…

Apple employs 43,000 people in the United States and 20,000 overseas, a small fraction of the over 400,000 American workers at General Motors in the 1950s, or the hundreds of thousands at General Electric in the 1980s. Many more people work for Apple’s contractors: an additional 700,000 people engineer, build and assemble iPads, iPhones and Apple’s other products.

But almost none of them work in the United States. Instead, they work for foreign companies in Asia, Europe and elsewhere, at factories that almost all electronics designers rely upon to build their wares.

…

Apple executives say that going overseas, at this point, is their only option. One former executive described how the company relied upon a Chinese factory to revamp iPhone manufacturing just weeks before the device was due on shelves. Apple had redesigned the iPhone’s screen at the last minute, forcing an assembly line overhaul. New screens began arriving at the plant near midnight.

A foreman immediately roused 8,000 workers inside the company’s dormitories, according to the executive. Each employee was given a biscuit and a cup of tea, guided to a workstation and within half an hour started a 12-hour shift fitting glass screens into beveled frames. Within 96 hours, the plant was producing over 10,000 iPhones a day.

“The speed and flexibility is breathtaking,” the executive said. “There’s no American plant that can match that.”

‘I Want a Glass Screen’

In 2007, a little over a month before the iPhone was scheduled to appear in stores, Mr. Jobs beckoned a handful of lieutenants into an office. For weeks, he had been carrying a prototype of the device in his pocket.

Mr. Jobs angrily held up his iPhone, angling it so everyone could see the dozens of tiny scratches marring its plastic screen, according to someone who attended the meeting. He then pulled his keys from his jeans.

People will carry this phone in their pocket, he said. People also carry their keys in their pocket. “I won’t sell a product that gets scratched,” he said tensely. The only solution was using unscratchable glass instead. “I want a glass screen, and I want it perfect in six weeks.”

After one executive left that meeting, he booked a flight to Shenzhen, China. If Mr. Jobs wanted perfect, there was nowhere else to go.

For over two years, the company had been working on a project — code-named Purple 2 — that presented the same questions at every turn: how do you completely reimagine the cellphone? And how do you design it at the highest quality — with an unscratchable screen, for instance — while also ensuring that millions can be manufactured quickly and inexpensively enough to earn a significant profit?

The answers, almost every time, were found outside the United States. Though components differ between versions, all iPhones contain hundreds of parts, an estimated 90 percent of which are manufactured abroad. Advanced semiconductors have come from Germany and Taiwan, memory from Korea and Japan, display panels and circuitry from Korea and Taiwan, chipsets from Europe and rare metals from Africa and Asia. And all of it is put together in China.

…

For [Apple’s operations expert, Timothy D. Cook], the focus on Asia “came down to two things,” said one former high-ranking Apple executive. Factories in Asia “can scale up and down faster” and “Asian supply chains have surpassed what’s in the U.S.” The result is that “we can’t compete at this point,” the executive said.

The impact of such advantages became obvious as soon as Mr. Jobs demanded glass screens in 2007.

For years, cellphone makers had avoided using glass because it required precision in cutting and grinding that was extremely difficult to achieve. Apple had already selected an American company, Corning Inc., to manufacture large panes of strengthened glass. But figuring out how to cut those panes into millions of iPhone screens required finding an empty cutting plant, hundreds of pieces of glass to use in experiments and an army of midlevel engineers. It would cost a fortune simply to prepare.

Then a bid for the work arrived from a Chinese factory.

When an Apple team visited, the Chinese plant’s owners were already constructing a new wing. “This is in case you give us the contract,” the manager said, according to a former Apple executive. The Chinese government had agreed to underwrite costs for numerous industries, and those subsidies had trickled down to the glass-cutting factory. It had a warehouse filled with glass samples available to Apple, free of charge. The owners made engineers available at almost no cost. They had built on-site dormitories so employees would be available 24 hours a day.

The Chinese plant got the job.

“The entire supply chain is in China now,” said another former high-ranking Apple executive. “You need a thousand rubber gaskets? That’s the factory next door. You need a million screws? That factory is a block away. You need that screw made a little bit different? It will take three hours.”

In Foxconn City

An eight-hour drive from that glass factory is a complex, known informally as Foxconn City, where the iPhone is assembled. To Apple executives, Foxconn City was further evidence that China could deliver workers — and diligence — that outpaced their American counterparts.

That’s because nothing like Foxconn City exists in the United States.

The facility has 230,000 employees, many working six days a week, often spending up to 12 hours a day at the plant. Over a quarter of Foxconn’s work force lives in company barracks and many workers earn less than $17 a day. When one Apple executive arrived during a shift change, his car was stuck in a river of employees streaming past. “The scale is unimaginable,” he said.

Foxconn employs nearly 300 guards to direct foot traffic so workers are not crushed in doorway bottlenecks. The facility’s central kitchen cooks an average of three tons of pork and 13 tons of rice a day. While factories are spotless, the air inside nearby teahouses is hazy with the smoke and stench of cigarettes.

Foxconn Technology has dozens of facilities in Asia and Eastern Europe, and in Mexico and Brazil, and it assembles an estimated 40 percent of the world’s consumer electronics for customers like Amazon, Dell, Hewlett-Packard, Motorola, Nintendo, Nokia, Samsung and Sony.

“They could hire 3,000 people overnight,” said Jennifer Rigoni, who was Apple’s worldwide supply demand manager until 2010, but declined to discuss specifics of her work. “What U.S. plant can find 3,000 people overnight and convince them to live in dorms?”

