Today, it passed 57 to the dollar for the first time ever, down nearly
8% just this week and over 40% this year. Even a steep interest hike has
done little to slow the ruble’s collapse.
There’s more bad economic news on the horizon. Some $128 billion is
projected to have fled the country this year, more than double last
year’s capital flight, and well over 6% of the entire Russian economy.
Lower oil prices have wiped out tens of billions of dollars in market
cap for Russia’s largest oil and gas companies. A recession is now projected next year. Inflation, particularly for food, is rising.
That’s not even the most troubling news.
Economists estimate Russian banks and major state-owned companies owe
western banks hundreds of billions of dollars. But due to Western
sanctions, they cannot refinance that debt in the U.S. or Europe.
Chinese banks can’t handle that volume, so they are facing defaults or
look for handouts from Russia’s dwindling rainy day funds.
The combination of factors has the potential to collapse Russia’s
economy, with unpredictable consequences for Putin and the rest of the
world.
President Vladimir Putin’s popularity is based on rising incomes and
maintaining stability. Both are threatened if oil keeps dropping and
prices keep rising. Russia’s budget will face a shortfall as it expected
oil revenues to be significantly higher, affecting everything from
state-owned companies that employ many Russians to pensioners and
government employees on fixed incomes.
The West hoped sanctions would force Putin to reign in his muscular foreign policy. But as a recent Economist cover explained, a “wounded bear” could be more dangerous abroad.
Russia remains one of the largest economies in the world and its economic deterioration could ripple across the world.
Meanwhile, Putin is trying to deflect blame and attention. The top story
on a major state-owned channel’s newscast today was not the ruble’s
sudden drop, but a story about French soccer fans getting beaten up in
Kiev.
Putin has tried to blame to western sanctions, and they surely played a
role, but for years the Kremlin failed to address major structural
problems with the Russian economy, which depends too much on oil revenue
and natural resources. Flat growth was predicted even before the oil
drop and sanctions.
There’s now a new joke making the rounds: “If you had the chance, what
would you change in your past?” one Russian ask his friend. The friend
replies: “I would’ve changed rubles to dollars.”
In the first two weeks of December, Russian President Vladimir Putin made two quick trips to Turkey (December 1) and India
(December 10 to 11) to sign a number of trade deals. As Clifford Gaddy
and I underscore in the new expanded version of our 2013 book, Mr. Putin: Operative in the Kremlin
(Brookings, February 2015), this is all part of a carefully crafted
foreign policy agenda. Putin’s agenda also happens to mesh neatly with
those of his counterparts in Turkey and India.
The agenda stems from Putin’s long-standing concerns about the
Russian economy that pre-date Western sanctions on Moscow after Russia’s
March 2014 annexation of Crimea. When Putin announced he would return
to the Russian presidency in September 2011, Russia’s economy was already at risk.
In the summer of 2011, his economic experts were full of bad news about
spillover from the ongoing eurozone crisis. Putin concluded he would
need to shift his economic policy to put less emphasis on growth and
more on survival. Once he was back in the Kremlin, he moved to ensure
that Russia (and his regime) could withstand economic shocks.
Putin encouraged the development of domestically-produced goods to
replace imports, promoted large state-financed infrastructure and
defense projects, and pushed for the creation of the Eurasian Economic
Union to create a protectionist regional buffer around the Russian
economy. He also set out to make sure he had plenty of economic
alternatives outside Europe, in case his European trading partners
continued on their downward spiral––or just in case Moscow’s relations
with any of them soured. He perhaps did not anticipate, back in
2011-2012, that his push for the Eurasian Union
would lead to a clash with the EU, a proxy war in Ukraine’s eastern
regions, and an open rift with Russia’s most important European partner,
Germany, but Vladimir Putin always plans for contingencies and keeps
his options open.
Working Around Sanctions
U.S. and E.U. sanctions have inflicted considerable damage
on the Russian economy in 2014, but they have not yet persuaded Putin
to change course in Ukraine. In part this is because Putin is still
betting he can work around the sanctions by associating with countries
that want to dilute the political influence and economic leverage of the
United States. Putin has long prioritized presidential visits and trade
deals that revitalize old Soviet connections in Africa, Asia, Latin
America, and the Middle East. Now he is nurturing relationships with
leaders like Recep Tayyip Erdoǧan of Turkey and Narendra Modi of India
who see themselves as major regional players.
In selecting countries and leaders to engage with, Putin is almost
always guided by Russia’s economic interests––targeting states with
industries that link to the production chains of key Russian economic
sectors, or the home countries of international companies operating in
Russia’s energy and manufacturing sectors that produce massive tax
revenues and/or large numbers of Russian jobs. Putin has put particular
emphasis on China and other members of the BRICS (Brazil, Russia, India,
China and South Africa) grouping, who have common economic interests
and a degree of antipathy toward the United States. Most importantly,
from Putin’s perspective, Russia’s “fellow” BRICS are all outside the Euro-Atlantic system.
Putin’s efforts to embrace the BRICS paid off when Russia was axed
from the G8 in March 2014 just after the annexation of Crimea. Putin was
due to host the G8 meeting in Sochi to top off his successful Winter
Olympics. When the G7 leaders decamped to Brussels instead, he countered their move by launching a six-day tour of Latin America after the BRICS summit and 2014 World Cup final in Brazil.
Targeting Turkey
Unlike India, Turkey is not a member of the BRICS. But it is an
important regional player that considers itself independent, in spite of
its links to European-Atlantic institutions. Ever the operative,
Putin sees Turkey as a valuable asset in dealing with two of his main
adversaries in the Ukraine standoff, NATO and the EU. In the case of
NATO, Turkey’s value is clear. Turkey is a full member of NATO. Putin
will have a “friend” inside the enemy camp. The EU connection is
different. Despite years of waiting in the wings, Turkey has not been
accepted into the EU, and it has grown more and more frustrated at its lack of progress.
Turkey is already a headache for the EU. The country’s move towards
Russia is not likely to make things better. If that happens, Putin—who
is a master of tapping into others’ discontent and desires for
alternatives—will be delighted.
Putin’s Turkish business deals send another important signal to
Germany and EU countries that became significant trading partners with
Russia in the 1990s and 2000s. Putin and Erdoǧan differ, very strongly,
on how to deal with Assad and the civil war in Syria, and Turkey has its
own historic equities in Crimea and Ukraine. But Putin put political
differences and geopolitics aside in his trip to Turkey. His visit was
all about business. Putin’s message to Europe was: disagreements don’t
have to get in the way. It is possible to do business even if you are at
odds on Syria, or Crimea and Ukraine!
Putin also surprised the EU, in Turkey, by jettisoning Russian energy giant Gazprom’s South Stream pipeline,
which was planned to bring gas to Europe across the Black Sea and up
through Bulgaria, Serbia, Hungary and Slovenia to Italy. This was done
in the manner of a gambit in a chess game: Putin offered up a tactical
sacrifice (South Stream) in order to avoid a strategic defeat (the
potential loss of Russia’s dominant position in Europe’s gas market).
South Stream had become too expensive financially and politically.
Sanctions and falling energy prices were reducing Gazprom’s disposable
cash and cutting off future loans; and Gazprom’s primary international
commercial partner, the Italian energy company ENI, had balked at the
idea of footing more of the bill. The EU was also blocking the pipeline
construction in Bulgaria, and putting pressure on the other states to
reconsider their participation. The game was up on South Stream, and in
Putin’s view, it was better to make the tactical sacrifice, in spite of
all the sunk costs, and look elsewhere for advantage.
