All Edge: Inside the New Workplace Networks

All Edge: Inside the New Workplace Networks

Available for preorder via Amazon

Work is changing. Speed and flexibility are more in demand than ever before thanks to an accelerating knowledge economy and sophisticated communication networks. These changes have forced a mass rethinking of the way we coordinate, collaborate, and communicate. Instead of projects coming to established teams, teams are increasingly converging around projects. These “all-edge adhocracies” are highly collaborative and mostly temporary, their edge coming from the ability to form links both inside and outside an organization. These nimble groups come together around a specific task, recruiting personnel, assigning roles, and establishing objectives. When the work is done they disband their members and take their skills to the next project.

In Blog

Reading :: A Vision So Noble

Posted by: on Jan 30, 2015 | No Comments

A Vision So Noble: John Boyd, the OODA Loop, and America’s War on Terror
By Daniel Ford

This fall, I became very interested in John Boyd, the autodidact military thinker who developed the OODA loop, served as a key individual in the development of the F-16, and provided some of the planning of the 1991 Gulf War. Boyd produced very few pieces of written work; his main form of delivery was slide decks, which he presented and iterated repeatedly. Scholarly work on Boyd has been thin.

This present book is one of the few out there. It was written by John Ford, who pulled it together from two essays and a short dissertation he wrote while taking an online master’s program at King’s College London. It’s self-published.

Despite these unusual origins, the book does a good job of overviewing Boyd’s life and the basics of his thought. I’ll soon review Osinga’s much more substantial dissertation-turned-book on Boyd’s strategic theory, so in this review, I’ll just hit some of the highlights.

Ford says, “The goal of all human behavior, Boyd begins, is to increase our capacity for independent action. We join with others so that we can cooperate—and compete—toward that goal. Since the resources available to us are finite, we thereby begin a struggle that can never end” (p.17). So action and decision become critical:

Each of our mental concepts represents both a domain and its constituent elements, and we can approach them in two ways, either analytically or deductively. Through analysis, we separate the elements from the domain, an activity that Boyd calls deductive destruction. We can then synthesize these disparate elements into ‘something new and different from what previously existed.’ Boyd calls this process constructive induction. His favorite example of the dual process of destruction and creation is to have his listeners build a mental ‘snowmobile’ by taking elements from the domains of skiing (using only the skis), boating (using the two-cycle outboard engine), motorcycling (the handlebars), and a child’s toy tank or earthmover (the treads). … ‘Over and over again,’ Boyd writes, ‘this cycle of Destruction and Creation is repeated until we demonstrate internal consistency and match-up with reality.’ (pp.17-18).

Of course, perfect “match-up” or correspondence is not possible, and Boyd “suggests that the closer we get to the underlying reality, the larger our uncertainty becomes” (p.18); Boyd claims that “‘the process of Structure, Unstructure, and Restructure … is repeated endlessly in moving to higher and broader levels of elaboration’ and argues that this “‘Dialectic Engine'” may help us to better understand how people cope with their environment to increase their capacity for independent action (p.18). Boyd later developed this insight into the OODA loop.

OODA stands for Orient, Observe, Decide, and Act. In developing this model, Boyd sought to explain the cycle of destruction and creation, or structure/unstructure/restructure, through which entities passed as they interacted with their environment. (This organism/environment distinction was influenced by Boyd’s reading of Maturana, among others.) Orientation was the decisive point or schwerpunkt of the loop (p.22), shaping how the organism observes, decides, and acts. That orientation involved not just the immediate situation but also the organism’s past experiences, cultural tradition and genetic heritage (p.22). And each stage of the cycle involves feedback as well; the cycle is not just sequential (p.23).

Boyd’s acolytes, such as Lind and Hammes, applied these insights to fourth-generation warfare (4GW). But “arguably, the first real-world application of the OODA Loop came in the 1991 Gulf War,” when the US forces used multiple deceptive thrusts and feints to keep the Iraqi forces off balance, getting inside their decision loop (pp.23-24).

