February 26, 2010

Up in the air and Schumpeter's creative destruction

Writing about web page ataraxiasocial.blogspot.com

"Companies rising and falling would unleash innovation and in the end make the economy stronger"

Joseph Schumpeter

The movie Up in the Air (Jason Reitman, 2009) describes the routinary life of Ryan Bingham, played by George Clooney. His job consists in travelling all across the countryfiring employees whose companies do not want to do it directly, either because they are cowards or because they do not want to deal with potential violentreaction of their now ex-employees. In his years of experience, Ryan has become quite efficientin his work and using carefulpersuasion techniques, manages to get employees to accepttheir firing, at least with some complianceand arguable"dignity".

Things get complicated when a new employee comes to Ryan's office(Natalie Keener, played by Anna Kendrick) with innovativeideas about improving the efficiency and productivity of the firm. The solution? Use technological tools such as video conferencing to conduct layoffs. This methodcan improve the efficiencyof the company, but ruins Ryan's plans for three reasons that he considers particularlyrelevant.The first is a woman, Alex Goran (Vera Farmiga), who met at one of his many journeys and because of his work must alsotravel constantly, with the possibility thatthey can coincidein a city and meetthere. The second is a personalgoal related to travel: Ryan wants to be the seventh person in the world to achieve10 million miles travelled, which among other benefits he will have a planenamed in his honour by the airline. The third is relatedtothe other two and is one ofthe premises of the film: travel is the natural state of Ryan; constantly moving all across the country, enjoying frequent flyer privileges and applying his travel experience in conferences is the way he feels in control of his life.

For the purpose of this blog'sentryit is necessary to focus on just one of the issues raisedby the film and applyit to the concept of 'creative destruction'.In the first instance, it is necessaryto givethe definition of that term. The 'creative destruction' is a theory popularized by the economist Joseph Schumpeter in which he argues that a radical innovation (good or services that are able to createa new category) makes that the previousgoodsor services become obsolete,and therefore,its useis dramatically reduced. A typicalexample is relatedto the audio devices. One of the first large-scaleused was the vinyl recordwhich was thenaccompanied by the tape. With the advent of Compact Disc (CD), sales of cassettes and vinyl records were reducedto negligiblelevels and now, at least in the case of vinyl, their few consumers do so as part of a nostalgic collection. Howeverthis does not stopthere. With the invention of the MP3,the CDioutdatedand itssales are now diminishingThis case can also be applied to the video and its players (VHS or BETA, Laser Disc, DVD and Blue Ray now) as well as computers. Obviously this processis not limited only to electronic devices. What happens is that in this sector this process is carriedout at an expeditious pace.

This theory proposes that the 'creative destruction' is inherent in the production process,and it is part of the development of any product.This not only relates to elements of product features but also with marketing elements that determinethe "destruction" of a product. For example, a cell phone camera that has a certainamountof megapixels. When you get a new cellto increasethe megapixels capacity, consumers feel the urge to buythis new product even if the functions provided by the previousmodel are essentiallythe same. This is knownas incremental innovation (amending a portion of a goodor service) and also generates the obsolescence of the previous product. In this case, an effective marketing strategy can convince consumers to buy a product that they do not actuallyneedand,as a result,"destroys" the past.

In the film, Ryan becomes a victim of a radical innovation. Video conferencing threatens his way of life and he could becomein the future another jobless similar to those he was responsible for announcing their dismissal. The issue here is more complicated because what is being "destroyed" is a human being or at least the purposeof his existence. Obviously in a metaphorical sense, but he could be considered as part of a process or production systemin a company that becomes obsolete. The point here is that the 'creative destruction' theorydoes not deal with ethical concerns. It is not goodor badin itself,but itis simply a processthat can lead to some benefits andcan also cause damage.Un exampleis Kodak company and its nearlybankruptas a result of the newdigital cameras. Consumers have been highlybenefited by cameras whose pictures can be edited and modified and they do not have to geta roll of the film, but many companies that were not able to keep up with this innovationbecame obsolete and disappeared. In other wordsthey were"destroyed".

