Schumpeter's notebook

MOTHER JONES has compiled some interesting graphics on the distribution of wealth in the United States. The magazine's list of the ten richest people in Congress is particularly interesting (John McCain, who forgot how many houses he owns during the 2008 presidential election, does not make it).

It is notable that seven of the top ten are Democrats. Of these, four made their money by marrying or inheriting it. Perhaps the Republicans should start rethinking their opposition to inheritance taxes.

THE fire that is burning in Libya will singe some surprising institutions in the West, from the Monitor Group, which provided the regime with consultancy, to the London School of Economics, which accepted a pledge of £1.5m from the Gaddafi International Charity and Development Foundation and which awarded Qaddafi's son and heir, Saif al-Islam Qaddafi, who controls the foundation, a PhD in political theory in 2008.

Mr Qaddafi's PhD thesis, titled "The Role of Civil Society in the Democratisation of Global Governance Institutions" looks as if it is a classic of the genre. Here is his summary of his argument, which he advances with lots of references to John Rawls and other liberal worthies:

The core aim of the thesis, then, is to explore the potential for the concept of Collective Management to develop a more democratic, morally justified system of global governance that recognises the rights of individuals…and is particularly focused on empowering civil society organizations (CSOs) to give a stronger voice to those currently under-represented in the existing system

You can read the whole thing online, if you have a sufficiently well-developed sense of irony. Hat tip to Crooked Timber.

DAVID LEONHARDT is to be congratulated for focusing on the state of the Egyptian economy, rather than the country's political machinations. He points out that, at a time when most of the rest of the emerging world is urbanising rapidly, Egypt has actually been de-urbanising:

When Hosni Mubarak took power in 1981, Egypt was indeed more urban than the rest of the world. About 44 percent of its population lived in cities. In East Asia, by comparison, only 26 percent of people lived in cities.

Since then, the cities of Asia have expanded rapidly, drawing in millions of peasant farmers looking for a better life — and, more often than not, finding it. Almost 50 percent of East Asians now live in cities. And Egypt? It is the only large country to have become less urban in the last 30 years, according to the World Bank. About 43 percent of Egyptians are city dwellers today.

I suspect that Egypt's economic reconstruction will be just as difficult as its political rehabilitation. Mubarak's cronies controlled most of the economy. Entrepreneurship was stifled by red tape and cronyism. The country ranks No. 96 in the Index of Economic Freedom (out of 179 states), and No. 94 in the World Bank's Doing Business rankings (out of 183 countries). It also has one of the lowest start-up rates in the world. Educated workers found it almost impossible to get jobs that paid them decently for their skills (Mr Leonhardt points out that Egyptians who emigrated to the United States saw their earning power increase eightfold). Perhaps most worrying of all, the army, which now controls the country, is a major economic force, owning companies that produce everything from fire extinguishers to laptops.

THE McKinsey Global Institute has produced a fascinating report on productivity growth in the United States: why the country needs more of it to maintain GDP growth, what barriers are holding the country back, and how they can be overcome. I'll quote it in full, since it is clearly written and compelling. But I must say I'm pessimistic about the country's ability to rise to the challenge. The report puts heavy emphasis on improving productivity in the public sector, and improving America's education system. But the public sector has proved almost impossible to reform, with temporary gains quickly being negated by vested interests (remember Al Gore's reinventing government programme); and the education system has proved even more resistant than the rest of the public sector. Alas, a country which is so good at business is pretty bad at government, and being good at government may be vital to bumping up those productivity numbers.

More than ever, the United States needs productivity gains to drive growth and competitiveness. As baby boomers retire and the female participation rate plateaus, increases in the labor force will no longer provide the lift to US growth that they once did. New research by the McKinsey Global Institute finds that, to match the GDP growth of the past 20 years and the rising living standards of past generations, the United States needs to boost labor productivity growth from 1.7 to 2.3 percent a year. That’s an acceleration of 34 percent to a rate not seen since the 1960s.