In Turkey, Russia already has a gas export pipeline in place that can
be expanded; and Turkey, itself, has aspirations to become a major
energy trading hub between Europe and the Middle East. Turkey’s
ambitions and existing infrastructure could eventually allow Putin to
bring more Russian gas into Europe through the back door. Turkey’s gas transit corridor might not be as desirable for Putin as Russia’s own pipeline across the Black Sea, but it will get the job done.
The Turks are willing players in this particular game, and just like
the Indians––who want to cut out middlemen in Europe and the Middle East
to buy rough diamonds directly from Russia for India’s massive diamond cutting and polishing industry.
Modi and Erdoǧan are not just pieces that Putin is moving around a
geo-economic chess board. They have their own gambits to play.
Diamonds may not be forever, and their prices fluctuate just like
those of oil and gas, but there is a great deal of mutual benefit for
India and Turkey in creating their own commodity hubs based on Russian
raw materials. With moves like this, with ready partners in different
arenas, Putin intends and hopes to stay at least one step ahead of the
West and U.S. and European sanctions in the ongoing struggle over
Ukraine.
Russian billionaire Arkady Rotenberg (R) and Rosneft President Igor
Sechin during the openings of the 2013 IIHF U18 World Junior
Championship on April 18, 2013 in Sochi, Russia.
The new prize from the Kremlin arrived in eastern Siberia.
On the plains near the city of Yakutsk, trumpets sounded as President Vladimir Putin
signed his name in white ink on a stretch of black pipeline, the
symbolic starting point of a $400 billion natural gas link to the Far East.
It was little more than show. The Power of Siberia pipeline will actually wind several hundred miles to the south.
What
was real was the money flowing to Arkady Rotenberg, a member of Putin’s
tightening inner circle and a boyhood friend. Rotenberg-affiliated
companies were paid about 94 million rubles ($1.7 million) to organize
the September ceremony, corporate filings show.
Having grown rich on government contracts during the boom in Putin’s Russia,
friends of the president are benefiting anew as times grow tough.
Lucrative orders keep rolling in for the favored few even as western
sanctions and a collapse in oil prices push the economy to the brink.
The
development has polarized Russia’s oligarchy and pitted Putin’s small
circle against less well-connected rivals in a battle for money and
privilege.
State Contracts
Companies linked to Rotenberg and another Putin confidant, Gennady Timchenko
-- both targeted by U.S. sanctions for their ties to the president --
are landing a growing amount of state contracts. Together, they have won
at least 309 billion rubles of work since U.S. sanctions were imposed
in March, filings show. That figure -- which works out to about $8.1
billion at the average exchange rate over the period -- is 12 percent more than they received in all of 2013.
Photographer: Alexei Nikolsky/RIA Novosti/Presidential Press Service via AP Photo
Russian President Vladimir Putin signs a pipe during the ceremony marking the... Read More
A
Rotenberg-affiliated company is also about to secure a
228-billion-ruble order to build a bridge to Crimea, which Russia
annexed in March, according to a high-ranking government official, who
spoke on the condition of anonymity because the contract hasn’t been
officially awarded.
The contract totals are based on a review of
hundreds of documents made public on the government portal for state
tenders and the SPARK corporate database, as well as on individual
company websites in Russia.
In all, companies linked to
Rotenberg and Timchenko have received orders since March that are
equivalent to more than a fifth of what the government spent on
contracts in the first nine months of the year.
‘Pie Shrinking’
There’s
more to come. Rotenberg and Timchenko, both 62, stand to gain most from
the 770-billion-ruble Power of Siberia pipeline as the main contractors
to OAO Gazprom, the energy company Putin has built into an instrument
of state-sponsored capitalism. Gazprom declined to comment on who will
receive the pipeline contracts.
Photographer: Chris Ratcliffe/Bloomberg
Russian billionaire Gennady Timchenko pauses during a session titled "Russia-China:... Read More
Their boon is coming at the expense of other oligarchs as the weak economy pressures Putin to reduce public spending.
“Not
only is the pie shrinking more rapidly than originally anticipated, the
political imperative of preserving some people’s slices means thinner
slivers for everyone else,” said Mark Galeotti, a Russia expert and
professor at New York University.
Executives
who are used to prospering from government ties complain privately they
are being elbowed aside. One Russian billionaire said Rotenberg and
Timchenko have all but cornered the market in government contracts. He
spoke on the condition of anonymity to avoid jeopardizing his companies’
chances of winning business.
‘Personal Bank’
With
Russian companies cut off from international financing, winners and
losers are starting to emerge. In July, the government stripped Alfa Bank, controlled by billionaires Mikhail Fridman, German Khan
and Alexey Kuzmichev, of its exclusive contract to service the
country’s wholesale electricity market. That business is worth an
estimated 4 billion rubles a year.
Instead the Market Council,
an industry regulator, shifted the business to OAO Bank Rossiya, which
the Obama administration has called the “personal bank” of Putin’s inner
circle. Bank Rossiya, also a target of U.S. sanctions, is controlled by
Yury Kovalchuk, another Putin associate who was singled out by the U.S.
Bank Rossiya, based in St. Petersburg, stronghold of Putin’s youth, declined to comment.
State contracts aren’t the only source of government money. Igor Sechin and Vladimir Yakunin,
who’ve known Putin since his days in the St. Petersburg mayor’s office,
have sought tens of billions of dollars in aid for the state companies
they command, OAO Rosneft, the country’s largest oil producer, and OAO
Russian Railways. Both companies have turned to the $80 billion Wellbeing Fund, (RUWFUSD)
which was designed to safeguard the nation’s pension system. Rosneft
and Russian Railways say helping to finance their investment programs
will benefit the broader economy.
Fair Contracts
Contracts
won by companies either controlled or partly owned by Timchenko were
obtained fairly through a competitive process, said Anton Kurevin, a
spokesman for Volga Group, which manages the businessman’s holdings.
Rotenberg
told Interfax news service in October that his friendship with Putin
didn’t affect his business “in any way.” He also said he hoped to build
Power of Siberia. A spokesman for Rotenberg said there was nothing to
add to the Interfax interview.
Putin has signaled he’ll continue
to support companies and industries targeted by sanctions, and Dmitry
Peskov, a spokesman for the president, said all contracts are awarded
fairly.
‘Tender System’
“There is a tender system in place,” Peskov said. “No one just hands them these contracts by some order.”
While
Putin’s allies prosper, some beyond his circle are losing out. A Moscow
court on Nov. 14 extended by three months the house arrest of
billionaire Vladimir Evtushenkov, on suspicion of money laundering, as authorities nationalize his OAO Bashneft oil company. Evtushenkov has said he’s innocent.
Evtushenkov, 66, is the richest Russian to be prosecuted since former Yukos Oil Co. owner Mikhail Khodorkovsky. Khodorkovsky spent a decade in jail as the state dismantled Yukos and Sechin’s Rosneft acquired the bulk of its best assets.
Khodorkovsky, who now lives in Switzerland,
said on his website that he was “absolutely sure” Evtushenkov was
targeted for refusing to sell Bashneft to Sechin. Sechin has denied
having an interest in Bashneft or playing a role in the case against
Evtushenkov.
‘Monopolizing Rents’
“Putin has been
masterful at distributing the rents to all the relevant people, but now
he’s monopolizing all the rents,” said Anders Aslund, a senior fellow at
the Peterson Institute for International Economics in Washington.
Aslund advised Putin’s predecessor, Boris Yeltsin, when the government handed the crown jewels of the Soviet economy to a handful of tycoons, including Khodorkovsky.
