Saturday, April 7, 2007

Russell on The American System, Schumpeter and Regulatory Standardization

Andrew L. Russell, Johns Hopkins, has posted a new essay, The American System: A Schumpeterian History of Standardization. The importance of Joseph Schumpeter is not as apparent from the abstract as from the essay itself. Russell begins his essay, the second in a series, this way:
Despite writing over 50 books and articles and spending almost two decades as an influential Harvard professor of economics, most of us are familiar with Joseph Schumpeter only through a short passage in his 1942 book, Capitalism, Socialism, and Democracy. In this passage, as I discussed in the first essay in this series, Schumpeter emphasized the dynamic aspects of capitalism. In Schumpeter’s view, capitalism is driven by a process 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."
In my first essay, I discussed how this "essential fact" can be seen clearly in the history of standardization across three Industrial Revolutions. Standardization provided stability for manufacturing and for building networks; yet, entrepreneurs and engineers developed innovations that upset this stability by introducing new products based on new standards. Standardization played a central role in the perpetual tension between the old and the new.
Schumpeter understood the dynamic characteristics of the economy as well as any thinker in the twentieth century. For example, when we consider the changes in standards used for telecommunications over the past thirty years, Schumpeter looks positively clairvoyant: we no longer rely on the Bell System to lease black telephones to us; instead, we choose from dozens of competing wired and wireless telephones that we use to listen to music, watch TV shows, or read the news. AT&T has been chopped up, sold, partially reassembled, and re-branded; the new telecom giants and would-be giants include the likes of Qualcomm, Skype, Vonage, and Google. "Creative destruction" indeed!

We might expect that the man who introduced the concept of creative destruction would have anticipated that innovation and entrepreneurship would dominate American capitalism in the late twentieth century. In fact, he predicted the opposite. The central claim of Capitalism, Socialism, and Democracy may come as quite a shock to those who have not perused its dense prose. Schumpeter stated this central claim with uncharacteristic brevity: "Can capitalism survive? No, I do not think it can."
What should we make of this unsettling prediction? This series of essays is based on the premise that the process of standardization is both a microcosm of the American style of capitalism as well as an index for measuring who is at the helm of the essential processes of industrial production and innovation.

Russel's abstract for essay #2 is here:
While governments as far back as the ancient Egyptians have implemented industry standards, their economic importance grew with the spread of industrialization. Throughout the 1800s, the rise of nationalism, a greater emphasis on accuracy and precision science, and the steady march of industrialization further underlined the importance of standards for establishing competitive advantages in the industrial age. In the Information Age, The U.S. government has played specific roles in the system of standardization: investment and leadership in basics standards to relieve some financial burden from firms; specific research and development funding for information technology; and policies that support standards built through industry consensus. While a few exceptions exist where the U.S. government has played a direct role in standards setting, policymakers have preferred to rely on standards set by private firms and collaboration. This market-oriented approach to industrial standards greatly increases the chances of such standards being widely adopted and implemented.

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