This acceleration needs to come both from efficiency gains—reducing inputs for given output—and from increasing the volume and value of outputs for any given input. Since 2000, the largest productivity gains have been in sectors that have seen large employment reductions. Periods such as this have made many Americans suspicious that boosting productivity is a job-destroying exercise. However, MGI finds that, since 1929, every ten-year rolling period except one has recorded increases in both US productivity and employment. It is nevertheless important that the United States returns to the more broadly-based productivity growth of the 1990s when strong demand and a shift to products with a higher value per unit helped to create jobs even as productivity was growing.

There is large untapped potential to increase productivity and growth in the United States, MGI finds. Businesses can achieve three-quarters of the necessary productivity growth acceleration in the current regulatory and business environment. Companies can achieve one-quarter of the acceleration by more widely adopting best practice. Even in such sectors as retail, where US businesses have a strong productivity record, there is scope to do more (e.g., by taking lean practices from the stockroom to the storefront). Aerospace companies may be leading global exporters but they have yet to adopt lean practices in the systematic way seen among best-in-class automotive players. The public sector and regulated sectors such as health care, which have not faced as strong competitive pressure, offer another large opportunity. Health care players have just begun to adopt lean. Hospitals have room to improve how nurses spend their time—at some hospitals, nurses spend less than 40 percent of their time with patients—and to improve their discharge and admissions processes.

Implementing emerging business and technology innovations can achieve a further half of the necessary acceleration. Opportunities lie in enhanced supply chain integration, greater responsiveness to evolving customer preferences and behavior, and innovating in what, and how, goods and services are provided to customers.

To obtain the last one-quarter of the acceleration—and potentially more—government and businesses need to act on economy-wide barriers that today limit productivity growth. MGI sees seven major imperatives:

1. Drive productivity gains in the public and regulated sectors.
Public and regulated sectors such as health care and education represent more than 20 percent of the US economy, but has persistently low productivity growth. McKinsey analysis has demonstrated that, if the US public sector could halve the estimated efficiency gap with similar private sector organizational functions, its productivity would be 5 to 15 percent higher and would generate annual savings of $100 billion to $300 billion.

2. Reinvigorate the innovation economy.
Innovation can increase the quality and quantity of goods and services produced, contributing to productivity gains. The United States remains the global leader in R&D spending but others are rapidly catching up. US policy and regulation should provide the right incentives for private companies to continue to invest in innovation and expand their US-based R&D activities. Specifically, the United States needs to ensure that the IT infrastructure and technologies are in place to capture fully the transformational potential of existing and new technologies. The potential runs from Big Data—data-driven business decisions and actions—to cloud computing and the application of advances in biology and the life sciences.

3. Develop the US talent pool to match the economy of the future and harness the full capabilities of the US population.
The US talent pool is not growing fast enough to meet future demand. For example, MGI estimates that the United States may face a shortfall of almost two million technical and analytical workers and a shortage of several hundred thousand nurses and as many as 100,000 physicians over the next ten years. In aerospace, 60 percent of the workforce is aged over 45 years old compared with 40 percent in the overall economy. The United States could alleviate such shortages by removing barriers to older workers staying in the workforce longer (e.g., altering disincentives in how health care costs for older workers are allocated; addressing defined benefit rules); improving incentives to technical and analytical training, for example through innovative funding mechanisms and direct links between jobs and educational institutions); and reducing barriers to the immigration of skilled workers.

4. Build 21st century infrastructure.
US infrastructure is not only inadequate to meet the needs of a dynamic, growing, and productive economy but its quality has been in relative decline. The United States today ranks 23rd in the quality of its infrastructure. There is major scope for the United States to identify and implement leading-edge practices from project selection to financing and delivery, sometimes through public-private partnerships.

5. Enhance the competitiveness of the US regulatory and business environment.
The relative competitiveness of the US regulatory and business environment is declining at a time when many competitor countries have taken major steps to create favorable conditions in order to attract companies to invest and participate in their economies. The United States scores particularly poorly on the burden of government regulation and red tape. The United States needs to reduce regulatory complexity, streamline the process of resolving disputes, and eliminate remaining sector-level barriers to more robust competition—learning from the most effective approaches employed elsewhere.