“Under Yeltsin, it was an oligarchy, but it was balanced among big groups,” Aslund said. “Now, Putin just squeezes them out.”
For
the connected, the money is still flowing. Rotenberg’s SMP Bank, which
is barred from U.S. and European markets, in April got a 10-year state
loan of about 100 billion rubles at a rate of 0.51 percent to rescue
another lender, Mosoblbank, according to two people familiar with the
matter. SMP said by e-mail that it’s been tasked with cutting costs at
Mosoblbank and returning the lender to profitability.
‘Huge Deal’
That
loan was “a huge deal” for SMP because long-term financing at less than
1 percent is “impossible” to get in Russia, Sovlink analyst Olga
Belenkaya said.
In 2012, when economic times were good, Russia
passed a law requiring tenders to be made public. That improved
transparency but also prompted connected businessmen to join forces to
keep challengers away.
“The cartels are breeding because it’s
better for contractors bidding for state tenders to cooperate than face
free competition,” said Irina Kuznetsova, who helped draft the 2012 law.
The tally of contracts calculated by Bloomberg doesn’t include
one for 134 billion rubles awarded by Russian Railways, which was won by
a consortium that includes Timchenko-affiliated SK Most. There is no
breakdown of how the consortium members are dividing it up the work or
the profit.
Rotenberg said in the Interfax interview that
sanctions were having a “negligible” effect on him economically because
his businesses are geared toward the domestic market. Still, Rotenberg,
who’s had luxury properties in Italy frozen, said the travel bans were taking a psychological toll.
Timchenko,
who owns a home on Lake Geneva, echoed similar sentiments in an August
interview with the news service TASS, saying it was unfair to be barred
from seeing family members and his beloved pet Labrador in Europe.
‘Disguised Hostility’
Alexey
Navalny, the anti-corruption blogger and opposition leader, said
Putin’s refusal to change course over Ukraine and end Russia’s
international isolation has created a disguised hostility among the
elite. Navalny, who has been under house arrest on fraud charges since
February, said with financial means dwindling, it will be harder for
Putin to maintain the loyalty of even his closest associates.
Vladimir
Rimsky, who studies corruption at the Indem research group in Moscow,
said there’s little evidence that will happen soon.
“It’s in the
interests of both Putin and the people close to him to continue this
policy of support,” Rimsky said. “For them, the crisis isn’t something
terrible, because they control all the resources.”
To contact the reporters on this story: Alan Katz in Washington at akatz5@bloomberg.net; Henry Meyer in Moscow at hmeyer4@bloomberg.net; Ilya Arkhipov in Moscow at iarkhipov@bloomberg.net
To contact the editors responsible for this story: Sara Forden at sforden@bloomberg.net; Balazs Penz at bpenz@bloomberg.net David Gillen
Why can't the russian propaganda ministry hire trolls with at least a
modicum of intelligence so we're not subjected to childish taunts and
schoolyard gibberish at every turn. I know putin is an unintelligent
boor, but must his proxies emulate him in forum posts?
Since the
internet is censored in russia, in order to 'protect' russian citizens
from outside influence (truths) we know the only pro russia comments
will come from those being allowed to read these non putin approved
publications - paid trolls whose value to the ministry is decided by the
number of postings they 'contribute' to western news media sites.
This
story is an accurate rendition of the ways things are being run in
russia these days. Average russian citizens don't get to read them
because they don't promote putin's idea of himself or his government in
the way he wants to be seen by them. They in turn remain meek, adoring
sheep who hang off his every utterance while failing to see exactly how
much trouble their country is in, how much taxpayer dollars (rubles) are
flowing into the personal bank accounts of their leader and his friends
and to what extent the world is trying to isolate putin and his buddies
from the rest of the world for their actions.
Give us a break
children, no more inane buffoonery. Earn your propaganda pay checks
honestly and try a little intelligent commentary.
"I know putin is an unintelligent boor, but must his proxies emulate him in forum posts?"
- We are subjected to childish taunts and schoolyard gibberish.
"Since
the internet is censored in russia, in order to 'protect' russian
citizens from outside influence (truths) we know the only pro russia
comments will come from those being allowed to read these non putin
approved publications - paid trolls whose value to the ministry is
decided by the number of postings they 'contribute' to western news
media sites."
- We are subjected to childish taunts and schoolyard gibberish.
"
Average russian citizens don't get to read them because they don't
promote putin's idea of himself or his government in the way he wants to
be seen by them. They in turn remain meek, adoring sheep who hang off
his every utterance while failing to see exactly how much trouble their
country is in, how much taxpayer dollars (rubles) are flowing into the
personal bank accounts of their leader and his friends and to what
extent the world is trying to isolate putin and his buddies from the
rest of the world for their actions.Give us a break children, no more
inane buffoonery. Earn your propaganda pay checks honestly and try a
little intelligent commentary."
- We are subjected to childish taunts and schoolyard gibberish
I
contacted " The Guinness Book of Records" and they confirmed that you
automatically qualify for the world stupidest post. Please, contact them
to collect on the reward. Ah, and they said that you must be a
canadian. I don't know why. My guess is because they can always tell a
harper's stooge.
Aleksandr Litvinenko is a good example of on the one hand Western
corruption (yes, oddly enough - I'll explain the reference...) and of
making up narratives for lack of understanding of your adversaries.
The
defining characteristic of the end of Litvinenko's life is that he
accused Russia's internal security forces of bombing apartment buildings
in which hundreds of their wives and children were killed. He made a
big splash with that in the West, as he knew he would. It basically
gained him fame and a more or less remunerative career as a Russia
critic.
So let's turn to the Western corruption bit. There are
many people in the US, including quite a few very public, well-known
personalities, who have accused the CIA of doing the 9/11 acts of
terrorism. I won't repeat their nut-case accusations except to note
they blamed the CIA of killing thousands of Americans, including people
who were close colleagues and family members of CIA employees.
In
Russia we do not think you are a real man if you allow some vicious jerk
to say you killed your own family if you do not seek revenge. That
goes for ordinary people and it especially goes for people who we think
are manly and military enough to serve in our special forces and in our
elite intelligence forces.
The Western corruption bit comes in
twofold: first, you think only your side has foreign intelligence
heroes like James Bond. That's a form of corruption not to realize that
other people, including your adversaries, have their heroes as well.
In your movies it is the brave CIA agent or James Bond who at the last
moment foils a plot by evil KGB agents. In our movies (at least those
of Soviet times) it is the brave KGB agent who at the last moment foils a
plot by evil CIA agents.
You also believe your own propaganda
about our state security forces. In reality, the modern KGB of late
Soviet times was one of the most professional and best educated of our
security services. It was, as the FSB is today, a truly elite agency
like your FBI domestically and parts of your CIA overseas. The best and
the brightest worked there and they truly did spend much of their time
foiling Islamic terrorist plots, attempts to steal nuclear weapons and
the like. Domestically they also fought drug smugglers, the mafia and
so on. You have corrupted yourself if you eat your own dogfood and
believe that every KGB guy was in league with the mafia and so on, just
as you would ridicule all those Americans who are certain the CIA is
always in league with drug smugglers and bad guys (sad that your movies
so often show that stereotype).
The second part of your corruption
as we Russians see the matter is that you have so cut off the manliness
of your security forces that vicious, leftist jerks feel perfectly safe
accusing them of killing their own families. It is just astonishing
to us that not one of all those thousands of killers and other strong
forces you have working in your security organs would not have taught
one of those vicious leftists a lesson the hard way.
