursor to a potential decline. The passing of these five years would seem to date how far behind the curve we are. With years of software development before we can exploit the Joint Operating Committee as the key organizational construct of the People, Ideas & Objects software application. We have much work to do. This morning the Obama administration have announced a six month moratorium on all offshore drilling. This may be the straw that breaks the Camel's back in terms of the U.S. energy consumption.

If one was willing to bet which group, the bureaucrats or the entrepreneurs will be the ones that solve this deliverability issue, I put my money with the entrepreneurs. Professor Langlois analyses Schumpeter's definition of the term.

The broad outlines of Schumpeter’s theory of entrepreneurship are of Weberian provenance (Carlin 1956). Indeed, one might say that Schumpeter’s schema is an application of Weber’s social theory to the problem of economic growth. Schumpeter’s innovation is to associate Weber’s category of charismatic leadership with the concept of entrepreneurship. p. 32

Weber is principally concerned with the religious leader or prophet, and to a lesser extent with military and political leadership; Schumpeter borrows heavily from that analysis in his characterization of the entrepreneur. Here we begin to see the outlines of Schumpeterian “personal capitalism,” which in its pure form is the antithesis of bureaucratic organization. Consider Weber’s account of the organization of charisma. p. 32

The corporate group which is subject to charismatic authority is based on an emotional form of communal relationship. The administrative staff of the charismatic leader does not consist of “officials”; at least its members are not technically trained. ... There is no hierarchy; the leader merely intervenes in general or in individual cases when he considers the members of his staff inadequate to a task to which they have been entrusted. There is no such thing as a definite sphere of authority and of competence. ... There are no established administrative organs. ... There is no system of formal rules, of abstract legal principles, and hence no process of judicial decision oriented to them. But equally there is no legal wisdom oriented to judicial precedent. Formally concrete judgments are newly created from case to case and are originally regarded as divine judgments and revelations. ... The genuine prophet, like the genuine military leader and every true leader in this sense, preaches, creates, or demands new obligations. In the pure type of charisma, these are imposed on the authority of revolution [sic] by oracles, or of the leader’s own will, and are recognized by the members of the religious, military, or party group because they come from such a source. (Weber 1947, pp. 360-361.) p. 32

Charismatic authority is thus outside the realm of everyday routine and the profane sphere. In this respect it is sharply opposed both to rational, and particularly bureaucratic, authority, and to traditional authority, whether in its patriarchal, patrimonial, or any other form. Both rational and traditional authority are specifically forms of everyday routine control of action; while the charismatic type is the direct antithesis of this. Bureaucratic authority is specifically rational in the sense of being bound to intellectually analysable rules; while charismatic authority is specifically irrational in the sense of being foreign to all rules. Traditional authority is bound to the precedents handed down from the past and to this extent is also oriented to rules. Within the sphere of its claims, charismatic authority repudiates the past, and is in this sense a specifically revolutionary force. (Weber 1947, pp. 361-362.) pp. 32 - 33

It is the charismatic, and therefore revolutionary, quality of entrepreneurship that makes it a source of economic growth, that allows it to play the role of “industrial mutation — if I may use that biological term — that incessantly revolutionizes the industrial structure from within, incessantly destroying the old one, incessantly creating a new one” (Schumpeter 1950 [1976, p. 83], emphasis original). p. 33

Recast in these explicitly Weberian terms, Schumpeter’s theory of entrepreneurship looks something like this. In its undeveloped state, an economy is based largely on traditional behavior, which bounds the possibilities for conscious economic activity. Under the right institutional setting — bourgeois capitalism — charismatic leadership arises, in the form of the entrepreneur, to break the crust of convention and to create new wealth by “‘lead[ing]’ the means of production into new channels” (Schumpeter 1934, p. 89). Charisma is personal and revolutionary; “in its pure form charismatic authority may be said to exist only in the process of originating. It cannot remain stable, but becomes either traditionalized or rationalized, or a combination of both” (Weber 1947, p. 364). In the economic sphere, of course, the tendency is toward rationalization. Not only do imitators rush in once the entrepreneur has blazed the trail, but also the problem of succession within the entrepreneurial organization leads (if the organization is to continue) to bureaucratization, that is, to the substitution of rules for personal authority; to the creation of abstract offices divorced from their individual holders; and to the increasing preeminence of specialized knowledge and spheres of competence (Weber 1947, pp. 330-334). p. 33