6. Embrace the energy productivity challenge.
Global demand for energy is predicted to rise at an accelerating pace over the next 20 years and focus needs to shift to boosting energy productivity—the level of GDP obtained from each unit of energy consumed. Today, the United States lags behind others in this regard, and also risks being left behind in important emerging technologies. Clear long-term policy could encourage the market discipline that drives productivity. For example fuel-economy standards could encourage the adoption of existing energy-saving technologies and spur the development of new ones.

7. Harness regional and local capacities to boost overall US growth and productivity.
Cities and regions in the United States have markedly different growth and productivity trajectories, and there is insufficient sharing of best practice among them. But there is a rich seam of effective solutions at the federal and local levels that offers scope for shared performance metrics (e.g., a defined set of tracking variables made transparent through technology) and the transfer of best practice. All levels of government should also seek cross-regional alliances in economic development.

DANIEL BELL, who died on January 25th, aged 91 (my column this week looks back on his life and works), was always sensitive to being called a neocon. He cut his intellectual teeth with future neocons at "Alcove No. 1", at City College. He was a close friend of Irving Kristol, the godfather of neoconservatism, and even founded the Public Interest with him. But he always remained, as he described himself, "a socialist in economics, a liberal in politics and a conservative in culture". Here is a letter he sent to us when we bracketed him a little too closely with Kristol.

SIR - Your obituary of Irving Kristol (September 26th) aligned me with his effort to transform conservatism from a dour to a modern outlook. I was never part of such an effort. I co-founded the Public Interest with Kristol. In our opening statement of intent there was not a word about conservatism; instead we focused on our effort to discuss public policy and to make whatever knowledge we have, primarily in the social sciences, more effective. From 1965 to 1972 most of our economic articles, for example, were written by Robert Solow, Tom Schelling, Robert Heilbroner and Ed Kuh, whose "demogrant" proposals (benefits based on demographic characteristics) were adopted by George McGovern.

Both Kristol and I supported Hubert Humphrey for president against Richard Nixon in 1968. All this came to a head in 1972 when Kristol, under great pressure from the right, declared for Nixon. Faute de mieux, I declared for Mr McGovern. Irving had also begun to espouse supply-side economics, and write about it in ideological terms, in the pages of the Wall Street Journal.

I had been friends with Kristol since 1937, going back to our days at the City College of New York. Yet when we began to disagree, even quarrel, about the direction of the Public Interest, I told Irving, but also said that friendship is more important than ideology, which I still believe. I resigned as co-editor of the magazine, to be replaced by our mutual friend Nathan Glazer. None of the economists I mentioned above ever wrote subsequently for the Public Interest. It had become, then, a neoconservative journal. I remain, if a label has to be stated, a social democrat in the mould of my old, close friend, Tony Crosland.

I mourn Irving Kristol. He was an extraordinarily warm, witty and engaging man. I remained friends with Irving and his wife Gertrude Himmelfarb. But I did not share their political views.

Daniel Bell,

Cambridge, Massachusetts

LIKE many people, I have been glued to Al Jazeera for the past few days. It's breathless and biased, to be sure, with a tendency to inflate numbers and play down risks, but it is much better than the alternatives. With the notable exception of Fareed Zakaria's programme, CNN is a shadow of its former self, and the BBC, which justifies its poll tax, in part, on the grounds that it provides superlative news coverage, is more interested in what Egypt means for British holidaymakers, bless them, than for geopolitics.

Given that Egypt is likely to produce a cascade of troubles in the Middle East, Al Jazeera has now become essential viewing. Pity the competition is so bad.

IN HIS special report on the global elite my esteemed colleague argued that "brains bring ever larger rewards". This is true enough, but I think that he missed an important wrinkle in the argument. The more productive economies become, powered, no doubt, by the cognitive elite, the more people can be rewarded for all sorts of talents, not just intelligence. Beards, as well as brains, can provide people with a livelihood, of a sort. From today's New York Times:

Jack Passion knows a thing or two about beards. With his orange-red “waterfall of hot lava,” as he called it, spilling from his chin, he is the country’s only full-time professional beard grower. It is not a lucrative job, really, but between the worldwide contests he wins and the book he wrote about beard growing, he can be considered an expert on the subject.