We are
different, as Litvinenko found out. Thousands of our best security
forces either had family killed in those bombings in Moscow or they knew
a close colleague who had family killed. It takes only one of those
guys to teach Litvinenko a lesson, the hard way, and the man will reach
the grave he deserves. To be open about the matter I personally was
astonished Litvinenko lasted as long as he did. The use of
characteristic tradecraft in eradicating that jerk was a deliberate
calling card so everyone in the business knew that it was someone who
Litvinenko insulted and wounded who took revenge.
Not
understanding that but thinking it had to be some plot ordered by a
higher up in the Kremlin, instead of anyone of thousands of people
acting on their own in a case where hundreds of them probably started
acting on taking revenge, is an example of not understanding your
adversary. It makes you unable to understand why Russians are
infuriated you are financing the people in Kiev who are killing our
relatives in Ukraine, or why ordinary Russians by the tens of thousands
would try to get in that fight, send supplies, donate money and by the
millions demand our government support our relatives in Ukraine. It's
not some contorted plot by a handful of guys in the Kremlin, it is
millions of Russians raging mad you are helping violent jerks kill our
relatives and demanding revenge. if our government doesn't do it, we
will.
By the way, John Kennedy also found out the hard way that
betraying very tough foreign intelligence killers is unwise. Americans
trained thousands of Cubans at CIA camps to invade Castro's Cuba and
then left them to die and be tortured by Castro when Kennedy called off
the promised US air support for the invasion. Your aircraft were
fueled and armed and ready to take off on their mission when Kennedy
held them back. That caused thousands of Cuban freedom fighters to get
trapped on the invasion beach at the Bay of Pigs and be slaughtered and
captured and later tortured and killed by Castro.
Many of those
thousands of Cubans were from the foreign intelligence elite and they
had hundreds of survivors still left in the US who also were some of the
world's most highly experienced and well trained killers. They had
just fought a vicious civil war against Castro, for example, and had the
additional benefit of graduate training, as it were, by the CIA.
Kennedy
thought the disaster at the Bay of Pigs was just a political problem to
be handled by a speech. He didn't realize that with hundreds of highly
trained Cuban experts in killing who blamed him for betraying their
comrades and their cause he had a much bigger problem on his hands.
I've been to Dealey Plaza in Dallas and I was struck by how perfect it
was for the operation that our experts believe the Cubans executed. It
is a very small place, provides many vantage points for shooters that
allow them a clear and easy shot with many very easy avenues of escape.
It is like an inclined bowl where the target vehicle comes around a
corner, slows, and then proceeds at slow pace downhill presenting the
target in absolutely perfect geometry for an ideal shot from any one of
several locations.
I know of no "smoking gun" evidence either here
or in the US that ties Kennedy's assassination to the Cubans betrayed
at the Bay of Pigs and to those Cubans only, but knowing what such
people are like (I extrapolate from what I know about what our people
are like) and having been to the scene and being struck by such a
professional choice of setting, I can see why so many of our experts
believe it was the Cubans who were betrayed at the Bay of Pigs who
settled scores in Dallas.
We Russians had no dog in that fight, as
you Americans say, and were horrified when we heard the news. Our
people actually liked Kennedy and had totally bought into the "Camelot"
thing. Russians everywhere were crying at the news. Our government was
in a panic because, as is well known, Oswald had defected to the USSR
and had lived here for a few years. We never trusted him and were glad
to be rid of him, so there was immense anger and frustration we ever
let him into the country.
The retail racks of Weird Stuff in Sunnyvale, Calif.Credit
Michael Vahrenwald for The New York Times
When
you pull off Highway 101 and head into Sunnyvale, Calif., the first
thing you notice is how boring innovation looks up close. This small
Silicon Valley city, which abuts both Cupertino, the home of Apple, and
Mountain View, the site of the Googleplex, is where Lockheed built the
Poseidon nuclear missile. It’s where the forebear of NASA did some of
its most important research and where a prototype for Pong debuted at a
neighborhood bar. Countless ambitious start-ups — with names like Qvivr,
Schoolfy, eCloset.me and PeerPal — appear in Sunnyvale every year.
Aesthetically, though, the city is one enormous glass-and-stucco office
park after another. Its dominant architectural feature, the five-story
headquarters of Yahoo, a few minutes from Innovation Way, looks about as
futuristic as a suburban hospital.
As
an industry becomes more dynamic, its architecture, by necessity, often
becomes less inspiring. These squat buildings have thick outer walls
that allow for a minimal number of internal support beams, creating
versatile open-floor plans for any kind of company — one processing
silicon into solar-power arrays, say, or a start-up monitoring weed
elimination in industrial agriculture. In Sunnyvale, companies generally
don’t stay the same size. They expand quickly or go out of business,
and then the office has to be ready for the next tenant. These buildings
need to be the business equivalent of dorms: spaces designed to house
important and tumultuous periods of people’s lives before being cleaned
out and prepped for the next occupant.
Photo
A staff office with a collection of reclaimed clocks.Credit
Michael Vahrenwald for The New York Times
Perhaps
the best place to behold the Valley’s success as a platform for
innovation is a 27,000-square-foot facility just down the block from
Yahoo. This is the warehouse of Weird Stuff, a 21-person company that
buys the office detritus that start-ups no longer want. One section of
the space teems with hundreds of laptops and desktops; another is
overloaded with C.P.U.s and orphaned cubicle partitions. “If founders
are in a building that’s costing $50,000 a month, and they’ve lost their
funding and have to be out by next Friday, we respond very quickly,”
said Chuck Schuetz, the founder of Weird Stuff.
Weird
Stuff also acquires goods from the start-ups that succeed, when they
are ready to upgrade offices and need to offload their old equipment.
“We get truckloads every day,” Schuetz told me. He said that he receives
a lot of calls from government offices and large corporate-network
operators who desperately need, for example, a 1981 Seagate ST506 hard
drive in order to keep a crucial piece of equipment running. But much of
his stuff is bought by new waves of start-ups in search of inexpensive
keyboards or cubicle partitions. What doesn’t move is sold to scrap
dealers. “This,” he said, gesturing to the giant scrap bin out back, “is
where everything ends up.”
For
decades, entrepreneurs and digital gurus of various repute have
referred to this era, in a breathlessness bordering on proselytizing, as
the age of innovation. But Weird Stuff is a reminder of another,
unexpected truth about innovation: It is, by necessity, inextricably
linked with failure. The path to any success is lined with disasters.
Most of the products that do make it out of the lab fail spectacularly
once they hit the market. Even successful products will ultimately fail
when a better idea comes along. (One of Schuetz’s most remarkable finds
is a portable eight-track player.) And those lucky innovations that are
truly triumphant, the ones that transform markets and industries, create
widespread failure among their competition.
An
age of constant invention naturally begets one of constant failure. The
life span of an innovation, in fact, has never been shorter. An African
hand ax from 285,000 years ago, for instance, was essentially identical
to those made some 250,000 years later. The Sumerians believed that the
hoe was invented by a godlike figure named Enlil a few thousand years
before Jesus, but a similar tool was being used a thousand years after
his death. During the Middle Ages, amid major advances in agriculture,
warfare and building technology, the failure loop closed to less than a
century. During the Enlightenment and early Industrial Revolution, it
was reduced to about a lifetime. By the 20th century, it could be
measured in decades. Today, it is best measured in years and, for some
products, even less. (Schuetz receives tons of smartphones that are only
a season or two old.)