Here, let me reproduce a block quote of Boyd that Ford uses to explain how the OODA Loop is applied in warfare:

And it occurred to me … that if I have an adversary out there, that what I want to do is fold my adversary back inside himself, where he can’t really consult the external environment he has to deal with … Then I can drive him into confusion and disorder and bring about paralysis. … If I can operate at a tempo or rhythm faster than he can operate at—well, he can’t keep up with me, and in effect then I fold him back inside himself. And if I do that—ball game! You saw it in Desert Storm, you see it in basketball games, football games, and a whole bunch of other stuff. (quoted in Ford pp.26-27)

That is, the warrior “gets inside” the adversary’s OODA Loop by changing conditions more rapidly than the adversary can react. (My summary is a little oversimplified, but let’s build on it.) Doing so allows the warrior to disrupt the tempo of the adversary’s loop, ensuring that the adversary is reacting to conditions that no longer obtain, and forcing the adversary into an equilibrium condition—that is, decreasing the adversary’s capacity for independent action, shrinking rather than broadening the levels of elaboration.

Okay, let’s play with theory a little. Suppose we apply these insights to another theoretical cycle, the cycle of the object in activity theory. In AT, the object of the activity is both objective and projective, representing both the current state and the future, intended state. The activity is structured around (i.e., oriented to) transforming that object. Yet the activity system also encounters contradictions, tensions across the system, and those contradictions require the activity system to either change or be shaken apart. Contradictions are “engines of change,” as Engestrom puts it.

In Engestromian third-generation activity theory (3GAT), these activity systems are linked: activities often overlap and even share objectives, which they might collaboratively try to transform (and in which they might be at cross purposes).

To my knowledge, activity theory hasn’t been applied to warfare; in fact, I can’t think of instances in which AT has been used to examine flatly antagonistic dynamics. But I can imagine using insights from the OODA loop to think through how one entity might deliberately introduce contradictions in the other’s cycle—contradictions such as internal disjunctures in the actors, disjunctures between actors and community, or disjunctures between tools and object. Introducing such disjunctures could disrupt that activity system severely, either shaking it apart or bogging it down. Getting inside the OODA Loop involves introducing secondary and tertiary contradictions across the target activity system. Now that I’m typing this, I’m a little surprised that I haven’t seen studies that examine such antagonistic actions across activities. (If you’ve seen some, please send them to me!)

But why not flip it? After all, 3GAT has generally focused on how to improve harmony across activity systems (probably from the orientation of educational psychology, the field from which Engestromian 3GAT emerged). We can just as easily imagine a virtuous cycle in which collaborators rather than antagonists synchronize their OODA Loops/transformation cycles to reinforce each others’ integrity. (Again, if you have seen some AT scholarship along these lines, I’d love to see it.)

OODA is still rather underdrawn, in large part because Boyd’s archives consist mostly of slide decks, but also because military scholars have generally not been as interested in Boyd’s work as practitioners. Ford’s book is one of the few that explore and elaborate on OODA; another is that of Osinga. I’ll plan on writing my review of that book soon.

In Blog

Reading :: Author Power

Posted by: on Jan 30, 2015 | No Comments

Author Power: Profit Before You Publish
By Lynn Isenberg

Lynn Isenberg reached out to me earlier this month. Although she lives in LA, she is planning on moving to Austin, so she was spending a few weeks here to check out the city, and coincidentally talked to a mutual acquaintance about being an entrepreneurial author. He suggested that she talk to me, and a few days later, we met at Caffe Medici.

Lynn has authored a trilogy of novels about a funeral planner who solves mysteries, but she has also sold nonfiction books on grief and writes scripts in LA. She is friendly, energetic, enthusiastic, hard-charging, and focused. And the problem on which she is focused is this: how do authors make a living? It wasn’t that long ago that an author could expect to write novels, sell them to publishers, receive a decent advance, and live on it and royalties while writing the next novel. To be sure, it was an uncertain living, but it could be done.

But that’s no longer true, she says. One, the market is flooded with books already, so those advances have steadily shrunk and shelf space—which is vital to selling mass-market books—is both in smaller supply and available during much shorter time windows. Two, the resale market means that authors lose out on sales, and with electronic marketplaces for connecting buyers and sellers, it’s easier than ever before to sell used copies to buyers. Three, digital publishing (such as Amazon’s Kindle versions) has taken a bite out of profits, since books sell for less. Four, digital publishing in particular has allowed authors to post their novels for little or nothing, meaning that the market is even more flooded and readers are even less willing to pay for books.