In mid-2007, after a month of experimentation, Apple’s engineers finally perfected a method for cutting strengthened glass so it could be used in the iPhone’s screen. The first truckloads of cut glass arrived at Foxconn City in the dead of night, according to the former Apple executive. That’s when managers woke thousands of workers, who crawled into their uniforms — white and black shirts for men, red for women — and quickly lined up to assemble, by hand, the phones. Within three months, Apple had sold one million iPhones. Since then, Foxconn has assembled over 200 million more.

Foxconn, in statements, declined to speak about specific clients.

…

Another critical advantage for Apple was that China provided engineers at a scale the United States could not match. Apple’s executives had estimated that about 8,700 industrial engineers were needed to oversee and guide the 200,000 assembly-line workers eventually involved in manufacturing iPhones. The company’s analysts had forecast it would take as long as nine months to find that many qualified engineers in the United States.

In China, it took 15 days.

…

Manufacturing glass for the iPhone revived a Corning factory in Kentucky, and today, much of the glass in iPhones is still made there. After the iPhone became a success, Corning received a flood of orders from other companies hoping to imitate Apple’s designs. Its strengthened glass sales have grown to more than $700 million a year, and it has hired or continued employing about 1,000 Americans to support the emerging market.

But as that market has expanded, the bulk of Corning’s strengthened glass manufacturing has occurred at plants in Japan and Taiwan.

“Our customers are in Taiwan, Korea, Japan and China,” said James B. Flaws, Corning’s vice chairman and chief financial officer. “We could make the glass here, and then ship it by boat, but that takes 35 days. Or, we could ship it by air, but that’s 10 times as expensive. So we build our glass factories next door to assembly factories, and those are overseas.”

Corning was founded in America 161 years ago and its headquarters are still in upstate New York. Theoretically, the company could manufacture all its glass domestically. But it would “require a total overhaul in how the industry is structured,” Mr. Flaws said. “The consumer electronics business has become an Asian business. As an American, I worry about that, but there’s nothing I can do to stop it. Asia has become what the U.S. was for the last 40 years.”

…

…

There are two widely circulated narratives to explain what is going on. The Keynesian narrative is that there has been a major drop in aggregate demand. According to this narrative, the slump can be largely cured by using monetary and fiscal stimulus.

The main anti-Keynesian narrative is that businesses are suffering from uncertainty and over-regulation. According to this narrative, the slump can be cured by having the government commit to and follow a more hands-off approach.

I want to suggest a third interpretation. Without ruling out a role for aggregate demand or for the regulatory environment, I wish to suggest that structural change is an important factor in the current rate of high unemployment. The economy is in a state of transition, in which the middle-class jobs that emerged after World War II have begun to decline.

The Great Transition from 1930 to 1950

Between 1930 and 1950, the United States economy underwent a Great Transition. Demand fell for human effort such as lifting, squeezing, and hammering. Demand increased for workers who could read and follow directions. The evolutionary process eventually changed us from a nation of laborers to a nation of clerks.

The proportion of employment classified as “clerical and kindred workers” grew from 5.2 percent in 1910 to a peak of 19.3 percent in 1980. (However, by 2000 this proportion had edged down to 17.4 percent.)1 Overall, workers classified as clerical, professional workers, technical workers, managers, officials, and proprietors exceeded 50 percent of the labor force by 2000.

Corresponding declines took place in the manual occupations. Workers classified as laborers, other than farm or mine, peaked at 11.4 percent of the labor force in 1920 but were barely 6 percent by 1950 and less than 4 percent by 2000. Farmers and farm laborers fell from 33 percent of the labor force in 1910 to less than 15 percent by 1950 and only 1.2 percent in 2000.

The advent of the tractor and improvements in the factory rapidly reduced the demand for uneducated workers. By the 1930s, a marginal farm hand could not produce enough to justify his employment. Sharecropping, never much better than a subsistence occupation, was no longer viable. Meanwhile, machines were replacing manufacturing occupations like cigar rolling and glass blowing for light bulbs.2

World War II also demonstrated the increase in the relative importance of white-collar workers and machines. With all due respect to GI Joe and Rosie the Riveter, it could be that Cynthia the Clerk is a more appropriate symbol of the war effort, as logistics and communications came to be dominant factors. Although Winston Churchill famously praised “the few” who flew airplanes during the Battle of Britain, historians emphasize the role played by the communications and control systems on the ground, staffed to a considerable extent by women, in making the British victory possible. Female clerks also played a crucial role in the process of decoding German messages—the famous Enigma intercepts.

The structural-transition interpretation of the unemployment problem of the 1930s would be that the demand for uneducated workers in the United States had fallen, but the supply remained high. The high school graduation rate was only 8.8 percent in 1912 and still just 29 percent in 1931. By 1950, it had reached 59 percent.3 With a new generation of workers who had completed high school, the mismatch between skills and jobs had been greatly reduced.

What took place after the Second World War was not the revival of a 1920s economy, with its small farming units, urban manufacturing, and plurality of laborers. Instead, the 1950s saw the creation of a new suburban economy, with a plurality of white-collar workers. With an expanded transportation and communications infrastructure, businesses needed telephone operators, shipping clerks, and similar occupations. If you could read, follow simple instructions, and settle into a routine, you could find a job in the post-war economy.