The
closure of the failure loop has sent uncomfortable ripples through the
economy. When a product or company is no longer valued in the
marketplace, there are typically thousands of workers whose own market
value diminishes, too. Our breakneck pace of innovation can be seen in
stock-market volatility and other boardroom metrics, but it can also be
measured in unemployment checks, in divorces and involuntary moves and
in promising careers turned stagnant. Every derelict product that makes
its way into Weird Stuff exists as part of a massive ecosystem of human
lives — of engineers and manufacturers; sales people and marketing
departments; logistics planners and truck drivers — that has shared in
this process of failure.
Photo
The founder of Weird Stuff, Chuck Schuetz.Credit
Michael Vahrenwald for The New York Times
Innovation
is, after all, terrifying. Right now we’re going through changes that
rip away the core logic of our economy. Will there be enough jobs to go
around? Will they pay a living wage? Terror, however, can also be
helpful. The only way to harness this new age of failure is to learn how
to bounce back from disaster and create the societal institutions that
help us do so. The real question is whether we’re up for the challenge.
After a tour
of Weird Stuff, Schuetz mentioned a purple chair that he kept among the
office furniture piled haphazardly in the back of his facility.
Unbeknown to him, that chair actually provides a great way to understand
the acceleration of innovation and failure that began 150 years ago. In
ancient times, purple chairs were virtually priceless. Back then, all
cloth dyes were made from natural products, like flower petals or
crushed rocks; they either bled or faded and needed constant repair. One
particular purple dye, which was culled from the glandular mucus of
shellfish, was among the rarest and most prized colors. It was generally
reserved for royalty. Nobody had surplus purple chairs piled up for $20
a pop.
But
that all changed in 1856, with a discovery by an 18-year-old English
chemist named William Henry Perkin. Tinkering in his home laboratory,
Perkin was trying to synthesize an artificial form of quinine, an
antimalarial agent. Although he botched his experiments, he happened to
notice that one substance maintained a bright and unexpected purple
color that didn’t run or fade. Perkin, it turned out, had discovered a
way of making arguably the world’s most coveted color from incredibly
cheap coal tar. He patented his invention — the first synthetic dye —
created a company and sold shares to raise capital for a factory.
Eventually his dye, and generations of dye that followed, so thoroughly
democratized the color purple that it became the emblematic color of
cheesy English rock bands, Prince albums and office chairs for those
willing to dare a hue slightly more bold than black.
Perkin’s
fortuitous failure, it’s safe to say, would have never occurred even a
hundred years earlier. In pre-modern times, when starvation was common
and there was little social insurance outside your clan, every
individual bore the risk of any new idea. As a result, risks simply
weren’t worth taking. If a clever idea for a crop rotation failed or an
enhanced plow was ineffective, a farmer’s family might not get enough to
eat. Children might die. Even if the innovation worked, any peasant who
found himself with an abundance of crops would most likely soon find a
representative of the local lord coming along to claim it. A similar
process, one in which success was stolen and failure could be lethal,
also ensured that carpenters, cobblers, bakers and the other skilled
artisans would only innovate slowly, if at all. So most people adjusted
accordingly by living near arable land, having as many children as
possible (a good insurance policy) and playing it safe.
Our
relationship with innovation finally began to change, however, during
the Industrial Revolution. While individual inventors like James Watt
and Eli Whitney tend to receive most of the credit, perhaps the most
significant changes were not technological but rather legal and
financial. The rise of stocks and bonds, patents and agricultural
futures allowed a large number of people to broadly share the risks of
possible failure and the rewards of potential success. If it weren’t for
these tools, a tinkerer like Perkin would never have been messing
around with an attempt at artificial quinine in the first place. And he
wouldn’t have had any way to capitalize on his idea. Anyway, he probably
would have been too consumed by tilling land and raising children.
The secret of the corporation’s success was that it
generally did not focus on truly transformative innovations.
Perkin’s
invention may have brought cheap purple (and, later, green and red)
dyes to the masses, but it helped upend whatever was left of the
existing global supply chain, with its small cottage-size dye houses and
its artisanal crafts people who were working with lichen and bugs. For
millenniums, the economy had been built around subsistence farming,
small-batch artisanal work and highly localized markets. Inventions like
Perkin’s — and the steam engine, the spinning jenny, the telegraph, the
Bessemer steel-production process — destroyed the last vestiges of this
way of life.
The
original age of innovation may have ushered in an era of unforeseen
productivity, but it was, for millions of people, absolutely terrifying.
Over a generation or two, however, our society responded by developing a
new set of institutions to lessen the pain of this new volatility,
including unions, Social Security and the single greatest
risk-mitigating institution ever: the corporation. During the late 19th
century, a series of experiments in organizational structure culminated,
in the 1920s, with the birth of General Motors, the first modern
corporation. Its basic characteristics soon became ubiquitous.
Ownership, which was once a job passed from father to son, was now
divided among countless shareholders. Management, too, was divided,
among a large group of professionals who directed units, or
“subdivisions,” within it. The corporation, in essence, acted as a giant
risk-sharing machine, amassing millions of investors’ capital and
spreading it among a large number of projects, then sharing the returns
broadly too. The corporation managed the risk so well, in fact, that it
created an innovation known as the steady job. For the first time in
history, the risks of innovation were not borne by the poorest. This
resulted in what economists call the Great Compression, when the gap
between the income of the rich and poor rapidly fell to its lowest
margin.
The
secret of the corporation’s success, however, was that it generally did
not focus on truly transformative innovations. Most firms found that
the surest way to grow was to perfect the manufacturing of the same
products, year after year. G.M., U.S. Steel, Procter & Gamble,
Kellogg’s, Coca-Cola and other iconic companies achieved their
breakthrough insights in the pre-corporate era and spent the next
several decades refining them, perhaps introducing a new product every
decade or so. During the period between 1870 and 1920, cars, planes,
electricity, telephones and radios were introduced. But over the next 50
years, as cars and planes got bigger and electricity and phones became
more ubiquitous, the core technologies stayed fundamentally the same.
(Though some notable exceptions include the television, nuclear power
and disposable diapers.)
Celebrated
corporate-research departments at Bell Labs, DuPont and Xerox may have
employed scores of white-coated scientists, but their impact was blunted
by the thick shell of bureaucracy around them. Bell Labs conceived some
radical inventions, like the transistor, the laser and many of the
programming languages in use today, but its parent company, AT&T,
ignored many of them to focus on its basic telephone monopoly. Xerox
scientists came up with the mouse, the visual operating system, laser
printers and Ethernet, but they couldn’t interest their bosses back
East, who were focused on protecting the copier business.
Corporate
leaders weren’t stupid. They were simply making so much money that they
didn’t see any reason to risk it all on lots of new ideas. This
conservatism extended through the ranks. Economic stability allowed
millions more people to forgo many of the risk-mitigation strategies
that had been in place for millenniums. Family size plummeted. Many
people moved away from arable land (Arizona!). Many young people, most
notably young women, saw new forms of economic freedom when they were no
longer tied to the routine of frequent childbirth. Failure was no
longer the expectation; most people could predict, with reasonable
assurance, what their lives and careers would look like decades into the
future. Our institutions — unions, schools, corporate career tracks,
pensions and retirement accounts — were all predicated on a stable and
rosy future.
Photo
Obsolete computer monitors mix with keyboards and other detritus throughout the 27,000-square-foot warehouse.Credit
Michael Vahrenwald for The New York Times
We
now know, of course, that this golden moment was really a benevolent
blip. In reality, the failure loop was closing far faster than we ever
could have realized. The American corporate era quietly began to unravel
in the 1960s. David Hounshell, a scholar of the history of American
innovation, told me about a key moment in 1968, when DuPont introduced
Qiana, a kind of nylon with a silklike feel, whose name was selected
through a computer-generated list of meaningless five-letter words.