Publishing, she is essentially saying, is no longer a way for authors to be fairly recompensed for their labor. And this fact hits fiction authors hard. When she received her BA in Literature and Film Studies at the University of Michigan, Lynn says, she looked back and realized that her education had not given her the tools to be entrepreneurial in her writing; career services were almost nonexistent for creative writers (and she compares this sorry state of affairs to how engineers enjoyed career fairs); and consequently, fiction writers were more or less at the mercy of publishers. This, she says, is not a recipe for author empowerment.

So how does an author become an entrepreneur? Lynn provides one path, which I’ll describe and then discuss.

First, Lynn says, “it makes no sense to go with a traditional publisher unless there is a significant advance. This is because with a traditional publisher your backend royalties are in the 10-15% range. Independently or in tandem with a next-generation publisher you’re looking at 25%-100% of the royalty depending on third party distribution channel fees and e-book or print book” (p.10). Self-publishing and hybrid publishing models are far easier to use than before, they provide higher royalties, and they allow the author much more control (all things to which I can attest).

Of those three reasons, the third—author control—is the most important for Lynn. She sketches out the “I AM” principle: Impresario, Author, Marketer. For true author power, she says, the author must embrace all three of these roles.

Impresario. As an impresario, the author must create a platform, explore options, embrace innovation, understand transmedia, act as an engine, be a connector, and behave originally and fearlessly (p.22). Specifically, the impresario focuses on building a personal brand in which the books, social media, and one’s fan base are the bricks and PR, marketing and distribution are the mortar. “The scope of the book,” she says at this point, “is focused on integrated branding opportunities and pre-release income for authors” (p.23). That is, to be liberated from the control of publishing firms, the author must act like a publishing firm, relentlessly tying her or his efforts to those of others who can provide income streams. “With technology stripping off the gatekeepers of distribution, it’s now possible to build your own media company and your own ad sales team” (p.32). And “In summary, Impresario means understanding the landscape you’re operating in so that you can connect people with ideas” (p.33, her emphasis).

Author. An author, in Lynn’s sense, must also be “an architect, creating the blueprint for partnerships and Transmedia content… [and] a proud ambassador of your work.” This author must write personal/universal stories, do in-depth research, rewrite with an awareness of your brand and current markets, brand content, and “pave a new path with words, media, technology, and brands” (p.37). She emphasizes that “the premise for this book is all about molding and blending opportunities that fit into what you are creating or have already created. If you start going in the other direction, you risk compromising the integrity of the work” (p.41). But with that caveat, she encourages authors to consider how they can rewrite parts of their work to incorporate product placement—and, as Marketers, to get paid for that product placement even before the book hits the shelves.

Marketer. “To be a successful Author Power author, it takes … confidence, open-mindedness, flexibility, vision, follow-through, pleasant phone manners, compelling e-mails, sleuthing, and creativity. It takes creativity to see and connect dots of opportunity and then follow through to implement them” (p.49).

Throughout the rest of the book, she provides various strategies to approach authorship in these terms, illustrating them with case studies and providing scripts to help authors through marketing calls. “Adapt or fade away,” she tells us crisply (p.78). We learn how to incorporate product placement, how to brand versions of the same book for different audiences, how to use the research for a novel to generate nonfiction companion titles, and how to get industry conventions to buy branded copies of a book. I can’t emphasize how impressive this system is.

So there’s the summary. Now the evaluation.

We tenured and tenure-track professors are relatively protected from the shocks of the market. Yes, things are tight in the university right now, and yes, the growing ranks of contingent faculty are far more vulnerable than the shrinking ranks of TT faculty. Similarly, many of the students in our humanities programs are protected by such shocks due to family support and background. So it’s easy for us to feel what some of you may be feeling right now: revulsion. You might be thinking: We are not marketers! We want to write—and teach our students to write—about the human condition, without compromises and certainly without integrated branding opportunities. Imagine the violence that this kind of approach would do to the integrity of the great authors!