The trend away from manual labor has continued. Even within the manufacturing sector, the share of production and non-supervisory workers in manufacturing employment went from over 85 percent just after the Second World War to less than 70 percent in more recent years. To put this another way, the proportion of white-collar work in manufacturing has doubled over the past 50 years. On the factory floor itself, work has become less physically demanding. Instead, it requires more cognitive skills and the ability to understand and carry out well-defined procedures.

The Current Transition

As noted earlier, the proportion of clerical workers in the economy peaked in 1980. By that date, computers and advanced communications equipment had already begun to affect telephone operations and banking. The rise of the personal computer and the Internet has widened the impact of these technologies to include nearly every business and industry.

The economy today differs from that of a generation ago. Mortgage and consumer loan underwriters have been replaced by credit scoring. Record stores have been replaced by music downloads. Book stores are closing, while sales of books on electronic readers have increased. Data entry has been moved off shore. Routine customer support also has been outsourced overseas.

These trends serve to limit the availability of well-defined jobs. If a job can be characterized by a precise set of instructions, then that job is a candidate to be automated or outsourced to modestly educated workers in developing countries.

The result is what David Autor calls the polarization of the American job market. Autor and various research collaborators have documented a number of findings that reflect this polarization:4

• In recent decades, wage and employment growth have both been lowest at the middle segment of the skill distribution. Wage improvements have tended to be concentrated at the high end, and employment gains have tended to be largest at the low end of the skill distribution.

• This particular symptom of polarization is also prevalent in OECD countries other than the United States.

• In the United States, this polarization was exacerbated by the economic downturn. While both high- and low-skill jobs have held steady, the brunt of the recession has been borne by mid-skill workers. For example, growth in employment in sales was 54 percent from 1979 to 1989, 14 percent from 1989 to 1999, 4 percent from 1999 to 2007, and -7 percent from 2007 to 2009. Employment in sales was a key component of upward economic mobility after World War II, but technological change and globalization appear to have stalled or perhaps reversed this engine of middle-class affluence.

• From 1980 to 2007, real wages for male workers with only a high school degree fell by 12 percent, real wages of male workers with only a college degree rose by 10 percent, and real wages of males with post-graduate degrees increased by 26 percent. Female workers show a similar pattern, although wage gains were generally higher for females over this period.

Using the latest Census Bureau data, Matthew Slaughter found that from 2000 to 2010 the real earnings of college graduates (with no advanced degree) fell by more in percentage terms than the earnings of high school graduates. In fact, over this period the only education category to show an increase in earnings was those with advanced degrees.

The outlook for mid-skill jobs would not appear to be bright. Communication technology and computer intelligence continue to improve, putting more occupations at risk.

For example, many people earn a living as drivers, including trucks and taxicabs. However, the age of driver-less vehicles appears to be moving closer.

Another example is in the field of education. In the fall of 2011, an experiment with an online course in artificial intelligence conducted by two Stanford professors drew tens of thousands of registrants. This increases the student-teacher ratio by a factor of close to a thousand. Imagine the number of teaching jobs that might be eliminated if this could be done for calculus, economics, chemistry, and so on.

It is important to bear in mind that when we offer a structural interpretation of unemployment, a “loss of jobs” means an increase in productivity. Traditionally, economists have argued that productivity increases are a good thing, even though they may cause dislocation for some workers in the short run. In the long run, the economy does not run out of jobs. Rather, new jobs emerge as old jobs disappear. The story we tell is that average well-being rises, and the more that people are able to adapt, the more widespread the improvement becomes.

…

Three future scenarios

The most optimistic scenario is the one I consider least likely. Under this scenario, the supply of workers adapts to changes in technology. In particular, this means a future with relatively fewer workers whose skills are limited to following directions in well-defined jobs. Instead, more workers will have the cognitive ability, initiative, and self-discipline to constantly update their skills, adapt to new technology, and to participate in the creative part of creative destruction. Under this scenario, economic growth will be very high, and median earnings will also be high.

I do not believe that this optimistic scenario will emerge through more spending on education or even with education reform. My reading of the research is that variations in education techniques lead to differences in outcomes that tend to be small and transitory.6

If the optimistic scenario does arise, I suspect it will be the result of discoveries in biology. Perhaps pharmacology will succeed where pedagogy fails.

Turning to more realistic scenarios, I see the desirability of the outcome depending on the extent to which institutions serve to ameliorate problems created by disparities in ability. At one extreme, charities and government will develop humane, rational approaches for providing for the needs of people who are disadvantaged in an economic environment where rewards are concentrated among those who are disciplined, self-directed learners with creative gifts. At the other extreme, collective institutions will be arenas in which elites compete for resources, even when they claim to be fighting on behalf of the disadvantaged.

I would assess our current situation as closer to the adverse scenario. Our government is very responsive to cries for bank bailouts or to pleas for subsidies coming from well-connected companies, large (General Motors) and small (Solyndra). That same government is much less likely to target assistance in a charitable fashion.

Economist Steve Allen calculated that a $447 billion spending plan could be used to pay all 14 million unemployed workers $32,000 a year to take low-paying or volunteer jobs.7 While there may be no practical way to implement Allen’s approach, it does illustrate the deficiencies in existing stimulus proposals. Even according to the most optimistic estimates, these create or save many fewer jobs per dollar spent.

