214. What Keynes and Schumpeter thought about time
A curious phenomenon is occurring at the present time in the consumer
market. In America and England, two countries in which economic growth
seems to be powering forward in the last quarter (especially in America)
and in which interest rates are very low, retail sales are not responding
to anything like the same extent. This may partly be due to the fact that
the average customer in these two countries is strapped with high credit
card debts, but I have the feeling that this is more general -- that it
includes the middle-class customer, too. I have no hard evidence for
believing this. It is a feeling I have in reading general articles in the
press, seeing the junk mail coming through the letter-box, reading
economic journalists -- it's something in the air, but the scent is quite
strong. If this is happening it might only be temporary but somehow I
don't think so.
It's a time factor again. Two of the greatest names in economics of the
last century, Keynes and Schumpeter, both thought that time was an
important factor in the scheme of things. John Maynard Keynes confidently
forecast that, with a steady 2% of economic growth and the constant
introduction of innovative time-saving machinery, then the average
individual would only need to work two or three hours a day within a
decade or two. Well, that certainly hasn't happened. Keynes would be
incredulous if he discovered that the average factory worker was working
between 45 and 50 hours a week now -- much as he did in the 1930s -- and,
even more surprisingly, that the average professional and managerial
worker is, if anything, working twice as many hours a week -- say, about
50-55 hours -- than he did in his day. For Keynes, the present day should
have been times of luxury and leisure
Joseph Schumpeter thought much the same, too -- though he foresaw quite
different consequences of increased leisure. He thought that the most
relaxed classes of all -- the middle-classes and intelligentsia -- would
have enough time to start to question the moral framework of capitalism.
He laid all this out in his majestic work, Capitalism, Socialism and
Democracy. Capitalism, he suggested, would destroy itself because its
prime actors would begin to ask questions about income inequality,
justice, pollution and so on. Schumpeter didn't believe that Capitalism
would survive.
I don't like the term Capitalism because it has gained pejorative
overtones since Schumpeter's day. I'd prefer to be less ad hominem
and use the term Consumerism instead. After all, we are all
consumers! But I also think that Consumerism will fail for temporal
reasons. But this time, not because of too much spare time on the part of
the trend-setting intelligentsia but too little.
There is a golden nugget in the following article about digitalisation
and its consumer goods -- which, incidentally, are all embellishments of
existing goods and are therefore not stratum goods. They start with
modest profit margins and don't produce vast swathes of further
investment. The aperçu occurs right at the end where Simon London refers
to Seth Godin's book, Purple Cow, which I haven't yet read but
intend to after reading this piece.
Seth Godin makes a very acute and, I think, highly significant,
observation which bears directly on my hypothesis. This is that that the
initiatory class of consumers is no longer a sitting duck for marketing
people. They haven't the time any longer to sit around and be bathed in a
plenitude of advertising from their TVs, or full-page ads in their
newspapers or the big advertising hoardings in public places. These
people -- the trend-setters -- have now learned to take not any notice.
They have too many other things to do, have too much on their mind. (As I
read my daily newspaper, I often come across an indication that a
double-page spread is next. I don't even turn the page to find out what
the advertisment is all about or the firm that is advertising whatever it
is. I simply jump two pages forward. That double-page never sees the
light of my consciousness. I am sure I am not alone.)
Instead, Seth Godin maintains, the discriminating consumer (that is, the
person with money) seeks out the necessary information about a desirable
product he wants for himself. If there is to be an all-singing
all-dancing stratum good which will stimulate the developed economy into
a new surge of consumerist demand then it will probably hit the producer
by surprise. We have indications of something similar to this already.
The MP3, for example. This never was a stratum good because it was priced
low from the start and therefore reached massive sales within months. But
it was never advertised. Its availability was spread by word of mouth.
Another reason why it was not a stratum good is that it didn't exact more
time for its use from the consumer. In fact, by being able to record
music directly from the Internet (and usually just one track from a whole
90-minute CD) without having to traipse into town and browse in a shop,
the consumer was saving time.
Both of the blockbuster stratum goods of the last century -- the car and
the TV -- made huge inroads into the spare time of the consumer. I am
sure that there are going to be large numbers of new digital goods in the
coming years and all sorts of specialised goods but they are all going to
be superior versions of spending time which is already being spent. There
is no more spare time for the sort of stratum goods which will boost
economic growth for much longer.