True, I think. But Lynn is not talking about training the next Pablo Neruda. She is specifically focused on genre fiction, in which legions of authors write—that is, produce their labor—with the express purpose of making a profit. Those people have traditionally relied on publishing, but the publishing industry has entered a dark cul-de-sac. In publishing’s current situation, how do authors secure fair wages for their labor? How do they avoid being systematically exploited, their labor devalued?

One way, the I AM approach, is for the author to take on the functions of the publisher, but more nimbly and ruthlessly, with fewer restrictions and less institutional propriety. The author, to quote Schumpeter, must carry out new combinations, ones that make an end run around the calcified publishing system. The I AM approach is not for everyone, but reading about it tells us volumes about the publishing system to which it reacts. 

And understanding that system can help authors to sketch out alternate approaches, ones that address the same system but in ways that may be more palatable to authors who do not want to employ the I AM strategies.

And for that reason, authors, even if you find the idea of product placement unbearable, I recommend that you take a look at Author Power.

In Blog

Reading :: Capitalism, Socialism, and Democracy

Posted by: on Jan 30, 2015 | No Comments

Capitalism, Socialism, and Democracy
By Joseph Schumpeter

Like the last review, in this one, I’ll focus on summarizing the argument and defining terms. I’m not enmeshed enough in the economics literature to form a strong critique or evaluation. But, when possible, I’ll draw connections to the entrepreneurship literature I’ve been reading lately.

The version I read is the Kindle version of the second edition. In the second preface, Schumpeter explains that this second edition doesn’t involve any changes to the original text, just an additional chapter to rebut critics of the first edition.

The book is about the future of capitalism. In the first part, Schumpeter “sums up, in a non-technical manner, what I have to say … on the subject of the Marxian doctrine.” Specifically, he’s interested in what Marx says about socialism. Schumpeter is (to put it mildly) not socialist, but he wants “to bear witness to this non-Marxist’s belief in the unique importance of that message, an importance that is completely independent of acceptance or rejection.” In the second part, he asks: “Can Capitalism Survive?” And, as he states in the first preface, he concludes “that a socialist form of society will inevitably emerge from an equally inevitable decomposition of capitalist society.” He concludes that “capitalism is being killed by its achievements.” This conclusion leads him to the third part: “Can Socialism Work?” Here, he surveys the various challenges that socialism faces. In the fourth part, “Socialism and Democracy,” he examines how the economic and political systems interact. Finally, in “A Historical Sketch of Socialist Parties,” he provides what he emphasizes is just a sketch of the question “from personal observation and from some very fragmentary research.”

So let’s see what we can mine from each part.

In Part I, Schumpeter examines “The Marxian Doctrine” from a non-Marxian perspective, giving Marx his due as a “prophet,” although sometimes denigrating Marxists in the process: “Marx was personally much too civilized to fall in with those vulgar professors of socialism who do not recognize a temple when they see it.” Rather than treating Marx as a prophet, Schumpeter says, we should “do a thing which is very objectionable to the faithful” and treat Marx as a sociologist whose work can be examined as independent parts. And Schumpeter argues that, contra many of Marx’s interpreters, “The economic interpretation of history does not mean that men are, consciously or unconsciously, wholly or primarily, actuated by economic motives. … He only tried to unveil the economic conditions which shape [religions, metaphysics, schools of art, ethical ideas and political volitions] and which account for their rise or fall. The whole of Max Weber’s facts and arguments fits perfectly into Marx’s system.”

Schumpeter also argues that “Marx’s philosophy is no more materialistic than Hegel’s, and his theory of history is not more materialistic than any other attempt to account for the historic process by the means at the command of empirical science.” Hmm.

“What the theory really says,” Schumpeter summarizes, “may be put into two propositions: (1) The forms or conditions of production are the fundamental determinant of social structures which in turn breed attitudes, actions and civilizations,” and “(2) The forms of production themselves have a logic of their own; that is to say, they change according to necessities inherent in them so as to produce their successors merely by their own working.” He adds that both propositions contain some truth and some working hypotheses. But he raises some objections. For instance, “Social structures, types and attitudes are coins that do not readily melt. Once they are formed they persist, possibly for centuries, and since different structures and types display different degrees of this ability to survive, we almost always find that actual group and national behavior more or less depart from what we might expect it to be if we tried to infer it from the dominant forms of the productive process.”