Langlois has captured Schumpeter's creative destruction and the business cycle in these quotations. If we agree on the problem that faces oil and gas, the decline in deliverability, it is reasonable to assume that we agree on the entrepreneur being a key to solving the problem. Langlois notes the change that needs to be brought about are initiated by the entrepreneur. Yesterday we discussed how individuals need to approach People, Ideas & Objects with a different mindset. [The cognitive and motivational paradox', the risk of becoming blind sleep-walking agents in the hands of whoever wants to feed us.] This mindset is accurately captured in Langlois discussion of the entrepreneur.

How I see this project developing is through the entrepreneurial efforts of the Community of Independent Service Providers. Each member of the CISP, SKIE, ID or BG would fulfill the role in making the necessary changes within the industry. Each member maybe supported by 5 - 10 support staff that are able to leverage the entrepreneur's talents. These groups would be part of the larger SKIE community that would work together through the enhanced Information Technologies they build with the People, Ideas & Objects software development capability. I think this is the logical and probable makeup of the service sectors of the greater oil and gas industry. What needs to be done today is that these members need to act.

I approach this environment with a sense of self preservation. There is an abundance of work that needs to be done. I have two choices in approaching this work, I can do it all, or I can do none of it. I choose the sane approach and find a role that I am best suited to filling. Raising the money needed for development and the CISP. To involve myself in the actually software development at this point is counter productive, or more probably destructive. My key role to date has been to ensure that the change as defined by the Draft Specification happens.

But — and this is the heart of Schumpeter’s thesis — once the hard work of crust-breaking has been done, charismatic leadership is no longer necessary, and the entrepreneur must ride into the sunset. p. 34

I can be a strong advocate for this software development. I am the one to encourage the investors and shareholders in oil and gas to fund these developments. I am the one who can direct the producers to involve themselves in the various communities working to build these solutions. That is the role that I feel I should fill on a go forward basis.

As we saw, however, Schumpeter’s claims are much different. He associates “personal” capitalism with charismatic leadership. It is the entrepreneur who makes dramatic, and often creatively destructive, changes. In Schumpeter, those who come along and fill in the details are important, but it is the changes that really matter. The obsolescence thesis is a claim not that large, fully articulated enterprises may be necessary to realize the vision of an individual entrepreneur; rather, it is a claim that those enterprises will be the sources of change. Let us put it succinctly. In Chandler, large organizations are the result of economic change; in Schumpeterian later capitalism, economic change is the result of large organizations. p. 36

Our appeal should be based on these eight "Focused on" priorities and values of how better the oil and gas industry and its operations could be handled. They may not initially be the right way to go, but we are committed to working with the various communities to discover and ensure the right ones are. If your an enlightened producer, an oil and gas director, investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

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McKinsey's Innovation Lessons From the 1930's

In their series dealing with the current economic crisis. McKinsey have published a short but interesting article on innovation in the 1930's. They have subtitled the document.

History suggests that even the deepest downturns can create huge opportunities for companies with money and ideas.

As part of their "Crisis" series, this document can be downloaded from here. Highlighting the efforts of DuPont in April 1930 and how they discovered and developed Neoprene. With low commodity prices and abundant research talent, they were able to discover and conduct their research over the course of the dirty thirties. They also highlight the successes of Hewlett-Packard and Polaroid during these times.

Their conclusion is one that should be considered carefully. We now have a situation where the governments around the world are attempting to stop the natural process of renewal. Instead of looking forward to the benfits of hardware, software, physics, nano-technology, bio-tecnology, genetics and a variety of new and promissing opportunities. We are proping up carcasses like GM, Fanny, Freddy and a long list of poorly run firms that don't want to face the music.

The experience of the 1930's also illustrates a broader point. Although deep downturns are destructive, they can also have an upside. The depression-era economist Joseph Schumpeter emphasized the positive consequences of downturns: the destruction of underperforming companies, the release of capital from dying sectors to new industries, and the movement to high-quality, skilled workers toward strong employers. For companies with cash and ideas, history shows that downturns can provide enormous strategic opportunities.

In oil and gas we have a variety of challenges that need a new approach. The approach I have suggested is documented in the Draft Specification, please join me here.