THE rise of new economic powers is inexorably bringing the rise of new intellectual powers, too. For decades American think-tanks have ruled the world. They have the finest facilities, the cleverest scholars and the best lunches. They have defined the terms of the global debate and provided America's hard power with a halo of soft power.

This is still largely the case. But emerging-market think-tanks are growing rapidly, promising to broaden the global debate. The big ideas of the future are increasingly likely to come from them. Journalists, wanting a comment on China or an op-ed on the balance of power, may well phone up somebody in São Paulo rather than Washington (or they should do, anwyay, if they are up to their job).

Every year the University of Pennsylvania provides a huge public service by compiling a list of the world's top think-tanks. America leads the world in absolute numbers, with 1816 think-tanks. It also leads the world in quality, with lots of American institutions in the top twenty and the Brookings Institution, rightly, ranked as number one. But China and India are making impressive strides, with 425 and 292 respectively. Argentina also puts in a strong performance, with 181 think-tanks. Journalists need to update their contacts lists.

IN A well-informed article in the Wall Street Journal Fred Siegel points out that, far from being part of the natural order of industrial society, public-sector unions were created by deliberate political decisions, as the Democratic Party saw a treasure trove of votes in organised public-sector workers. What was created by political will can also be undone by it:

The turbulent years of the 1960s and '70s are best known by the headline-grabbing civil rights and women's rights movements. But there was another "rights" movement, largely overlooked, that has also had a profound effect on American life. The looming public-pension crisis that threatens to bankrupt city, county and state governments had its origins in those same years when public employees, already protected by civil-service rules, gained the right to bargain collectively.

Liberals were once skeptical of public-sector unionism. In the 1930s, New York Mayor Fiorello LaGuardia warned against it as an infringement on democratic freedoms that threatened the ability of government to represent the broad needs of the citizenry. And in a 1937 letter to the head of an organization of federal workers, FDR noted that "a strike of public employees manifests nothing less than an intent on their part to prevent or obstruct the operations of Government until their demands are satisfied. Such action, looking toward the paralysis of Government by those who have sworn to support it, is unthinkable and intolerable."

I STARTED the day on Tuesday by visiting Tata's steelworks in Jamshedpur. I found it awe-inspiring. The scale is mind-blowing: 2.5 hectares of industrial muscle. Even more mind-blowing is the steelmaking process itself: the giant cauldrons of molten steel, the huge trains shifting raw materials about, the fashioning of the molten steel into iron sheets. Three things struck me in particular. First, the relatively small number of people involved. Though based in a relatively poor company, this is a high-tech, high-skill, highly mechanised process. Second, the intelligence and enthusiasm of the people I talked to. These people love to talk about steel! And they love to recite war stories from their visits to other steel mills! (I apologise if I lost the plot every now and again). And third, the smoothness of the organisation. Every process seemed to be perfectly choreographed, and everybody seemed to know their role. Tata Steel has reduced its workforce from 78,000 in the mid-1990s to 35,000 today, while quadrupling the amount of steel it produces. We need a similar revolution in the public sector.

I spent the afternoon on a whirlwind tour of Kolkata, and a somewhat eccentric one, owing to linguistic problems. It is hard for even the most hard-hearted anarcho-capitalist not to be shocked by the poverty, and discombobulated by the confusion. You come across inexplicable things all the time. I watched a cheerful-looking gentleman wash himself carefully in the river, covering himself with a soapy lather, only to empty a huge bag of rubbish into the water when he had finished. On the positive side, I was struck by the omnipresence of entrepreneurialism. Even the most desperate people were constantly busy. People sit at the side of the road sewing on their Singer sewing machines or cobbling shoes. Truck stops, of which there were an inordinate number, generate service economies, with people selling tea, food and, one suspects, a lot else besides. People also preserve their dignity among the squalor: many women are brightly dressed, and a striking number of children wear smart school uniforms. You would not find the same energy or sartorial dignity in a British inner city.