Later in the section, Schumpeter summarizes: “it is as reasonable to make … ownership the defining element [of class divisions in social structure] as it would be to define a soldier as a man who happens to have a gun.” Schumpeter asserts that the Marxian analysis “misses the salient point about social classes—the incessant rise  and fall of individual families into and out of the upper strata. The facts I am alluding to are all obvious and indisputable. If they do not show on the Marxian canvas, the reason can only be in their non-Marxian implications.”

In the third chapter of this section, Schumpeter evaluates Marx as an economist. He states:

The masses have not always felt themselves to be frustrated and exploited. But the intellectuals that formulated their views for them have always told them that they were, without necessarily meaning by it anything precise. Marx could not have done without the phrase even if he had wanted to. His merit and achievement were that he perceived the weakness of the various arguments by which the tutors of the mass mind before him had tried to show how exploitation came about and which even today supply the stock in trade of the ordinary radical. None of the usual slogans about bargaining power and cheating satisfied him. What he wanted to prove was that exploitation did not arise from individual situations occasionally and accidentally; but that it resulted from the very logic of the capitalist system, unavoidably and quite independently of any individual intention. This is how he did it. The brain, muscles and nerves of a laborer constitute, as it were, a fund or stock of potential labor (Arbeitskraft, usually translated not very satisfactorily by labor power). This fund or stock Marx looks upon as a sort of substance that exists in a definite quantity and in capitalist society is a commodity like any other. (my emphasis)

Schumpeter admires the “pedagogics” of this argument, but raises objections: (1) Marx’s theory assumes that “workmen, like machines, are being produced according to rational cost calculations,” which Schumpeter believes is obviously incorrect; (2) “perfectly competitive equilibrium cannot exist in a situation in which all capitalist-employers make exploitation gains” because all would try to expand production unsustainably; (3) Schumpeter asserts that the theory of surplus value assumes equilibrium, yet Marx says this equilibrium cannot be achieved in a capitalist system, which undergoes incessant change. And this third point, Schumpeter asserts, is pivotally important:

As a matter of fact, capitalist economy is not and cannot be stationary. Nor is it merely expanding in a steady manner. It is incessantly being revolutionized from within by new enterprise, i.e., by the intrusion of new commodities or new methods of production or new commercial opportunities into the industrial structure as it exists at any moment. Any existing structures and all the conditions of doing business are always in a process of change. Every situation is being upset before it has had time to work itself out. Economic progress, in capitalist society, means turmoil. And, as we shall see in the next part, in this turmoil competition works in a manner completely different from the way it would work in a stationary process, however perfectly competitive. Possibilities of gains to be reaped by producing new things or by producing old things more cheaply are constantly materializing and calling for new investments. These new products and new methods compete with the old products and old methods not on equal terms but at a decisive advantage that may mean death to the latter. This is how “progress” comes about in capitalist society. In order to escape being undersold, every firm is in the end compelled to follow suit, to invest in its turn and, in order to be able to do so, to plow back part of its profits, i.e., to accumulate. Thus, everyone else accumulates. (my emphasis)

Marx, Schumpeter argues, misses the boat here: “He had no adequate theory of enterprise and his failure to distinguish the entrepreneur from the capitalist, together with a faulty theoretical technique, accounts for many cases of non sequitur and mistakes.” Among other things, Schumpeter says, Marx “had no simple theory of business cycles,” although, granted, “he understood much of its mechanism.”

(As an aside: Schumpeter largely focuses on Marx rather than Engels. In footnote 25, Schumpeter makes the reason clear: “I observe that the few comments on Engels that are contained in this sketch are of a derogatory nature. This is unfortunate and not due to any intention to belittle the merits of that eminent man. I do think however that it should be frankly admitted that intellectually and especially as a theorist he stood far below Marx. We cannot even be sure that he always got the latter’s meaning. His interpretations must therefore be used with care.”)