There are other films that presentthe same issue but with a different approach. Some do it explicitly as Blade Runner, I Robot, Matrix and Terminator (replicants, robots and machines are radicalinnovationprocesses, which in the case of the lasttwo movies makehumans obsolete, this time in a literal). Other films doit subtly and withmuch more tangential approach.However, it is possible to find traces of this theory and its approaches (perhaps the Godfather, Vito Corleone, was madeobsolete by not wanting to be linked to the new drug businessand thus became necessary his "destruction").The fact is that the 'creative destruction' is an issue that raises questions about its renewalprocess and howits benefits can be exploited while minimizing its negative effects.Finally, one element of the filmthat is also part of this theory is that the motivationto makehim obsoletewas not a deliberatedecisionin order to harmhim. Simply, he was a collateral victim of a process of radicalinnovationthat in turn generated a process of "creative destruction".

January 22, 2010

Batman, The Untouchables, the Cold War and the 'Escalation Effect'

Writing about web page ataraxiasocial.blogspot.com

Batman Begins (2005)

Jim Gordon: What about escalation?

Batman: Escalation? Jim Gordon: We start carrying semi-automatics, they buy automatics. We start wearing Kevlar, they buy armor-piercing rounds.

Batman: And?

Jim Gordon: And you're wearing a mask and jumping off rooftops. Now, take this guy: armed robbery, double homicide. Got a taste for theatrical, like you. Leaves a calling card.

Batman: I'll look into it.

The Untouchables (1987)

Malone: You said you wanted to get Capone. Do you really wanna get him? You see what I'm saying is, what are you prepared to do?

Ness: Anything and everything in my power. Malone: And then what are you prepared to do? If you open the can on these worms you must be prepared to go all the way because they're not gonna give up the fight until one of you is dead.

Ness: How do you do it then?

Malone: You wanna know how you do it? Here's how, they pull a knife, you pull a gun. He sends one of yours to the hospital, you send one of his to the morgue. That's the Chicago way, and that's how you get Capone! Now do you want to do that? Are you ready to do that?

Escalation is defined as "to increase in intensity or extent". In this context, the escalation effect' could be associated to the process in which a situation begins to worsen progressively until its implications are quite negative, reaching a point where it is too late to act without worsening the situation or the solution involves a significant sacrifice on the part of either party involved.

What could be the escalation effect in the everyday?

Every day you can see examples of 'escalation effect' in various situations and among different people. In the final analysis, this phenomenon is the result of social interactions among individuals, institutions, companies and of course the government and the governed. Both the scenes of Batman Begins (Christopher Nolan, 2005) and the Untouchables (The Untouchables, 1987) illustrate two particular approaches to analyse this phenomenon.

In the final scene of Batman Begins there is a conversation between Commissioner Gordon (Gary Oldman) and Batman (Christian Bale). Gordon questions Batman for the 'escalation effect' that his actions have generated and the consequences will be evident in the sequel, The Dark Knight (Christopher Nolan, 2008). First, Gordon explains what is the escalation in this case: if the police force makes an improvement in their weapons, criminals will too, so every action of one side will have a reaction from the other side. Gordon explains that the criminals caught by Batman, were dangerous but ordinary, as well as their arms and modus operandi. Of course, with the arrival of the hero (or vigilante?) their weapons are inadequate and are easily defeated. In this context comes the escalation in the form of the Joker (Heath Ledger). Intelligent, clever and definitely an opponent very dangerous capable of disasters of nightmarish proportions, as was seen later in the sequel. Given this, the question arises: Is Batman the cause of the rise of the Joker? If viewed from the perspective of the escalation effect, the joker is the natural response from criminal force to the new force of order embodied by Batman. On the other hand, it could be argued that the Joker would have emerged anyway without the prior existence of Batman, but at least in the movie, the argument favours the hypothesis of escalation effect. Before an avengerwho uses extraordinary methods, the escalation effect is reflected in a criminal who uses extraordinary methods.