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In these troubled times.

We need to better understand where we are and where we are headed. Professor Carlota Perez has provided excellent analysis regarding the economic cycles of the last 300 years. Professor Perez wrote this paper in 2005 and she provides new ideas to her theories. These theories have been a major contributor to both the Draft Specification and the understanding and predictive nature of what she has described as the economic "turning". And in so doing specified much of our current economies antics and a clear road for us to follow in building this software for the next Information & Communication Technology driven world we are to experience soon. This will be the fourteenth article / blog post that I have written on Professor Perez. 

"Respecialisation and the Deployment of the ICT Paradigm - an essay on the present challenges of globalization". I can not seem to find where I pulled the full document from. I have however, found a much smaller document that is available from the Cisco website. I am publishing this paper in two sections. This first section contains some valuable information that builds on her theories and adds to them. The second section will be published on Monday and contain new ideas that are directly pertinent to the work we have proposed in the Draft Specification.

Professor Perez picks up elements of, indirectly it seems, Professor Anthony Giddens Theory of Structuration and Professor Wanda Orlikowski Model of Structuration in this first quotation.

But the relationship is mutual. Technology shapes the economy as well as society and these, in turn, are constantly shaping technology, guiding its development and selecting within the potential it offers. The space of the technologically feasible will be filtered by the economically profitable and the socially and culturally acceptable as well as modified by market and policy developments (including inaction, as much as action, by the various social agents). p. 4

Well put Professor. I have been struggling with the "markets have failed" claim that seems to be made by any and all western governments in these past few months. Taking the management of the issue into the governments to me is setting us up for an even greater fall. The markets may have failed, but I am certain the governments will fail, and very quickly. The point I think they are making is that the markets are not sophisticated enough to have figured things out for itself. In a globalized system the optimal division of labor and specialization are not going to spontaneously order themselves as Hayek (1945) once stated. In this limited instance I can concur that the future methods of organization will need to take these points into consideration. I have incorporated many of these components into the Draft Specification and they were based on the work of Giddens and Orlikowski. Essentially saying that society and technology are self reinforcing and iterative. Denoting the enhanced role of software in our future economies. Professor Perez states a similar conclusion.

On the basis of that framework, it will argue that, though the role of free markets was crucial in the early decades of diffusion of the ICT revolution, their continued unrestrained and unguided operation can only aggravate the tensions inherited from the casino economy and the income polarization of the 1980s and 1990s. It will propose that a conscious, policy-facilitated and consensus-driven process of re-specialization in the developed economies can be the most effective way to overcome those tensions as well as the instabilities generated by the present uneven globalization of production.

The intention is to share some of the concerns and ideas for action that emerge from observing the present circumstances with the aid of a historical model of recurrence. As such it is a personal contribution to a debate about shaping the future, the need for which is becoming more acute as globalization proceeds. p. 5

The recurring diffusion patterns of revolutionary technologies.

Noting that history has provided four prior examples of the duality of the technologies definition and support of societal benefits, Professor Perez analyzes the current Information & Communication Technologies (ICT) and notes.

When the potential of that surge is exhausted, the new one [ICT] is articulated in circumstances that are unfavorable to it, because they have become over-adapted to the previous paradigm. That is why, it takes two or three decades of Schumpeterian creative destruction to demolish those obstacles and to prove the superiority of the new technologies and their capability to modernize the whole economy and increase its wealth creating capacities. p. 9

This time has past and we only need to deal with the difficulty of whom is to drive the car. As the old economy and its ways that are steeped in the history of the previous sixty years. Begin to collapse as they are today. Then and only then will the new technologies (ICT) take the lead position in new and innovative ways in the economy. SAP is the bureaucracy was what I suggested was the situation in the Preliminary Research Report. SAP began as a firm in the late 1970's proving the accuracy of Professor Perez' analysis that "decades of Schumpeterian creative destruction is required."

These changed conditions for the deployment period, will also modify the direction of innovation. Once the paradigm is established and the styles of life and main business models are more or less known, the core industries begin to make the transition from “supply push” innovation, of the sort that needs to create new markets by educating consumers and producers to a completely new way of functioning, to more of a “demand pull” model, where attention moves towards trying to fulfill consumer and producer’s needs by completing the new life and production styles with interlinking innovations or improving the ease of use of the existing products through complementary services and so on. p. 12

Doesn't this sound like the situation we are in today? Please check out the recently published Business Model for the People, Ideas & Objects software development application. What else may be in store for us is the following comment from Professor Perez.