But—and here’s the gateway to the rest of the book—Schumpeter says: “However, even though Marx’s facts and reasoning were still more at fault than they are, his result might nevertheless be true so far as it simply avers that capitalist evolution will destroy the foundations of capitalist society. I believe it is.”

In Part II, “Can Capitalism Survive?”, Schumpeter bluntly answers the question in the first paragraph: “No, I do not think that it can.”

Capitalism tends to spread goods at ever-lower prices: “The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort.” Revolutions in economic activity “periodically reshape the existing structure of industry by introducing new means of production.” And as these revolutions are assimilated, we get cycles of groundswells followed by depression as “antiquated elements of the industrial structure” are eliminated. Through this cycle, “the capitalist process … progressively raises the standard of life of the masses,” although not steadily but in cycles. “Capitalist reality is first and last a process of change. In appraising the performance of competitive enterprise, the question whether it would or would not tend to maximize production in a perfectly equilibrated stationary condition of the economic process is hence almost, though not quite, irrelevant.”

This brings us to Schumpeter’s famous notion of creative destruction. First, he asserts that competition is vital: “As soon as we go into details and inquire into the individual items in which progress was most conspicuous, the trail leads not to the doors of those firms that work under conditions of comparatively free competition but precisely to the doors of the large concerns— which, as in the case of agricultural machinery, also account for much of the progress in the competitive sector— and a shocking suspicion dawns upon us that big business may have had more to do with creating that standard of life than with keeping it down.”

Next, he links competition to the dynamic nature of capitalism:

The essential point to grasp is that in dealing with capitalism we are dealing with an evolutionary process. It may seem strange that anyone can fail to see so obvious a fact which moreover was long ago emphasized by Karl Marx. Yet that fragmentary analysis which yields the bulk of our propositions about the functioning of modern capitalism persistently neglects it. Let us restate the point and see how it bears upon our problem. Capitalism, then, is by nature a form or method of economic change and not only never is but never can be stationary. And this evolutionary character of the capitalist process is not merely due to the fact that economic life goes on in a social and natural environment which changes and by its change alters the data of economic action; this fact is important and these changes (wars, revolutions and so on) often condition industrial change, but they are not its prime movers. Nor is this evolutionary character due to a quasi-automatic increase in population and capital or to the vagaries of monetary systems of which exactly the same thing holds true. The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates. (my emphasis)

That is, capitalist enterprise changes, not just due to external conditions, but internally:

The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U. S. Steel illustrate the same process of industrial mutation— if I may use that biological term— that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in. 

He adds: “Every piece of business strategy acquires its true significance only against the background of that process and within the situation created by it. It must be seen in its role in the perennial gale of creative destruction; it cannot be understood irrespective of it or, in fact, on the hypothesis that there is a perennial lull.” That creative destruction goes well beyond price competition: “Economists are at long last emerging from the stage in which price competition was all they saw. As soon as quality competition and sales effort are admitted into the sacred precincts of theory, the price variable is ousted from its dominant position.”

Given that internal impulse to change (creative destruction), restrictive practices such as monopolies “may do much to steady the ship and to alleviate temporary difficulties.”

As Schumpeter looks ahead, in his chapter “Crumbling Walls,” he essentially sees capitalism as inevitably making itself obsolete:

In our discussion of the theory of vanishing investment opportunity, a reservation was made in favor of the possibility that the economic wants of humanity might some day be so completely satisfied that little motive would be left to push productive effort still further ahead. Such a state of satiety is no doubt very far off even if we keep within the present scheme of wants; and if we take account of the fact that, as higher standards of life are attained, these wants automatically expand and new wants emerge or are created, satiety becomes a flying goal, particularly if we include leisure among consumers’ goods. However, let us glance at that possibility, assuming, still more unrealistically, that methods of production have reached a state of perfection which does not admit of further improvement.  