The queue to get through security at Kolkata airport was more than a thousand people long—a grumpy fellow-passenger blamed it on the city being run by success-hating, business-loathing, cretinous and corrupt Communists—but thereafter I was transported into a different India. The flight was on time. Mumbai airport was shiny and new. A driver was waiting. And he whisked me, via a new and almost traffic-free road, to the Taj Mahal Palace, which is about as close to heaven on earth as you can get. The beautiful people of the new India, who were pouring out of the hotel when I arrived, really are beautiful; and the Taj's reputation for hospitality is richly deserved.

All this obviously raises the question of what a single conglomerate is doing running steel mills and luxury hotels. But here is a conjecture, driven, admittedly, by Taj-induced goodwill. Peter Drucker argued that the first job of a company is to create a customer. Most Western bosses would probably say that the first job of a company is to create a profit. But in the emerging world—and particularly the emerging India where Tata Steel and the Taj Palace were created a century ago—the first job of a company is to create order amid chaos. In their different ways, the steelworks and the luxury hotel are fortresses against the surrounding madness.

COMPANY towns used to be common in the West. The Cadburys and Rowntrees built them in England, as did William Hesketh Lever, founder of what is now Unilever. At one point the United States had more than 3,000 of them. They were particularly popular in the South and West, and in the mining and lumber industries. But they have long since disappeared, destroyed by the motorcar, the cult of corporate focus, and the general maturing of the economy.

As so often, what is dying in the West is surviving or being reborn in the emerging world. New company towns are being constructed from nothing, most notably in China. And old ones are being given a new lease of life. But even with all this new activity Jamshedpur, the corporate headquarters of Tata Steel and home of its biggest steel plant, continues to lead the pack.

Jamshedpur was created at the turn of the past century to solve a practical problem: the resources needed to make steel, in the form of coal, iron ore and running water, were stuck in the middle of an isolated forest. But practicality was also infused with idealism: Jamsetji Tata, the founder of both the town and of what became the Tata Group (pictured here with his great-grandson Ratan Tata, the group's modern-day boss), wanted to create an industrial jewel, with wide avenues, good schools and generous sports facilities, to prove that India was capable of economic independence.

Of late the town has become more ambitious still. Tata Steel has become a global force, gobbling up, among others, Britain's Corus. But the company has modernised and expanded, rather than qualified and limited, its relationship with the town and its surrounding region. Again, practical and idealistic considerations are reinforcing each other. The state administration is incompetent. The Naxalite rebellion is a growing threat (I travelled 30 miles into the countryside and saw plenty of signs of soldiers camped out to deal with insurgents). The Western doctrine of "corporate social responsibility" (CSR) has also given the founder's very Victorian vision a new lease of life.

"We also make steel"
The result is odd, to Western eyes. Tata Steel runs a 900-bed hospital, and provides its workers with accommodation ("I have a company house and a company car," says one manager, "all I had to bring was a wife.") Jusco, a Tata Steel subsidiary, provides the town with its utilities, and keeps it clean and well-ordered. The company employs 250 people who are responsible for rural outreach. They teach tribespeople how to grow crops, give advice on HIV, help create irrigation systems, and generally act as mentors to the rural population. They also provide all sorts of social services to poor city dwellers. Tata Steel pays for a huge sports centre, which is open to all, in the shadow of the steel mill. It also runs several sports academies, for archery, athletics, cricket and, above all, football, which train people from all over the country. The football academy has trained 142 people who have played for their country in various capacities, and has frequently formed a tie-up with Sheffield United, which is a much admired team in these parts (from England's most famous steel town). Tata also owns the local newspaper and even runs the town's zoo.

Far from apologising for all these activities, Tata is so proud of them that it uses the phrase "we also make steel" in its advertisements. There are clearly good commercial arguments for some of these activities. The company has to step in to fill institutional voids left by the market (which is underdeveloped in such an isolated spot) and the government (which is ineffective). Creating national sports stars from scratch is arguably even better for your brand than sticking it on the shirts of established stars. Tata Steel has not had a strike since the 1920s, and has so far escaped the wrath of the Naxalites. But there is surely a question of where good strategy stops and where sprawl begins. Does Tata Steel know when to say no? Or will it be constantly pulled into new CSR activities that will divert too many resources from its core mission?

Read on: Our review of "The Company Town: The Industrial Edens and Satanic Mills That Shaped the American Economy", By Hardy Green (Oct 2010)