My guess is that the more power is concentrated in governmental units, the less likely it is that our collective institutions will be geared toward achieving outcomes that are charitable and make efficient use of resources. Trying to get large sums of tax money past the grabbing hands of rent-seeking elites will be like trying to get a stagecoach full of gold past a horde of armed robbers.

Government’s role as an employer and as a regulator is likely to exacerbate earnings inequality going forward. Government pay scales and contract award policies tend to place a very high weight on formal academic credentials. This increases the advantages of advanced degrees both directly and indirectly. The more that government requires educational credentials, the greater the rewards to the providers of educational credentials. Of course, becoming a provider of educational credentials requires obtaining high credentials oneself.

I suspect that a more decentralized set of voluntary collective institutions would achieve better results. People are less likely to donate to institutions that provide windfalls only to elites, so that such organizations would lose out in a competitive environment. I believe that a scenario in which many people have dignified jobs and enjoyable lifestyles is more likely to emerge in an environment with decentralized voluntary charities than one with concentrated, coercive government.

To put this another way, I think it is possible that technocrats will be able to come up with programs that offer decent work and reasonable incomes for workers with modest skills. However, I have more faith in a process in which technocrats must compete for charitable donations than a process in which they compete for government power.

Kim Il Sung’s title Eobeoi Suryeong means not “Fatherly Leader”—a common rendering that encourages Martin to exaggerate the influence of Confucianism on the personality cult—but “Parent Leader,” the most feminine title the regime could get away with. As the country’s visual arts make clear, Kim was more a mother to his people than a stern Confucian patriarch: he is still shown as soft-cheeked and solicitous, holding weeping adults to his expansive bosom, bending down to tie a young soldier’s bootlaces, or letting giddy children clamber over him.

The tradition continues under Kim Jong Il, who has been called “more of a mother than all the mothers in the world.” His military-first policy may come with the title of general, but reports of his endless tour of army bases focus squarely on his fussy concern for the troops’ health and comfort. The international ridicule of his appearance is thus as unfair as it is tedious. Anyone who has seen a crowd of Korean mothers waiting outside an examination hall will have no difficulty recognizing Kim’s drab parka and drooping shoulders, or the long-suffering face under the pillow-swept perm: this is a mother with no time to think of herself.

When it comes to the Workers’ Party, the symbolism is even more explicit, as in this recent propaganda poem:

Ah, Korean Workers’ Party, at whose
breast only
My life begins and ends
Be I buried in the ground or strewn
to the wind
I remain your son, and again return to
your breast!
Entrusting my body to your
affectionate gaze,
Your loving outstretched hand,
I cry out forever in the voice of a child,
Mother! I can’t live without Mother!

It’s easy to imagine what Carl Jung would have made of all this, and he would have been right. Whereas Father Stalin set out to instill revolutionary consciousness into the masses (to make them grow up, in other words), North Korea’s Mother Regime appeals to the emotions of a systematically infantilized people. Although the propaganda may seem absurd at a remove, it speaks more forcefully to the psyche than anything European communism could come up with. As a result, North Korea’s political culture has weathered the economic collapse so well that even refugees remain loyal to the memory of Kim Il Sung.

…

It would appear that Kim knows just enough. The border with China remains so porous that even children often sneak back and forth, and yet no more than three or four percent of the population has chosen to flee for good. The regime obviously did the smart thing by publicly acknowledging the food shortage and then blaming it on American sanctions, instead of pretending there was no food shortage at all, as Stalin used to do.

The Dear Leader has also deftly exploited the tradition according to which Koreans care for their parents in old age: the masses are told that it is their job to feed him, not the other way around, and his famed diet of “whatever the troops are eating” is routinely invoked to shame everyone into working harder. Never has a dictator been such an object of pity to his people, or such a powerful source of guilt. In 2003 North Korean cheerleaders, living it up on a rare visit to a sports event in the South, responded to a rain-soaked picture of Kim by bursting into a hysterical lament that baffled their hosts.

…

Kim must also be aware that the infantilization of the people has come at a price. Away from Pyongyang’s carefully monitored tourist sites, North Korea is a much more raucous place than any dictator could be comfortable with. “One surprising thing,” Michael Breen writes in Kim Jong Il: North Korea’s Dear Leader (2004), “surprising because you expect robots, is … how frequently fights break out.” According to refugees, even women fight out their differences, and young female teachers are said to hit children the hardest.

This lack of restraint is a problem for many North Koreans trying to adjust to life in the South. Social workers complain that the refugees pick fights with strangers, and storm off jobs on the first day. “I’d have thought they’d be better at controlling themselves, coming from a socialist system,” is a common lament.

Why did a city like New York recover when a city like Detroit, which had a more durable industrial base, fell into blight and decay? The answer, Jacobs argues in The Economy of Cities, turns on the ability of a city’s inhabitants to innovate. Cities grow, she says, through a process she calls “import replacement.” This occurs when local tradesmen produce for themselves the goods and services they had previously been importing and then use the skills learned from this local production to create new products, which they can then export in great bulk.

Detroit, she notes, began as a port for shipping flour across the Great Lakes. Soon, local manufacturers were building their own steamships to make the lake crossings and got so good at it they began making ocean-going ships for use in other cities. This not only put money into local coffers, but supported the dozens of local engine-parts makers Henry Ford drew upon when he founded the Ford Motor Company.