DuPont had helped to create the modern method of product development, in
which managers would identify a market need and simply inform the
research department that it had to produce a solution by a specific
date. Over the course of decades, this process was responsible for
successful materials like Freon, Lucite, Orlon, Dacron and Mylar. In
Qiana, DuPont hoped that it had the next Lycra.
But
not long after the company introduced Qiana to the market, it was met
by a flood of cheap Japanese products made from polyester. Qiana, which
only came close to breaking even during one year of sales, eventually
sustained operating losses of more than $200 million. Similar shudders
were felt in corporate suites across America, as new global competitors —
first from Europe, then from Asia — shook up the stable order of the
automotive and steel industries. Global trade narrowed the failure loop
from generations to a decade or less, far shorter than most people’s
careers.
For
American workers, the greatest challenge would come from computers. By
the 1970s, the impact of computers was greatest in lower-skilled,
lower-paid jobs. Factory workers competed with computer-run machines;
secretaries and bookkeepers saw their jobs eliminated by desktop
software. Over the last two decades, the destabilizing forces of
computers and the Internet has spread to even the highest-paid
professions. Corporations “were created to coordinate and organize
communication among lots of different people,” says Chris Dixon, a
partner at the venture-capital firm Andreessen Horowitz. “A lot of those
organizations are being replaced by computer networks.” Dixon says that
start-ups like Uber and Kickstarter are harbingers of a much larger
shift, in which loose groupings of individuals will perform functions
that were once the domain of larger corporations. “If you had to know
one thing that will explain the next 20 years, that’s the key idea: We
are moving toward a period of decentralization,” Dixon says.
Were
we simply enduring a one-time shift into an age of computers, the
adjustment might just require us to retrain and move onward. Instead, in
a time of constant change, it’s hard for us to predict the skills that
we will need in the future. Whereas the corporate era created a virtuous
cycle of growing companies, better-paid workers and richer consumers,
we’re now suffering through a cycle of destabilization, whereby each new
technology makes it ever easier and faster to create the next one,
which, of course, leads to more and more failure. It’s enough to make us
feel like mollusk-gland hunters.
Much as William
Henry Perkin’s generation ripped apart an old way of life, the
innovation era is sundering the stability of the corporate age.
Industries that once seemed resistant to change are only now entering
the early stages of major disruption. A large percentage of the
health-care industry, for example, includes the rote work of recording,
storing and accessing medical records. But many companies are currently
devising ways to digitize our medical documents more efficiently. Many
economists believe that peer-to-peer lending, Bitcoin and other
financial innovations will soon strike at the core of banking by making
it easier to receive loans or seed money outside a traditional
institution. Education is facing the threat of computer-based learning
posed by Khan Academy, Coursera and other upstart companies. Government
is changing, too. India recently introduced a site that allows anybody
to see which government workers are showing up for their jobs on time
(or at all) and which are shirking. Similarly, Houston recently
developed a complex database that helps managers put an end to runaway
overtime costs. These changes are still new, in part because so many
large businesses benefit from the old system and use their capital to
impede innovation. But the changes will inevitably become greater, and
the results will be drastic. Those four industries — health care,
finance, education and government — represent well more than half of the
U.S. economy. The lives of tens of millions of people will change.
In the corporate era, most people borrowed their
reputations from large institutions. Now, our own personal reputations
will matter more.
Some
professions, however, are already demonstrating ways to embrace
failure. For example, there’s an uncharacteristic explosion of
creativity among accountants. Yes, accountants: Groups like the Thriveal
C.P.A. Network and the VeraSage Institute are leading that profession
from its roots in near-total risk aversion to something approaching the
opposite. Computing may have commoditized much of the industry’s
everyday work, but some enterprising accountants are learning how to use
some of their biggest assets — the trust of their clients and access to
financial data — to provide deep insights into a company’s business.
They’re identifying which activities are most profitable, which ones are
wasteful and when the former become the latter. Accounting once was
entirely backward-looking and, because no one would pay for an audit for
fun, dependent on government regulation. It was a cost. Now real-time
networked software can make it forward-looking and a source of profit.
It’s worth remembering, though, that this process never ends: As soon as
accountants discover a new sort of service to provide their customers,
some software innovator will be seeking ways to automate it, which means
those accountants will work to constantly come up with even newer
ideas. The failure loop will continue to close.
Lawyers,
too, are trying to transform computers from a threat into a
value-adding tool. For centuries the legal profession has made a great
deal of money from drawing up contracts or patent applications that
inevitably sit in drawers, unexamined. Software can insert boilerplate
language more cheaply now. But some computer-minded lawyers have found
real value in those cabinets filled with old contracts and patent
filings. They use data-sniffing programs and their own legal expertise
to cull through millions of patent applications or contracts to build
never-before-seen complex models of the business landscape and sell it
to their clients.
The
manufacturing industry is going through the early stages of its own
change. Until quite recently, it cost tens of millions of dollars to
build a manufacturing plant. Today, 3-D printing and cloud
manufacturing, a process in which entrepreneurs pay relatively little to
access other companies’ machines during downtime, have drastically
lowered the barrier to entry for new companies. Many imagine this will
revitalize the business of making things in America. Successful
factories, like accounting firms, need to focus on special new products
that no one in Asia has yet figured out how to mass produce. Something
similar is happening in agriculture, where commodity grains are tended
by computer-run tractors as farming entrepreneurs seek more value in
heritage, organic, local and other specialty crops. This has been
manifested in the stunning proliferation of apple varieties in our
stores over the past couple of years.
Every
other major shift in economic order has made an enormous impact on the
nature of personal and family life, and this one probably will, too.
Rather than undertake one career for our entire working lives, with
minimal failure allowed, many of us will be forced to experiment with
several careers, frequently changing course as the market demands — and
not always succeeding in our new efforts. In the corporate era, most
people borrowed their reputations from the large institutions they
affiliated themselves with: their employers, perhaps, or their
universities. Our own personal reputations will now matter more, and
they will be far more self-made. As career trajectories and earnings
become increasingly volatile, gender roles will fragment further, and
many families will spend some time in which the mother is a primary
breadwinner and the father is underemployed and at home with the
children. It will be harder to explain what you do for a living to
acquaintances. The advice of mentors, whose wisdom is ascribed to a
passing age, will mean less and less.
To
succeed in the innovation era, says Daron Acemoglu, a prominent M.I.T.
economist, we will need, above all, to build a new set of institutions,
something like the societal equivalent of those office parks in
Sunnyvale, that help us stay flexible in the midst of turbulent lives.
We’ll need modern insurance and financial products that encourage us to
pursue entrepreneurial ideas or the education needed for a career
change. And we’ll need incentives that encourage us to take these risks;
we won’t take them if we fear paying the full cost of failure. Acemoglu
says we will need a far stronger safety net, because a society that
encourages risk will intrinsically be wealthier over all.
History
is filled with examples of societal innovation, like the United States
Constitution and the eight-hour workday, that have made many people
better off. These beneficial changes tend to come, Acemoglu told me,
when large swaths of the population rally together to demand them. He
says it’s too early to fully understand exactly what sorts of governing
innovations we need today, because the new economic system is still
emerging and questions about it remain: How many people will be
displaced by robots and mobile apps? How many new jobs will be created?
We can’t build the right social institutions until we know the precise
problem we’re solving. “I don’t think we are quite there yet,” he told
me.