A more or less stationary state would ensue. Capitalism, being essentially an evolutionary process, would become atrophic. There would be nothing left for entrepreneurs to do. They would find themselves in much the same situation as generals would in a society perfectly sure of permanent peace. Profits and along with profits the rate of interest would converge toward zero. The bourgeois strata that live on profits and interest would tend to disappear. The management of industry and trade would become a matter of current administration, and the personnel would unavoidably acquire the characteristics of a bureaucracy. Socialism of a very sober type would almost automatically come into being. Human energy would turn away from business. Other than economic pursuits would attract the brains and provide the adventure. (my emphasis)

And later in the chapter:

if capitalist evolution— “progress”— either ceases or becomes completely automatic, the economic basis of the industrial bourgeoisie will be reduced eventually to wages such as are paid for current administrative work excepting remnants of quasirents and monopoloid gains that may be expected to linger on for some time. Since capitalist enterprise, by its very achievements, tends to automatize progress, we conclude that it tends to make itself superfluous— to break to pieces under the pressure of its own success. 

Schumpeter sees this eventuality itself in the terms of creative destruction, and like Marx, sees economic and sociological conditions as two parts of the same whole:

The capitalist process not only destroys its own institutional framework but it also creates the conditions for another. Destruction may not be the right word after all. Perhaps I should have spoken of transformation. The outcome of the process is not simply a void that could be filled by whatever might happen to turn up; things and souls are transformed in such a way as to become increasingly amenable to the socialist form of life.

This brings us to the next section: “Can Socialism Work?” Short answer: Yes, but it requires certain social conditions. 
Let’s speed past this argument and get to get to Part IV: “Socialism and Democracy.” Can socialism and democracy coexist? Schumpeter says yes and no:
Between socialism as we defined it and democracy as we defined it there is no necessary relation: the one can exist without the other. At the same time there is no incompatibility: in appropriate states of the social environment the socialist engine can be run on democratic principles. But observe that these simple statements depend upon our view about what socialism and democracy are. Therefore they mean not only less than, but also something different from, what either party to the contest has in mind.

After some analysis, he concludes:
I. In setting forth our conclusions we had better begin with the relation between democracy and the capitalist order of things.  

The ideology of democracy as reflected by the classical doctrine rests on a rationalist scheme of human action and of the values of life. By virtue of a previous argument (Chapter XI) this fact would in itself suffice to suggest that it is of bourgeois origin. History clearly confirms this suggestion: historically, the modern democracy rose along with capitalism, and in causal connection with it. But the same holds true for democratic practice: democracy in the sense of our theory of competitive leadership presided over the process of political and institutional change by which the bourgeoisie reshaped, and from its own point of view rationalized, the social and political structure that preceded its ascendancy: the democratic method was the political tool of that reconstruction. We have seen that the democratic method works, particularly well, also in certain extra- and pre-capitalist societies. But modern democracy is a product of the capitalist process.  

Whether or not democracy is one of those products of capitalism which are to die out with it is of course another question. And still another is how well or ill capitalist society qualifies for the task of working the democratic method it evolved. (my emphasis)

And let’s leave it there, not covering the final section, “A Historical Sketch of Socialist Parties.”

Like Marx, Schumpeter takes up economics, but within a sociological framework. He’s interested in the questions of how societies evolve and how different economic frameworks work within those sociological conditions. Although he’s certainly not Marxist in the economic sense, he sees definite insights in Marx’s thought and seeks to understand what the Marxian framework can and can’t do. And his notion of creative destruction attempts to address the question of dynamism that he believes Marx doesn’t account for. I don’t pretend to do justice to this book, but I do suggest picking it up—it’s interesting in its own right, but it’s also enormously influential for entrepreneurs and tells us a lot about how they see their worth. 

In Blog

Reading :: The Theory of Economic Development

Posted by: on Jan 29, 2015 | No Comments

The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle
By Joseph A. Schumpeter

In my last few reviews, I’ve felt compelled to say that I’m not an ethnographer, nor am I an entrepreneur. At the risk of sounding like Dr. McCoy, I’m not an economist either. But I wanted to read this book because it’s a classic for entrepreneurs. In this review, I’ll focus mainly on the terms and concepts that have made their way into the entrepreneur lexicon. Since I’m reading the Kindle version, I won’t use page numbers.