But here’s the rub: the auto industry was so successful that once Ford arrived at his greatest innovation, the assembly line, the industry so dominated Detroit’s economy that there was no local market for further innovation, and, as Jacobs points out, it was only a matter of time before another city – in this case, cities in Japan – improved upon Ford’s ideas and made better, cheaper cars.

The Economy of Cities came out four years before the gas crisis that set Detroit’s long tailspin in motion, but it eerily predicts the dilemma the city faces today, in which a moribund auto industry, out-innovated by foreign competitors, had to be bailed out by the U.S. taxpayer to avoid collapse.

Like Detroit, New York began as a port city, but in New York’s case a principal byproduct of its shipping trade was a robust banking industry, which survived the city’s manufacturing collapse. Even as New York was begging for a bailout from the federal government in the mid-1970s, young hotshots like Ivan Boesky and Michael Milken, many of them children and grandchildren of immigrants who had filled the ghettos earlier in the century, were inventing new ways to own and finance large companies. Think of all the financial innovations of the last thirty years: junk bonds, hedge funds, leveraged buyouts, asset-backed securities, credit derivatives, subprime mortgage markets, and on and on.

Yes, bankers are evil, and, yes, the banking industry required a federal bailout even larger than that of the auto industry’s, but like it or not, New York is the safest large city in America, with a vital private sector and a buoyant real estate market, largely because the living, breathing organism we call Wall Street has spent the last thirty years innovating its way out of obsolescence.

How whole industries disappear

Take the story of Dell Computer and its Taiwanese electronics manufacturer. The story is told in the brilliant book by Clayton Christensen, Jerome Grossman and Jason Hwang, The Innovator’s Prescription:

Dell accepted the proposal because from a perspective of making money, it made sense: Dell’s revenues were unaffected and its profits improved significantly. On successive occasions, ASUSTeK came back and took over the motherboard, the assembly of the computer, the management of the supply chain and the design of the computer.

In each case Dell accepted the proposal because from a perspective of making money, it made sense: Dell’s revenues were unaffected and its profits improved significantly. However the next time, ASUSTeK came back, it wasn’t to talk to Dell. It was to talk to Best Buy and other retailers to tell them that they could offer them their own brand or any brand PC for 20% lower cost. As The Innovator’s Prescription concludes:

The US has lost or is on the verge of losing its ability to develop and manufacture a slew of high-tech products. Amazon’s Kindle 2 couldn’t be made in the US, even if Amazon wanted to:

• The flex circuit connectors are made in China because the US supplier base migrated to Asia.
• The electrophoretic display is made in Taiwan because the expertise developed from producting flat-panel LCDs migrated to Asia with semiconductor manufacturing.
• The highly polished injection-molded case is made in China because the US supplier base eroded as the manufacture of toys, consumer electronics and computers migrated to China.
• The wireless card is made in South Korea because that country became a center for making mobile phone components and handsets.
• The controller board is made in China because US companies long ago transferred manufacture of printed circuit boards to Asia.
• The Lithium polymer battery is made in China because battery development and manufacturing migrated to China along with the development and manufacture of consumer electronics and notebook computers.

An exception is Apple [AAPL], which “has been able to preserve a first-rate design capability in the States so far by remaining deeply involved in the selection of components, in industrial design, in software development, and in the articulation of the concept of its products and how they address users’ needs.”

…

Pisano and Shih have a frighteningly long list of industries of industries that are “already lost” to the USA:

Their list of industries “at risk” is even longer and more worrisome.

What’s to be done?

With such a complex societal problem, it’s hard not to start from Albert Einstein’s insight: “The significant problems that we have cannot be solved at the same level of thinking with which we created them.” Many actors will have to play a role.

• Company leaders: Business leaders need to recommit themselves to continuous innovation and the values and practices that are necessary to accomplish that. i.e radical management. As Pisano and Shih write: “Whether you’re the US firm IBM with a major research laboratory in Switzerland or the Swiss company Novartis operating in the biotech commons in the Boston area, sacrificing such a commons for short-term cost benefits is a risky proposition.”
• Accountants: Accountants need to get beyond the mental prison of cost accounting and embrace the thinking in throughput accounting that puts the emphasis on how companies can add new value, rather than just cutting costs.
• Management theorists and consultants: stop rearranging deck chairs on the Titanic of traditional management (e.g. by finding new and ingenious ways to cut costs) and start understanding and disseminating management theory that is fit for the 21st Century.
• Investors: Investors need to realize that the companies of the future are those that practice continuous innovation as Apple, Amazon and Salesforce, as compared to companies practicing traditional management, such Wal-Mart, Cisco or GE. Investors need to realize that short-term financial gains are ephemeral: the companies that will generate real value are those that do what is necessary to continuously innovate.
• Government: Government has a role to play in protecting and promoting fields of expertise or what Pisano and Shih call “the industrial commons”. Thus: “Government-sponsored endeavors that have made a huge difference in the past three decades include DARPA’s VLSI chip development program and Strategic Computing Initiative; the DOD’s and NASA’s support of supercomputers and of NSFNET (an important contributor to the Internet); and the DOD’s support of the Global Positioning System, to mention a handful.”
• Politicians: At a time of poisonously divisive political debate, in which candidates recite anti-government mantras and call for “getting government out of the way of the private sector”, it is time for serious politicians to step up and examine which parts of the private sector are fostering, and which parts are destroying, the economy of the country. They must stop embodying e.e. cummings definition of a politician as “an ass upon which everyone has sat except a man.”
• Economists: Economists need to realize that merely adding up the numbers is not enough. They have to look at the meaning behind the numbers. When they trumpet their finding that “Chinese goods are only 1% of the U.S. economy”, it’s akin to saying “we kept the house but gave away the keys.”