Generally,
those with power and wealth resist any significant shift in the
existing institutions. Robber barons fought many of the changes of the
Progressive Era, and Wall Street fought the reforms of the 1930s. Today,
the political system seems incapable of wholesale reinvention. But
Acemoglu said that could change in an instant if enough people demand
it. In 1900, after all, it was impossible to predict the rise of the
modern corporation, labor unions, Social Security and other
transformative institutions that shifted gains from the wealthy to
workers.
We
are a strange species, at once risk-averse and thrill-seeking,
terrified of failure but eager for new adventure. If we discover ways to
share those risks and those rewards, then we could conceivably arrive
somewhere better. The pre-modern era was all risk and no reward. The
corporate era had modest rewards and minimal risks. If we conquer our
fear of failure, we can, just maybe, have both.
Adam Davidson
is a frequent contributor to the magazine and a founder of NPR’s
“Planet Money.” He is working on a book about the future of the American
economy for Knopf.
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We will need stronger safety nets because
technology is destroying jobs at an exponential rate. The USA will be a
very different place in 10 years, so the GOP dinosaurs better hold onto
their boot straps.
The cleverest of ideas goes nowhere if there is
no perceived need for it. Of course, with inspired marketing a need for
something can be fabricated but that only occurs in a small number of
cases which just proves the larger point.
Take the case of Xerox
and AT&T that is mentioned in the article. It wasn't simply that the
various technologies mentioned weren't appreciated, it's just that a
vast infrastructure would have to be created to provide a capability for
which there was no perceived need. A good example of that was the first
portable PCs. I recall various people in our company were entranced by
these devices, bought them, and proudly carried them around for
meetings. All the early fascination disappeared when it became apparent
that there was limited software that was also troublesome to use and had
the habit of crashing at the most inopportune moments.
Personal
PCs could have gone the way of Sony's Betamax or Video Discs (remember
those?) if not for Microsoft having an open architecture that allowed
anyone to write software for it which, amazingly, people did thereby
creating a need that wasn't originally there. Apple, on the other hand,
almost went under in part because of their use of a closed architecture
that was more profitable but too restrictive compared to Microsoft's
approach.
In the end the entire PC business is based on something
no one could have imagined, that a world of nerds existed that was
willing to write mind-numbing software. Who knew?
"Generally those with power and wealth resist any signficant shift in existing institutions."
And
today the nexus of the two most powerful institutions in the U.S. - big
banks and government - is the Federal Reserve. The Fed is resisting
with every fiber of its being against a force which threatens both -
deflation. Yet it is this same deflation which benefits the working and
middle classes.
Nice story about our home-grown American
Corporate Capitalistic version of Calcutta's garbage land-fill sustained
society of India. Each step forward we take in the name of mass
producing and selling ever more endless quantities of more useless junk
simply for the sake of higher profit margins and limited real
technological gain, we also take one step closer to becoming just like
the rest of India in every other economic and social sense, with one
have for every 10 to 100 million have-nots.
A glorious undertaking . . . our American Consumerist's Dream.
It all sounds so wondrous! Innovation! Conquering fear! Disruptive tech clearing out the deadwood! Onward! To the stars!!!
How
many millions of people, families, animals, and now species have been,
and are now being, torn apart -- and not metaphorically -- by our
accelerating hubris? How many now? All?
It's so exciting!!
Perhaps a better choice of words, instead of
"innovation" and "failure", would be "innovation" and "selection". After
all, some innovations succeed and some fail. And some innovations
succeed for a while and then fail, and "a while" can be minutes or
millennia. "Selection" (as it's used in biology) encompasses all those
possibilities.
Innovation is a progressive process, and
selection is a conservative process. Innovation is necessary for
progress, and selection conserves the innovations that are successful,
so that progress isn't lost.
From my view in California I worry about young
people, many starting out with huge student debt, being enticed into
expensive homeownership or being encouraged to lease in apartment
complexes with amenities galore -- how can they become anything but
risk-averse?? They don't see it now because they are dazzled by their
high salaries that allow them to buy into all this -- but they will
surely become exploited employees down the line because they feel they
can't afford to lose everything.
Kudos to those who can, despite the pressures, keep it simple from the beginning and adventure out to try other things.
History is also filled with examples of how
ongoing businesses fought any new ideas that might replace their
products. They bought up patents on gas savings etc. to keep them from
the marketplace. It is always a ongoing battle between the established
folks and the newcomers. its a battle that is always slowing progress
down.
Tye major battle now is the innovative "green techs' being
fought at every front by the fossil fuel guys. They have the money and
have bought off the politicians to limit the technology for as long as
they can. The same thing is sen with the Pharms companies and the
generic folks. Again they enlist the politicians to stop their
competition. Its interesting that the repubs are the main ones who are
up for sale to limit free markets and competition and they are the ones
who claim to be the champions of these capitalistic ideas.
Innovation = replacing human labor/skill with fossil fuel powered machines. Period.
Fuel
costs less than labor due to purposeful mispricing/false accounting.
Instead of one (fuel) being the equivalent to the other (labor),
fuel/input cost = extraction costs + interest on money lent + land rent.
The outcome has been ongoing exhaustion of fuel supplies and other
necessary inputs -- capital. Exhaustion is the consequence of capital
being too cheap, too easy to squander on wasteful 'innovations' such as
cars, freeways, suburbs, tower cities, finance, insurance, giant
governments, militaries, etc.
As fuel and other inputs become
unaffordably costly it becomes plain to see how little our precious
gadgets are really worth. For fun and distractions we have ruined
ourselves ...
Steve, don't forget that waste is also almost
always externalized, so add that to the part of the bill that no one is
paying for all the so-called innovation.
Energy sources have a lot to do with the
transformations you describe. The steam engine, coal tar, large
manufacturing plants, and modern transportation were all made possible
by the combustion of fossil fuels. When the only energy you have comes
from the sun, through the growth of plants and animals, small farmers
and artisans working in decentralized places would be the norm. A new
energy transition is under way, if fossil fuel interests don't manage to
stop it, and I'd be interested to hear how you think it will affect the
economy.
In view of all this information, it is impressive that the author seems somewhat hopeful. He must be a younger person.
from
an older's vantage point, this failure thing is putting the onus on the
leaders we elect in a government structure that is past it's prime. We
cannot hope to keep up with our form of government which allows the
tyranny of the minority to hold us back. Therefore, my hope for the
future and our ability to meet it is being dashed every day by the very
foundation of our government (read Constitution) which is in need of a
radical overhaul. And the robber barons will do nothing to loosen their
choke hold on the current system.
At the end of the day it seems important that we
as a society get a handle on technological development rather than
technology for profit would control human development. This indeed is
where our current capitalist institutions fail and stand in the way of
what i would call progress. The human community has to decide what is
adequate for the human condition and put the right policies into place
to oontrol which technologies and when they should get developed for the
greater good of the majority of people.
It's hard to know what to say here. By 1900,
the existence of corporations and labor unions was well established. The
conflict between Capital and Labor was well underway. The future was
being predicted left, right and center.
Some fifty years ago,
John Kenneth Galbraith described the economy as being made up of two
parts, which he called the planning sector and the market sector. The
planning sector contained the government, the wealthy, and the
management of firms that could largely control their areas of business,
typically in collaboration with each other. In the market sector was
everything this article presents as "the economy": the quick changes,
the insecure employment, and the innovations in business relations (that
somehow never change the underlying distribution of wealth). And this
was essentially a pro-capitalist analysis. There were other voices that
identified deeper injustices and called for more radical change.