Deployment, by contrast, sees investment become more sober and rational. The companies that emerged successful from the installation period invest to expand their scale of production and markets and to increase their productivity. The larger ones are likely to pursue mergers and acquisitions to stabilize markets in their industry and to occupy strategic territories to strengthen their competitive positions. There is a clear long-term view among decision-makers and innovation becomes a complement of such strategies. p. 14

The Turning Point as the space for role shift.

Once again we are seeing the accuracy of Professor Perez' research. Her analysis of the last 300 years brings to mind phenomenally prescient predictions. This next one in my mind, recall this being written in 2005, is as follows. It is also clear in reading the document that Professor Perez believes the dot com meltdown in 2001 was the beginning of the "turning".

It is precisely the tensions and instabilities that are the legacy of the frenzied bubble years that create the conditions for a shifting of roles, usually with the intervention of State regulation to control the excesses of finance, to counter its short-termism and to favor demand expansion and stable long term investment in production. That is the reason for the term Turning Point, referring to the tilting of the field away from favoring paper assets and towards favoring the flourishing of the real economy. p. 15

I can certify this software development project is 100% oriented to the "flourishing of the real economy." Professor Perez has more.

The first tension is the very essence of the bubble: a process of asset inflation in which the stock market (paper) values decouple from the real value of the companies they represent. Thus, rather than from dividends, profit gains come from reselling the assets or from participating in the many instruments (futures, derivatives, hedge funds or others) that are created in the casino economy that builds up during Installation.

Once the bubble collapses, this tension should disappear and the values should come back into line. The major losses bring the investors back to reality and the losers are likely to press for regulation. However, if the collapse is not big enough (as the author believes was the case with the NASDAQ in relation to the whole stock market) and/or if a healthy investment climate is not re-established after the bubble by an exemplary combination of punishment of fraud and “remedial” regulation, then the distorting influence of the financial world’s short-termism will weigh upon the economy and against growth.

At present, the CEOs of production companies find it extremely difficult and risky to embark upon long-term projects, not because of competition but because of the continued short-term profit pressures of the finance world. p. 16

A disconcerting comment made by Professor Perez is in relation to the democratic process. Noting that the divisions between rich and poor are most extreme at the point we are at now. This next quote brings on an eerie feeling with respect to the American election in general, and Barack Obama specifically.

What Installation leaves in its wake is the resentment stemming from downward mobility in the face of affluence. The conviction that “my children will be worse off than I have been”, confronted with the conspicuous consumption at the other end, results in loss of hope and breeds anger, violence, problems of governance and an increase in the attraction power of messianic leaders who thrive precisely on intensifying that resentment. There are also migratory pressures, as the most positive among the excluded run unimaginable risks to reach a place where –often accepting unacceptable conditions– they can hope for a better future. p. 18

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Mises Institute Daily Article

A few days ago an article was published at the Ludwig von Mises Institute that talked about my favorite term "Creative Destruction". It got me thinking about the situation we face in the energy and software industries, and made me wonder whom is being "Creatively Destroyed" by the concept of using the Joint Operating Committee as the key organizational construct? The oil and gas business, or the software business.

"Creative destruction (Joseph Schumpeter's phrase) occurs when innovations - new technologies or business models - demolish the capital structures of well established industries, industries that have lost the ability to satisfy the urgent wants of customers."

Some may think that the energy industry is being attacked by this concept. I think its also the software industry. If, as Professor Carlotta Perez states, we are now entering the Information and Communication Technologies "deployment" phase. I think it is clear the software that is available from established vendors is fundamentally flawed. Microsoft can't keep up with Linux, let alone Mac OS X and Solaris. This applies to the larger ERP type of vendors as well. SAP has an application that is badly constrained by > 14 million lines of procedural code and over 1 million customers. Change is an impossibility. The technologies that are available today are so much more efficient then when SAP locked into their technologies in the late 1970's. These new ICT technologies will replace the SAP's and Microsoft's of the world. The changes that can be exercised, and their efficiencies, are so tangible, there really is no choice to make.