Is cost accounting the problem?

One reader (“justin431”) wrote:

This comment is in fact an illustration of the mental guide-rails generated by cost accounting. There is an automatic assumption that when faced with a market challenge the way to be more competitive is to cut costs. The possibility of adding more value is unconsciously eliminated.

It would be wrong though to say that cost accounting is the main cause of these problems. But it is a contributing factor. With decisions and thinking and values based on cost-accounting and short-term profits, Dell’s fate was sealed. If decisions and thinking and values had been based on how could Dell deliver more value to customers sooner, the outcome would not have been predetermined, as Apple has shown.

How to get employers to hire people who have already been out of work for too long? Traditional government solutions like job training have an absolutely dismal record. The only government solution to long-term unemployment we’ve ever found was to have World War II, and for various reasons, we’re probably not going to reauthorize that particular program.

One suggestion is to give them direct incentives to choose the long-term unemployed over those who are already in work, or out of work for only a short time. How? We could exempt new hires from both the employee and the employer sides of the payroll tax, one month for every month that they were unemployed.

The result is a direct wage subsidy of more than 10%. But it is a time-limited subsidy, and one carefully targeted to those who need it the most. By the time the tax relief expires, these workers will have been reintegrated into the labor force. This will cost the government something of course–but not nearly as much as supporting them on welfare, disability, or early retirement–or the prison system.

The United States should create a national microlending program positioned to provide ready access to capital to small business. It is widely acknowledged that small business represents the engine of job creation in this country. Small business accounts for approximately 50 percent of all private-sector jobs, and roughly 70 percent of all new jobs created in the past decade.

In today’s environment, banks have much less incentive to extend a traditional small-business loan ($5,000 to $25,000), because the relationship between the transaction costs associated with processing that loan and the return on that investment to the bank often doesn’t make economic sense. It’s all about opportunity cost.

For example, consider that the transaction costs associated with processing a $10,000 loan to a small business and a $5 million loan to a large business are roughly the same. Also recognize that the return on investment to the bank (that is, the interest paid on the loan) increases proportionally with the size of the loan–the larger the loan, the more interest income generated relative to the “cost” of issuing and servicing the loan. Therefore, whether you are a large public bank with a fiduciary responsibility to shareholders or a small credit union responsible to its membership, there is an incentive to focus on larger and thus more profitable loans. Banks are in business to make a profit.

Research highlights that most small businesses, especially over the first five years of operation, require only small and incremental infusions of capital to sustain positive growth. A national microlending program positioned to provide capital infusions of $1,000-$20,000 to small business–created as a partnership between government and community-based lenders–would represent an compelling channel for small businesses to access start-up and growth capital.

It has become increasingly popular to speak of racial and ethnic diversity as a civic strength. From multicultural festivals to pronouncements from political leaders, the message is the same: our differences make us stronger.

But a massive new study, based on detailed interviews of nearly 30,000 people across America, has concluded just the opposite. Harvard political scientist Robert Putnam — famous for “Bowling Alone,” his 2000 book on declining civic engagement — has found that the greater the diversity in a community, the fewer people vote and the less they volunteer, the less they give to charity and work on community projects. In the most diverse communities, neighbors trust one another about half as much as they do in the most homogenous settings. The study, the largest ever on civic engagement in America, found that virtually all measures of civic health are lower in more diverse settings.

“The extent of the effect is shocking,” says Scott Page, a University of Michigan political scientist.

The study comes at a time when the future of the American melting pot is the focus of intense political debate, from immigration to race-based admissions to schools, and it poses challenges to advocates on all sides of the issues. The study is already being cited by some conservatives as proof of the harm large-scale immigration causes to the nation’s social fabric. But with demographic trends already pushing the nation inexorably toward greater diversity, the real question may yet lie ahead: how to handle the unsettling social changes that Putnam’s research predicts.

“We can’t ignore the findings,” says Ali Noorani, executive director of the Massachusetts Immigrant and Refugee Advocacy Coalition. “The big question we have to ask ourselves is, what do we do about it; what are the next steps?”

The study is part of a fascinating new portrait of diversity emerging from recent scholarship. Diversity, it shows, makes us uncomfortable — but discomfort, it turns out, isn’t always a bad thing. Unease with differences helps explain why teams of engineers from different cultures may be ideally suited to solve a vexing problem. Culture clashes can produce a dynamic give-and-take, generating a solution that may have eluded a group of people with more similar backgrounds and approaches. At the same time, though, Putnam’s work adds to a growing body of research indicating that more diverse populations seem to extend themselves less on behalf of collective needs and goals.

In what is being called a landmark decision, a Ontario court this week ruled that employees have a right to privacy for material contained on a work computer.

The judgment from the Ontario Court of Appeal … agreed with a trial judge that by giving tech devices to employees, along with permission to take them home on evenings and vacations, the employer gave “explicit permission to use the laptops for personal use.”

The ruling has significant implications for workers who use electronic devices including cell phones for personal purposes – “which is pretty well everyone” – as well as employers who might like to keep tabs on employee use of tech devices, said Frank Addario, of Sack, Goldblatt, Mitchell LLP, who argued the appeal for defendant Richard Cole.