The
"Failure Age" is hardly new. In the market sector it has existed since
the beginnings of organized society. It's only new to those who haven't
looked far enough around them, or who somehow thought their own place
was more secure than it turned out to be.
Good article. I wonder about the ending though:
"If we conquer our fear of failure, we can, just maybe, have both." Both
what? It sounds like the author Adam Davidson thinks we can have both
risks and rewards.
But don't we already have that now? And for
most people, it's not working very well. The average American worker
gets paid under $20 an hour. Life at that level is tough. You cannot
build your own safety net, since you spend all you earn. Lots of risk,
too, since a layoff or a medical bill can put you in bankruptcy.
But
the rewards for some are very great. The top 1% that we see on
television (professional sports figures, news anchors, actors, dotcom
billionaires) rake in the bucks. But their numbers are very few. The
bottom 50% are no longer mostly in a strong middle class, as noted
above.
It's hard to think of a solution. We workers all seem to
be playing in a lottery, hoping to be one of the winners in the economic
game. But like all lotteries, most players will be disappointed. Isn't
that how risk and reward works.
It does help to talk about these
issues, even though solutions are hard to come by. Judging from the
recent elections, no one in government, Democrat or Republican, cares at
all about issues like this. That's a shame.
We survived one "guilded age" and we can survive
this one. There will be changes, and people will demand those changes.
Even with rigged voting, people will find a way to unseat these
corrupted congress people. The current economy with its millions of
unemployed living on limited safety nets and expiring food stamps will
not be ignored forever. We cannot sustain ourselves on a service only
economy; we will need to begin making things again. We are a huge
diverse country, and we will emerge from this. The current leadership,
not so much.
What most don't wish to address is our biggest
failure has been in the family unit with people not taking
responsibility for raising their children to adulthood. This manifests
itself in problems throughout school, at work and in society. It is a
failure we cannot afford and must be addressed or we will all continue
to suffer, now and in the future.
The current economy has shattered your so-called
"family unit"; and your righteous lecture about family responsibility
ignores how many mothers and fathers are both working, how many single
parent families are headed by women who work. The '50's have been gone
for over 60 years, and they are not coming back.
gunste
is a trusted commenterPortola valley CA27 days ago
There have always been companies that resist
innovation. In my 10 years at Memorex, we developed process control and
test instrumentation to get a handle of the product quality at all major
steps of the tape making process. Engineering resisted because they did
not want an instrument telling them that the process was not going
right. Management stood by and took no part in that contest the status
quo vs. innovative process control. They wanted to stick to the policy
of making more if the product did not turn out right. - An unsustainable
way when competition drove the price down. - Shortly after I left the
company, they pulled out all remaining instruments.
Memorex tape manufacturing went down the drain a few years later.
Meanwhile, I built my own small business on making and selling the same
instruments world wide to magnetic media manufacturers. After 14 years,
when my instruments became obsolete in view of new developments, I
retired in comfort to a life of traveling the world, instead of a
miniscule corporate pension.
The lesson is that management must be
technically competent enough to improve the products and processes for
maximum efficiency and QUALITY. Failure leads to the business going
bust.
What is missing in the article is the change in
conduct of management. Using Hewlett-Packard as an example I feel
fortunate to have worked there during what might be called some of the
golden years, when Bill and Dave were still around. I recall a summer
when one division was struggling and the company relocated people
temporarily to work at another, doing whatever needed to be done. Now it
is like a scene from the 'Fifth Element' where Zorg tells his staff to
lay off a large number of people, 50,000 in HP's case. Some of the
managers I knew said that they were glad to be retiring, as they did not
like the change in business ethics and what they were being asked to
do. With other companies witness the collusion on hiring practices in
Silicon valley in order to keep wages down, the large numbers of H1-Bs
designed to do the same, and the willingness to export huge numbers of
jobs overseas regardless of the social impact, persistent discrimination
in the upper ranks, etc.
HP use to manage failure pretty well,
it was not on the backs of employees, the company would continue to
prosper, if one left to do a start-up they would still be welcomed back,
and employees could be contributing members of the community. Now they
seem to manage it about as well as most others.
I also worked at HP while Bill and Dave were
alive. There were stories of Dave having a bag lunch with a co-worker
of mine in Palo Alto, Dave filling up his own gas tank at the gas
station near the site I worked at, Bill being late for a meeting with
some engineers because he stopped to fix a flat.
They were
people who started their business during the depression and knew that
employees valued steady employment not executives obsessed with
"shareholder value".
The two founders were concerned about profits, quality, customers, employees and stockholders and vendors.
The
new HP is like a start up in one way, that being intrinsic book value.
As HP has acquired companies and shed manufacturing and real-estate,
the goodwill acquired has caused intrinsic book value to go negative
(about negative 5 billion) in the most recent quarter.
This is a
back to the future moment as HP's intrinsic book value was probably
close to negative when Hewlett invented their first product in 1938.
But
HP's stock performance has been good even though short seller James
Chanos called it the "ultimate value trap" in 2012 when the stock was
$19.30. Now the stock is $36.92, resulting in a very painful short at
$19.30.
The Japanese innovations from the 1980s were
systematized by a method they called QFD. Technology was deployed as a
solution to a customers' spoken and unspoken needs (problem,
opportunity, image). If the need was strong and Inadequately met,
technologies were developed. Just inventing new technologies for
invention's sake was too risky - better to establish a market need
first.
QFD is still going strong. Learn more at the 26th QFD Symposium on December 5 2014 in Charleston SC. www.qfdi.org
Carlson, and democrats will shout not fair, and
subsidize the failed idea! Guess this shows the monumental task we face,
when even this article can become political cannon fodder.
Excellent well researched article giving
texture. depth and historical perspective about social and political
changes brought about by technological changes.
Mr. Davidson's
piece caption " Welcome to the Failure Age!" indicates his positive
outlook view about the future. As he reasons " In 1900, after all, it
was impossible to predict the rise of the modern corporation, labor
unions, Social Security and other transformative institutions that
shifted gains from the wealthy to workers."
Many readers will
share the author's views and many will not. The old division between
optimists vs pessimists about life. From an analytical standpoint, there
are two ways to tackle the question.
The first school of
thought says technological breakthroughs always bring prosperity to
society. Like the industrial revolution in the 19th century, the
internet revolution will benefit the world in the 21st century.
The
second school of thought identifies winners and losers. Positive
outcomes (job creation and wages, for example) are weighed against
negative outcomes such as concentration of income and political power.
The
most important lesson from history is the following. Any major
technological game changer revolution has created winners and losers.
The question is whether the winning side is willing to compensate the
losing side.
Today, the majority of middle class Americans are no longer sure whether they are on the winning side.
Weird Stuff is the perfect metaphor for the new
Internet economy. You drive over to provide them with your stuff for
free, which they take, and sell back to you later when you need it.
I'm
all in favor of "try hard, fail rapidly", but after 30 years in Silicon
Valley, it's come to the point where everything is instantly
expendable: people, careers, ideas, equipment.
It's not the
technology promoting this either. It's business and finance people that
are turning Tech into a Pachinko parlor. If you don't get a payoff from a
machine in 20 minutes, you go on to the next one.
IBM, Bell
Labs, Xerox-PARC, passed on commercializing a lot of Tech, but the level
of waste is actually far higher today. Too many bad or "me too" ideas
get funded, and investors won't stick with anything that takes real
R&D.
Blog PostDecember 9, 2014
Director, Center on the United States and EuropeSenior Fellow, Foreign Policy© 2014 The Brookings Institution