Another approach in the analysis of escalation effect is shown in the film The Untouchables (Brian de Palma, 1987), particularly in the scene between Sam Malone (Sean Connery) and Eliot Ness (Kevin Costner), inside a church whereNessasks Malone to help him in the capture of Al Capone (Robert De Niro). In that moment, Malone tests what is willing to do ness to achieve his objective. When Ness tells him that he will do anything in his power to catch Capone, Malone explains his particular vision that definitely fits into the escalation effect hypothesis. If criminals pull a knife, the response from the police is to use a pistol; if criminals sent a member of the police to the hospital, the answer is to send one of the criminals to the morgue. Almost like Newton's third law: to every action there is an equal and opposite reaction. Maybe that is why in a later scene, when the Untouchables are about to strike first, Sam asks Ness for the last time if he is willing to go till the end and accept the consequences of the escalation effect that he started. As illustrated by the film, the escalation effect resulted in a progressive deterioration of the situation, until it reached a point of no return. Finally, a party won, but a big sacrifice was necessary, as Malone had foreseen in a cruel irony of destiny.

Although in the two examples the parties involved are criminals versus villains, the objective of this paper is to highlight that the escalation effect can occur in many situations and with different participants. A concrete example is the Cold War. In the conflict between the United States (USA) And the Union of Soviet Socialist Republics (USSR), the escalation effect was present at various levels and dimensions. The most visible in the military field. Both USA and the USSR were involved in an arms race in which the announcement of a new weapon by one side, was responded by the other side with another military-technological advance. In this case, the escalation effect is related to zero-sum game (the gain of one is the loss of another) and the domino effect. If a country adopted the ideology of one side, there had to be a reaction from the other side to continue the escalation, otherwise, as explained by the domino effect, the surrounding countries will also tend to adopt the ideology of its neighbour. Fortunately, in this case it did not reach a point of no return, although tension was dormant at this time and there were constant fears that a direct confrontation would erupt caused by the escalation effect.

Perhaps the key point was precisely that the escalation effect was based in only one level like the military but several, like the economic and those related with the Soft Power (the dimension proposed by Joseph Nye). The economic outlook is associated with the assumption that the competing ideologies in the Cold War were based on its economic model. In that sense one side had to react to any sign of economic strength from the opposing side. Less evident but also important are the levels related with soft power, represented by the culture, science, technology and even sport. For example, in the Olympic Games during the Cold War era, there was a confrontation between communist countries versus capitalist, especially USA. The escalation effect is given by the fact that each side was willing to do anything to defeat the other side. However, as in The Untouchables, the victory was charging a high price. Just look at the athletes of that time and the terrible consequences on their bodies and health, in some cases irreversible due to the "extra" aids to enhance their performance. There are other fields in the Cold War that can be analysed from the perspective of the escalation effect like the space race. The important thing is that this phenomenon occurred with different intensities and nuances in the Cold War and perhaps that's why it did not was fully developed in the military field.

November 14, 2009

The Essay, as a boxing metaphor

Julio Cortazar said once that, as in boxing, "the novel always wins by points, while short tales must win by knock-out." In that context, I was wondering this: Does the essay as a literary genre fit into the boxing metaphor? And if so, how would it? I think it is not ridiculous to talk about the essay as a boxing match won by a decision of the judges. In this case the readers would be the judges. That is, they stop being contenders to become analysts of the arguments that ultimately make them take a stand on what they read.

I believe the essay is just that, a presentation of arguments on any particular issue that asks the readers to take sides and develop judgments. As well as judges of a fight, in the essay, readers produce subjective judgments on the arguments presented to them and, in one way or another, take a position, assess, decide and reach a verdict which, as in boxing, not always is unanimous, and maybe that's what's fascinating about the essay: not to leave anyone indifferent, or one is convinced by the arguments or is not, or takes the position of the essayist or goes in an opposite direction.