“A big issue here is the tradeoff that employers expect employees to make,” Mr. Addario said. “If they want their employees to be available 24/7 and are giving them BlackBerrys and PCs to contact them outside of business hours, it is inevitable that people are going to use those devices on their personal time as well as business time. That’s an inevitable consequence of asking people to be on call beyond eight hours a day,” he said.

“That means artifacts of personal, private life are going to get left on the electronic devices, regardless of who paid for them,” Mr. Addario said. And the court is saying that employers are going to have to respect that these are the employee’s private property, he said.

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“I would call the court of appeal finding a seismic shift in the way privacy rights are dealt with in the workplace,” said Daniel Lublin, a lawyer with Whitten & Lublin LLP in Toronto.

“Until now most people generally assumed there was no reasonable expectation of privacy in work computers, and that would extend to work e-mail and Internet use,” he noted. “The court has now resoundingly said that there is a reasonable expectation of privacy in work technology that leaves the office.”

According to a recent study by the Kauffman Foundation, for example, all net job growth in the U.S. since 1977 has been due to start-ups. The data show that if you took start-ups out of the picture and looked only at large established firms, job growth in the U.S. over the last 34 years would actually be negative.

“When it comes to U.S. job growth,” said Kauffman Foundation economist Tim Kane in his report, “start-up companies aren’t everything. They’re the only thing.”

In your address last night, Mr. President, you correctly noted that, “The first step in winning the future is encouraging American innovation.” Here, too, start-ups are the driving engine of our nation’s global innovation leadership.

It is startups who have generated virtually all of our nation’s major technological breakthroughs in the last hundred years — from cars and planes to semiconductors, PCs, software, and the Internet — and in the process sparked the creation of whole new industries and millions of new jobs. And as economists have demonstrated, this kind of start-up-led innovation is the source of virtually all economic growth and increases in living standards in the U.S.

In other words, Mr. President, everything depends upon start-ups: Job creation. Our standard of living. Our prosperity as a nation. The American Dream itself.

So if the target of national policy is job creation, then the bullseye of that policy must be centered on startups. Yet policy makers in both parties continue to aim at the wrong target.

Last month, Mr. President, you held a summit meeting with 20 of the nation’s top CEOs to look for ways to spur job creation. But Fortune 100 CEOs are exactly the wrong people to talk to about jobs. Big Business is not a major job creator. Indeed, as one commentator put it, the guest list at this summit meeting represented “a who’s who of outsourcing American jobs.”

There is a ripple of rage spreading across Britain. It is clearer every day that the people of this country have been colossally scammed. The bankers who crashed the economy are richer and fatter than ever, on our cash. The Prime Minister who promised us before the election “we’re not talking about swingeing cuts” just imposed the worst cuts since the 1920s, condemning another million people to the dole queue.

Yet the rage is matched by a flailing sense of impotence. We are furious, but we feel there is nothing we can do. There’s a mood that we have been stitched up by forces more powerful and devious than us, and all we can do is sit back and be shafted.

This mood is wrong. It doesn’t have to be this way – if enough of us act to stop it.

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[Let's] look at a group of protesters who thought they had failed. The protests within the United States against the Vietnam War couldn’t prevent it killing three million Vietnamese and 80,000 Americans. But even in the years it was “failing”, it was achieving more than the protestors could possibly have known. In 1966, the specialists at the Pentagon went to US President Lyndon Johnson – a thug prone to threatening to “crush” entire elected governments – with a plan to end the Vietnam War: nuke the country. They “proved”, using their computer modeling, that a nuclear attack would “save lives.”

It was a plan that might well have appealed to him. But Johnson pointed out the window, towards the hoardes of protesters, and said: “I have one more problem for your computer. Will you feed into it how long it will take 500,000 angry Americans to climb the White House wall out there and lynch their President?” He knew that there would be a cost – in protest and democratic revolt – that made that cruelty too great.

Protest raises the political price for governments making bad decisions. It stopped LBJ and Nixon making the most catastrophic decision of all. The same principle can apply to the Conservative desire to kneecap the welfare state while handing out massive baubles to their rich friends. The next time George Osborne has to decide whether to cancel the tax bill of a super-rich corporation and make us all pick up the tab, he will know there is a price. People will find out, and they will be angry. The more protests there are, the higher the price. If enough of us demand it, we can make the rich pay their share for the running of our country, rather than the poor and the middle – to name just one urgent cause that deserves protest.

And protest can have an invisible ripple-effect that lasts for generations. A small group of women from Iowa lost their sons early in the Vietnam war, and they decided to set up an organization of mothers opposing the assault on the country. They called a protest of all mothers of serving soldiers outside the White House – and six turned up in the snow. Even though later in the war they became nationally important voices, they always remembered that protest as an embarrassment and a humiliation.

Until, that is, one day in the 1990s, one of them read the autobiography of Benjamin Spock, the much-loved and trusted celebrity doctor, who was the Oprah of his day. When he came out against the war in 1968, it was a major turning point in American public opinion. And he explained why he did it. One day, he had been called to a meeting at the White House to be told how well the war in Vietnam was going, and he saw six women standing in the snow with placards, alone, chanting. It troubled his conscience and his dreams for years. If these women were brave enough to protest, he asked himself, why aren’t I? It was because of them that he could eventually find the courage to take his stand – and that in turn changed the minds of millions, and ended the war sooner. An event that they thought was a humiliation actually turned the course of history.