"This process can happen almost over night, such as when the vinyl record industry collapsed in the wake of digital music. Or, the process can slowly run its course, similar to the decades - long crumbling of a building's foundation. Here the process is akin to the way moss attaches to surface imperfections and degrades - over decades - the strength and resilience of concrete."

This latter quote accurately captures the process of creative destruction in oil and gas. During the 1970's and 1980's the seven sisters (Shell, BP, Exxon, Mobil, Chevron, Amoco, and Texaco) were responsible for the majority of the oil production in the world. Collectively they, Exxon Mobil, BP, Shell and Chevron, produce less then fifteen percent of the worlds production of oil and gas. Long gone are Texaco, Amoco and Mobil as legal entities. The remaining four producers serve no role of significance in exploration or production. Independents and national interests have moved into the exploration business and have consistently out produced the "majors". Peak Oil, and the era of expensive and difficult to produce oil, accurately emulates the long term process of the moss attaching itself to the concrete. The remaining "majors" may have finally proceeded to the point where their resilience and strength are not enough to sustain the organization.

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Prophet of Innovation: Joseph Schumpeter and Creative Destruction.

Click on the title of this entry to be taken to the Google Book Search page for this book. I was introduced to the writings of Professor Richard N. Langlois, our key research author, through his being awarded the Schumpeter Prize in 2004, for his paper The Dynamics of Industrial Capitalism. I'll admit I have not read the Prophet of Innovation, yet, and even if I had read it, that would not have been the point of the blog entry. Harvard Professor Thomas McCraw has participated in two PodCasts in the past few months. His promotion of his book brings up a number of very interesting points about the times that we live in today. It will be worthwhile for the readers of this blog to put this book on their reading list, Professor McCraw is a Pulitzer Prize Winner and therefore, easy to recommend.

The August 9, 2007 PodCast is on "Bloomberg on the Economy" with Tom Keene. He opens the PodCast with the comment that the Prophet of Innovation is the "Publishing event of 2007, the definitive one volume of Schumpeter." The opening discussion reviews Schumpeter's life and some of the key term's of which he became famous for. Like Creative Destruction is what entrepreneurs do. Will and the "emotion of our will" in making change. How the charismatic leader is someone who is bound and determined to change things.

"Successful innovation is more a matter of will then of intellect." The shear effort necessary to carry out the tasks that face our energy industry are possibly the largest issues we have faced to date. Our way of life will be challenged by the reduction in energy production. I also think this is the point in time where mankind will stand up and prove that we can, through force of the will that Schumpeter comments on, make the necessary changes and prosper in a future that few can imagine today. This new world is right around the corner and promises to bring democratic freedoms to their highest levels attainable.
Professor McCraw's book shows how barriers that confront entrepreneurs have to be overcome, and hence this obsession or will has to be maintained throughout the adventure. Many new entrepreneur's, on the scale of Henry Ford will be needed to solve these problems. The entrepreneur's character and disposition are some of the things that Schumpeter identified and valued and McCraw has documented in his book.

The second podcast of Professor McCraw's is on October 8, 2007 on EconTalk with Professor Russ Roberts. Schumpeter was believed to be the one who first noted the role and value of vision in business. To see the future in a vision of what, where and how the changes could improve the efficiency and effectiveness of the business is a key attribute of the entrepreneur. But there is something more. Professor's Roberts and McCraw discuss the important difference between innovation and invention. Leonardo DaVinci never built an airplane. He invented it, or was at least the first to think about it. He never took the next step that is critical of the entrepreneur. "Doing the thing" is what McCraw describes that Schumpeter focused on as the key difference between innovation and inventions definitions.

The other key attribute noted by Schumpeter was the concept of the business cycle's influence in the innovative marketplace. Business fail and that is the natural way of economic progress. There was a time when people thought that businesses would never fail, however today we know that not to be the case. The difference is the founding entrepreneur is consumed by a feverish perseverance that drives the business further then the competitors. Succession of the business, whether through the family or size, can not capture this fever and therefore makes the business susceptible to failure.

Who will be the leaders and entrepreneur's in this new era in energy. We do not know. I am certainly doing all that I can to ensure the most efficient organizational structure is supported by a highly capable software development team so that those entrepreneur's can operate as efficiently as possible.

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