For this reason, I consider that the essay is important in both form and substance; it is not enough to expose some arguments, it is necessary also to mold them, aligning and presenting them according to the target audience because, at the end, it is the one who approves if the essay met its objectives. But unlike in a boxing fight, if you give a good argumentative fight, as an essayist, you will have already won at the onset.

November 03, 2009

Market: Traffic light regulation

One of the issues that historically has generated more debate in the study of economic theory is the market performance. It is an issue that polarizes and generates radicalism, as it is central to the quest for an answer to why some countries develop economically, and others do not. Faced with this mystery, two basic propositions have been set: there are those who argue that the state or government should monitor the functioning of the market to regulate prices and the goods or services that are traded there. On the other hand, there are those who say that the market should operate without any control by the government and that simply the forces of supply and demand will determine the performance level of the market. 
Both positions clearly formulate arguments as to why one proposal is valid and the other proposal is not. . And so, historically, economic analysts have opted for one of those two proposals to determine the reasons there is growth and economic development of countries. As noted, both positions are located in the opposite poles of economic policy, specifically in relation to the dynamics of the state in regard to the market.
From this introductory part, one can then formulate an alternative hypothesis based on the premise of Aristotelian virtue. Aristotle argued that virtuous behavior observed a balance between two extremes that express opposing characteristics: excess and deficiency. In the case of the market and the state, the aims are given by the proposed total regulation of the state towards the market and its opposing pole which proposes zero intervention. In this context, why not talk then of an Aristotelian approach where the state is present but gives broad leeway to autonomous operation of the market. In other words: a virtuous performance of the market that does not tilt to one of the two extremes. One argument in support of this hypothesis, as in many of the themes of social sciences, is the use of simile. The simile is understood as an analogy in which the related elements are presented as equal in terms of a quality. In this case, the simile that is intended to be depicted is the market with the roads and traffic in a city.

The markets would be understood as the routes that the government has designed for “automobiles” (market players, suppliers and applicants for goods and services); there they can interact. In addition, an important element in this analysis is that just as not all people have the ability to have a car and drive on the streets, not all market players may have their own business, so for them, as employees,to be able to move (to interact in the market) necessitates mass transportation. . In this context, the point at which clarity can be at its best is the metaphor of traffic lights and traffic signals. These devices are ready to report, prevent and regulate the operation of transit in a city. In normal operation, it is assumed that all people know and respect the signs and traffic lights and the organization of these is available to increase the flow and efficiency in transport.

In that vein, moving this analysis to the functioning of the market, state intervention implies that the State would be responsible for directing and in some cases restricting the way motorists are mobilized in the city, practically telling them where to be and to dictate where they should go, meaning, as a result of this, that people would have to move their cars as they are imposed by the government regardless of whether they want to or can do so. The other aim would be given by the case where there are roads but with little or no regulation and each motorist is free to decide where to go without any indication or restriction. To understand the consequences this would entail simply observing a high flow of vehicular crossing at an intersection where the traffic lights have been damaged: it is total chaos and each person seeking his own interest does not act as predicted in Adam Smith's theory of the invisible hand, but increasingly entangles traffic and hampers mobility. 
In the case of market performance, in this example we show that total freedom generates chaos because the market is far from perfect and can cause damage to some of the players who move in it. For this reason, the best operation f traffic in a city is where motorists have full autonomy and freedom to move wherever they want in their vehicles, but at the same time respecting the laws and signals that the government has arranged to operate traffic, efficiently and smoothly. 
In conclusion, for a proper functioning of the market, there is no need to think in terms of a dilemma with extreme positions, but the idea is not outlandish of a balance or middle ground between total regulation versus absolute freedom of the market. In Aristotle’s words, a virtuous intervention that seeks a balance between these two extremes, and that, combined with the simile exposed, would seek to form a market of regulatory traffic li

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