You don’t know what the amazing ripple-effect of your protest will be – but wouldn’t Britain be a better place if it replaced the ripple of impotent anger so many of us are feeling? Yes, you can sit back and let yourself be ripped off by the bankers and the corporations and their political lackeys if you want. But it’s an indulgent fiction to believe that is all you can do. You can act in your own self-defence. As Margaret Mead, the great democratic campaigner, said: “Never doubt that a small group of thoughtful people could change the world. Indeed, it’s the only thing that ever has.”

China’s ruling Communist Party has swiftly quashed previous bouts of labour unrest. This one drew a more relaxed reaction. Goons from the government-controlled trade union roughed up some Honda strikers, but they were quickly called off. The strikes were widely, if briefly, covered in the state-supervised press. And the ringleaders have not so far heard any midnight knocks at the door.

This suggests three things. First, China is reluctant to get heavy-handed with workers in big-brand firms that attract global media attention. But, second, China is becoming more relaxed about spooking foreign investors. Indeed, if workers are upset, better that they blame foreign bosses than local ones.

In the wake of the financial crisis, the party has concluded, correctly, that foreign investors need China more than it needs them. Third, and most important, the government may believe that the new bolshiness of its workers is in keeping with its professed aim of “rebalancing” the economy.

And it would be right. China’s economy relies too much on investment and too little on consumer spending. That is mostly because workers get such a small slice of the national cake: 53% in 2007, down from 61% in 1990 (and compared with about two-thirds in America). Letting wages rise at the expense of profits would allow workers to enjoy more of the fruits of their labour.

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In the wake of the financial crisis, things are different. Deflation is now a bigger threat than inflation. And with 47m workers unemployed in the OECD alone, labour is not holding back the global economy. What the world lacks is willing customers, not willing workers. Higher Chinese wages will have a similar effect to the stronger exchange rate that America has been calling for, shrinking China’s trade surplus and boosting its spending.

This will help foreign companies and the workers they have idled. A 20% rise in Chinese consumption might well lead to an extra $25 billion of American exports. That could create over 200,000 American jobs.

Even the best-organized plans can be derailed by bad weather or glitches nobody can have foreseen, but whether the incidents or gaffes blow over quickly, or whether they become legendary tipping points has a lot to do with impressions that have already been formed subliminally in the public perception about the leader’s internal authenticity and confidence.

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When leaders have self-confidence — the real kind, that comes from within and glows in the dark, or rather glows in luggage-losing interludes — they can fumble the ball and shrug it off. If Trudeau had fumbled a football, he would have made it seem as though it were the football’s fault for being such a stupid shape. Barack Obama has all kinds of blippy things happen to him — the Rev Wright fiasco would have sunk a less confident man – but he never loses his cool because, say what you will about his leadership, he is supremely confident inside with an unshakeable sense of his greater destiny. That can go a long way to cover up gaffes. Clinton has it. JFK had it.

Mr Obama complained that technology was putting “new pressures on our country and on our democracy”. But iPods, iPads and suchlike are not to blame for the crazy theories—about, for instance, politicians’ birth certificates—that circulate in the blogosphere.

People have always traded gossip: the internet just makes it easier and quicker. The culprit is human nature, not technology. And new communications technologies tend to strengthen democracy, not weaken it, as revolutionaries have known ever since Thomas Paine and others used the printing press to argue for American independence.

At least Mr Obama got one thing right: the idea that educating people is the best way to enable them to adapt to technological change, and use it for good. But technology is not an alternative to education and empowerment; it can, in fact, help deliver them. America’s first web-savvy president should understand that.

For a planet at a constant temperature, the amount of energy absorbed as sunlight and the amount emitted back to space in the longer wavelengths of the infra-red must be the same. In the case of the Earth, the amount of sunlight absorbed is 239 watts per square metre. According to the laws of thermodynamics, a simple body emitting energy at that rate should have a temperature of about –18ºC.

You do not need a comprehensive set of surface-temperature data to notice that this is not the average temperature at which humanity goes about its business. The discrepancy is due to greenhouse gases in the atmosphere, which absorb and re-emit infra-red radiation, and thus keep the lower atmosphere, and the surface, warm (see the diagram below). The radiation that gets out to the cosmos comes mostly from above the bulk of the greenhouse gases, where the air temperature is indeed around –18ºC.

No one doubts that carbon dioxide is a greenhouse gas, good at absorbing infra-red radiation. It is also well established that human activity is putting more of it into the atmosphere than natural processes can currently remove. Measurements made since the 1950s show the level of carbon dioxide rising year on year, from 316 parts per million (ppm) in 1959 to 387ppm in 2009. Less direct records show that the rise began about 1750, and that the level was stable at around 280ppm for about 10,000 years before that.

This fits with human history: in the middle of the 18th century people started to burn fossil fuels in order to power industrial machinery. Analysis of carbon isotopes, among other things, shows that the carbon dioxide from industry accounts for most of the build-up in the atmosphere.

The serious disagreements start when discussion turns to the level of warming associated with that rise in carbon dioxide. For various reasons, scientists would not expect temperatures simply to rise in step with the carbon dioxide (and other greenhouse gases). The climate is a noisy thing, with ups and downs of its own that can make trends hard to detect.

What’s more, the oceans can absorb a great deal of heat—and there is evidence that they have done so—and in storing heat away, they add inertia to the system. This means that the atmosphere will warm more slowly than a given level of greenhouse gas would lead you to expect.