Schumpeter defines economic development as “only such changes in economic life as are not forced upon it from without but arise by its own initiative, from within,” and argues that “Development in our sense is then defined by the carrying out of new combinations.” He continues, “This concept covers the following five cases: (1) The introduction of a new good … (2) The introduction of a new method of production … (3) The opening of a new market … (4) The conquest of a new source of supply of raw materials or half-manufactured goods … (5) The carrying out of the new organization of any industry.” These all will sound familiar to entrepreneurs today: they are potential component claims in the complex argument of the entrepreneur’s pitch.

Combining “new combinations of the means of production” and credit, Schumpeter says, yields “the fundamental phenomenon of economic development. The carrying out of new combinations we call ‘enterprise'; the individuals whose function it is to carry them out we call ‘entrepreneurs.'” He adds that “we call entrepreneurs not only those ‘independent’ businessmen in an exchange economy who are usually so designated, but all who actually fulfil the function by which we define the concept, even if they are, as is becoming the rule, ‘dependent’ employees of the company, like managers, members of the boards of directors, and so forth, or even if their actual power to perform an entrepreneurial function has other foundations, such as the control of a majority of shares.”

Yet “our concept is narrower than the traditional one in that it does not include all heads of firms or managers or industrialists who merely may operate an established business, bur only those who actually perform that function.” And a few pages later: “whatever the type, everyone is an entrepreneur only when he actually ‘carries out new combinations,’ and loses that character as soon as he has built up his business, when he settles down to running it as other people run their businesses.” The functions are different: “Carrying out a new plan and acting according to a customary one are things as different as making a road and walking along it.”

Critically, entrepreneurs are not the same as inventors. “As long as they are not carried into practice, inventions are economically irrelevant. And to carry any improvement into effect is a task entirely different from the inventing of it, and a task, moreover, requiring entirely different aptitudes. Although entrepreneurs of course may be inventors just as they may be capitalists, they are inventors not by nature of their function but by coincidence and vice versa.”

Capital,” Schumpeter says, “is nothing but the lever by which the entrepreneur subjects to his control the concrete goods which he needs, nothing but a means of diverting the factors of production to new uses, or dictating a new direction to production. This is the only function of capital” (His emphasis).

Once the new combinations have been carried out, Schumpeter says, “the new process of production will be repeated. And for this entrepreneurial activity is no longer necessary.” Entrepreneurship in his sense is fleeting, an innovative stage that leads to stable production, and an entrepreneur who is not engaged in this stage is no longer an entrepreneur.

At the end of the book, Schumpeter responds to critics. Most interesting for me was the criticism: “why is it that economic development in our sense does not proceed evenly as a tree grows, but as it were jerkily; why does it display those characteristic ups and downs?” And he answers: “exclusively because the new combinations are not, as one would expect according to general principles of probability, evenly distributed through time—in such a way that equal intervals of time could be chosen, in each of which the carrying out of one new combination would fall—but appear, if at all, discontinuously in groups or swarms.” Schumpeter argues that these swarms are due to three things: (1) “the vast majority of new combinations will not grow out of the old firms or immediately take their place, but appear side by side, and compete, with them.” (2) An en masse increase in entrepreneurial demand “signifies a very substantial increase in purchasing power all over the business sphere.” (3) trying new combinations results in more errors. “Why do entrepreneurs appear, not continuously… but in clusters? Exclusively because the appearance of one or a few entrepreneurs facilitates the appearance of others, and these the appearance of more, in ever-increasing numbers” (his emphasis). One or two entrepreneurs lead, and once they are successful, others rush in.

I found the book interesting, although hard to get through in spots. My real interest is in how entrepreneurs see opportunity and how they argue in ways that help others see it. And for those purposes, Schumpeter’s foundational work has been helpful. I wouldn’t call this book a page-turner, but if you’re interested in entrepreneurship and how entrepreneurs argue, it’s a must read.

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Reading :: The Startup Owner’s Manual

Posted by: on Jan 29, 2015 | No Comments

The Startup Owner’s Manual: The Step-By-Step Guide for Building a Great CompanyBy Steve Blank and Bob DorfI just reviewed Steve Blank’s Four Steps to the Epiphany. Blank’s coauthor on this book, Bob Dorf, “critiqued the early versions of Steve’s F…