Keith Hudson
<<<<
DIGITAL DISCOMFORT: COMPANIES STRUGGLE TO DEAL WITH THE 'INEVITABLE
SURPRISE' OF THE TRANSITION FROM ATOMS TO BITS
To prosper from digitisation, businesses may have to be bold in
identifying new opportunities and devise more inventive ways to catch
customers
Simon London
Type "digitisation" into Amazon.com's new Search Inside The
Book feature and you get back a list of 1,176 titles. Along with the
usual roster of authors and publishers, you also get to browse pages
relevant to the search.
Before deciding whether to buy Stan Gibilisco's Teach Yourself
Electricity and Electronics (McGraw-Hill, 3rd Edition, 2001) you can
read page 510 which contains a passing reference to digitisation as a
prelude to a treatise on digital signal processing.
Too arcane? Then how about page 180 of Straight from the Gut, Jack
Welch's managerial memoir? Or pages 40, 156, 211 and 221 of Best
Practices in Planning and Management Reporting by David
Axson?
The new search feature is in itself a reminder that, more than a decade
after digitisation became a buzzword, its impact is being felt in new and
different ways. By scanning every page of 120,000 volumes -- 33m pages in
total -- Amazon has for the first time brought a significant chunk of the
English language book catalogue into the digital domain.
While Amazon has taken precautions against piracy -- the electronic
facsimiles are virtually impossible to print or download -- the long-term
implications for authors, publishers and rival booksellers are profound.
As with other media, once books are digitised they become not only easier
to search but also easier to copy and share.
The wider point is that while industries ranging from travel to
securities trading have already been transformed by the transition
"from atoms to bits" -- a phrase coined by Nicholas Negroponte,
head of the Media Lab at the Massachusetts Institute of Technology --
other sectors are only now starting to feel the impact.
Many of the business and social stories of 2004 will revolve around the
impact of digitisation on, among others, broadcast television,
conventional telephony, publishing, the motion picture industry, health
and education.
"People tend to confuse the secular trend [digitisation] with the
cyclical phenomenon of the dotcom bubble," says Gary Hamel, an
author and consultant on corporate strategy. "It is clear to me that
the secular trend remains intact."
For evidence, look at the business pages. Digital discomfort is
widespread: in Kodak's cathartic decision to focus its resources on
digital imaging; in the record industry's attempts to regain control
through the courts of digital music distribution; in the challenge posed
to telecommunications companies by internet-based telephony; in the
collision of consumer electronics companies such as Sony and Matsushita
with the big names of personal computing -- Dell, Hewlett-Packard,
Gateway and Apple.
Then there are companies that are finding ways to harness digital
technology to add value to their products. Examples here might include
OnStar, General Motor's in-car telematics service or the global
positioning system (GPS) service that enables users of John Deere farm
equipment to plough or spray to an accuracy of two inches.
"This is not just about the transition from atoms to bits,"
says John Hagel, a Silicon Valley-based consultant. "It isdigitally
e3nhanced atoms."
The obvious uestion is why, given the progress of digital technology,
over at least 30 years, digitisation continues to catch companies by
surprise. After all, the force behind digitisation is Moore's Law, which
predicts a doubling in the number of transistors on a chip every 18
months. This trajectory has more or less held since the 1960s, when it
was first propounded by Gordon Moore, Intel co-founder.
The mobile camera-phone, one of this year's consumer gadgets, is a prime
illustration of Moore's Law at work: billions of transistors in an
affordable, hand-held package, enabling digitisation and high-speed
transmission of both voice and images.
If the sales success of camera phones this year took some companies by
surprise -- step forward Motorola, which was both late to the market and
failed to secure sufficient component supplies to meet demand -- it was
surely an "inevitable surprise", the phrase used by Peter
Schwartz, the author, to describe sudden but foreseeable
events.
In the same category fall other instruments of digitisation, including
the sub-$400 (£230), five-megapixel cameras that have led the consumer
stampede this year away from film-based photography, the affordable
40-gigabyte disk drives that power the latest generation of portable
digital music players and the steady improvements in "voice-over
internet protocol" (Voip) telephony.
Why did companies fail to see this coming? The trite answer is that they
often did -- but were too closely wedded to existing products to
respond.
As Clayton Christensen, a professor at Harvard Business School, points
out, there is more than managerial myopia at work.
Given the choice between investing in a proven technology in a known
high-margin business where you have clear competitive advantage or
investing in an unproven technology in a new and probably low-margin
business where sources of competitive advantage are in flux, it is
perfectly rational to choose the former. This is especially true if the
unproven technology threatens to cannibalise your existing, lucrative
business.
The 30-year struggle of Xerox to come to terms with digitisation is a
textbook example of how these powerful forces can play out. Senior
managers realised in the late-1960s that Xerox's dominance of
photocopying, an analogue technology it pioneered, would expire along
with its patent portfolio. In 1970 the group opened its Palo Alto
Research Centre (Parc), in California's Silicon Valley, to search growth
opportunities in the emerging digital realm of "office
automation".
Yet, in the ensuing three decades, Xerox managers decided against making
risky bets on the new-fangled computer and networking technology that
Parc scientists had invented.
Meanwhile, rivals such as Apple Computer and 3Com commercialised
breakthroughs including the graphical user interface and ethernet
networking. At Xerox, xerography took precedence.
These forces equally help explain why Motorola in the mid-1990s resisted
the transition from analogue to digital mobile phones -- a stragetic
misstep from which it has arguably never fully recovered.
More recently, they help illuminate the predicament of Kodak, which long
ago recognised the opportunities and threats from digital imaging but
waited until this year to make a decisive break with chemical-based
film.
There is more to navigating the digital revolution than plotting
transistor-counts on a graph. The transition from atoms to bits is also
dictated by the less predictable progress of telecoms bandwidth and
compression, the technologies that allow digitised content to be stored
and shared.
Indeed, the rate of adoption of digital photography has been dictated not
only by price-per-pixel in cameras but also by the spread of e-mail,
broadband internet connections and affordable home printing.
Similarly, downloading music from the internet achieved mass popularity
only with the arrival of MP3, a compression technology that offers a
reasonable compromise between musical fidelity and convenience.
Hollywood now faces a similar challenge in the form of DivX, a
compression "codec" that can squash digital video into files
small enough to be stored, copied and shared. Is DivX the MP3 of
Hollywood? Or will Tinseltown be spared for another few years?
"One of the things we have learnt about technological progress is
that we often get the direction right but the timing hopelessly
wrong," says Robert Mittelstaedt, vice-dean at Wharton Business
School at the University of Pennsylvania.
----
About the general direction, however, there can be no doubt. Digitisation
is in full swing. Companies that prosper will be those that anticipate
how this will effect not only costs, products and processes but also
customer expectations and attitudes.
"The least appreciated effects of digitisation are the fragmentation
of customer attention," says Mr Hamel. "Customers become harder
to find and more difficult to keep."
In Purple Cow, among this year's best-selling business books, Seth
Godin argues that the 21st-century consumer is too busy, and faces too
many choices, to respond to conventional marketing tactics.
In particular, he argues that people have ceased paying attention to
advertisements on television or in print. "The old rule was this:
create safe, ordinary products and combine them with great marketing. The
new rule is: create remarkable products that the right people seek
out," he says.
If Mr Hamel and Mr Godin are correct, companies will have to rethink
their supply chains (how goods are made) and their demand chains (how
goods are marketed and sold).
Moreover, this puts in jeopardy the fate of all companies, not only those
whose products are being digitised.
Sceptics will object that there is nothing new in any of this. Prophets
have been sounding a digital death knell for mass-market advertising
since the mid-1990s. Indeed, the term "viral marketing", often
used to describe the alternative word-of-mouth approach, was coined in
1997 to describe the spread of Hotmail, the original free e-mail
service.
As with digitisation itself, however, the fact that the message is
familiar does not mean either that it is wrong or that it can be safely
ignored. Want proof? In Amazon's Search Inside The Book a search
for "business failure" yields no fewer than 69,267
results.
Financial Times -- 18 December 2003
>>>>
Keith Hudson, Bath, England,
<www.evolutionary-economics.org>
