David Warsh: They want a 'Fourth Revolution' in the West

  BOSTON

When he was 18,  before entering college, John Micklethwait toured the  U.S. for a year with a friend, traveling on Greyhound buses. When they arrived in San Francisco, they spent a memorable evening with expat British businessman Antony Fisher, founder of London’s Institute of Economic Affairs, and his downstairs neighbor, Milton Friedman.

They talked about the possibilities now that Margaret Thatcher had become  prime minister and Ronald Reagan president of the United States. The conversation made a deep impression on Mickelthwait. Then it was back to Magdalen College, Oxford, and an eventual career in journalism.

Today his companion is a major general, but Micklethwait commands many more battalions as editor-in-chief, since 2006, of The Economist. His new book is The Fourth Revolution: The Global Race to Reinvent the State, written with longtime collaborator Adrian Wooldridge, management editor of the magazine. They argue that the West should complete the revolution of the ’80s that Friedman started.

It won’t be easy, the authors acknowledge. Both the welfare state and democracy itself must be reined in, the former by redefining and reducing expectations of it; the latter by consensually imposing a series of self-denying limits: global budget caps, monetary targets, earmarked taxes, co-payments, borrowing ceilings, sunset provisions and the like.

The successful construction and adoption of such a fiscal constitution would amount to a “Fourth Revolution” in the nature of government in the West, they say.  Previous revolutions they associate with three philosophers who at intervals wrote influentially on the role of the state. This catechism, a familiar device from their magazine, is designed to buttress the case for what they hope will happen next.

Thus, Thomas Hobbes described the fundamental purpose of the nation-state as the creation of law and order, thus the overwhelming force necessary to maintain  the nation-state known ever since, at least to Hobbesians, as “Leviathan.” John Stuart Mill, who lived in a more prosperous time, imagined the state as a kind of “night watchman,” dedicated to free trade, social rights (of women in particular),  and education.   And Fabian Society socialist Beatrice Webb conjured a ”welfatre state” in the 20th century in which government influence extended into every sphere of production and consumption.

The authors are then off on a round of breathless reporting: to California, which they say illustrates everything that is wrong with modern democratic government, until, miraculously, under Gov. Jerry Brown, the state begins to straighten itself out; to Singapore, to see Lee Kuan Yew, founding father of  a new model of national development, adopted in some ways by China, “that is in many ways leaner and more efficient than the decadent Western model”; to Sweden, where a wave of privatizations has reduced government spending in  20 years from 67 percent of GDP to 49 percent.

Along the way, we meet many of the usual suspects. Clayton Christensen, of the Harvard Business School, is “perhaps the world’s most respected writer on innovation,” who thinks  that the public sector will be upset by what he calls “mutants”  -- new organisms that may spin out from unexpected directions. (Their esteem is not  universally shared.) Peter Theil, a prominent venture capitalist, laments that technology has so far failed to change the public sector.

Devi Shetty, an entrepreneur, “whom American surgeons may one day remember the same way that American engineers think of Kiichiro Toyoda,” has a production line of  40  cardiologists who perform 600 operations a week in Bangalore.

There is a peroration in the book:

"The Fourth Revolution is about many things. It is about harnessing the power of technology to provide better services. It is about finding clever ideas from every corner of the world. It is about getting rid of outdated labor practices. But at its heart it is about reviving the power of two great liberal ideas.  It is about reviving the spirit of liberty by putting more emphasis on individual rights and less on social rights. And it is about reviving the spirit of democracy by lightening the burden of the state.''

One indication that history may not be tending in this direction is that the subject of climate change comes up nowhere in the book.  This is odd because the weekly Economist does such a good job of reporting on the growing scientific consensus that global warming is becoming a serious problem.

Another contraindication is to be found in the authors’ proposal to “leapfrog over the muddle of Obamacare,” borrowing equally from “Old Europe and New Asia.” Why not combine a European-style single-payer health care system, featuring an independent medical board to evaluate the cost-effectiveness of medicines, devices and procedures, with means tests and a Singapore-style stream of earmarked taxes pay for it.  That might strike Tea Party fundamentalists as socialism, they write, but  it is precisely the kind of transparency-inducing global cap that  they advocate in other connections, including Social Security.

It is not fair to place so much weight, as the authors do, on Milton Friedman’s shoulders. The Chicago economist, who was 94 when he died, in 2006, was a deeply consequential 20^th Century figure whose role is not yet well understood. He may be fruitfully compared to John Maynard Keynes. Both men were authors of clarion wake-up calls. Keynes argued that government had a role in stabilization policy that it must not shirk; Friedman, that there are many economic ways to address a problem (including, presumably, the threat of global warming). Neither man was much concerned in his day with the finer points of economic analysis,  but each commanded the attention and, ultimately, the agreement of his age.   Other theorists, notably James Buchanan and Friedrich Hayek, have been more concerned with the idea of fiscal constitution.

At one point in their roundup, the authors quote Michael Bloomberg, the billionaire financial analytics entrepreneur who served three successful terms as mayor of New York City before returning to civilian life.  Among other things,he oversees Bloomberg BusinessWeek, which he bought while he was mayor. Running a city is different  from running a business, Bloomberg says.

''People are motivated by different things and you face a much more intrusive press.  You cannot pay good staff a lot of money…. In business you experiment and you back the projects that win. The healthy bits get the money, and the unhealthy bits wither. In government the unhealthy bits get all the attention because they have the fiercest defenders.''

Doubtless so.  But that doesn’t mean that governmental processes are not being improved, mainly along the lines advocated by Micklethwait and Wooldridge.  Perhaps it is familiarity with the details that makes Bloomberg BusinessWeek so consistently interesting when it arrives along with The Economist each week.  Hardly a week passes that I don’t compare the one to the other. In coverage of the Fourth Revolution, most weeks I think that the Americans are getting ahead.

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A 14-page article, The Biden Agenda: Reckoning with Ukraine and Iraq, and keeping an eye on 2016,  by Evan Osnos, in the current issue of The New Yorker, signals the vice-president’s willingness to contest the Democratic presidential nomination with former Secretary of State Hillary Rodham Clinton. For both the politician and the journalist it is an impressive outing (Osnos, recently returned from China, is author of Age of Ambition: Chasing Fortune, Truth and Fraith in the New China). The article would seem to promise a spirited campaign.

David Warsh, an economic historian and a longtime financial journalist, is proprietor of economic principals.com.

David Warsh: The disrupted life of a business guru

  BOSTON

Chances are, unless you are an MBA, you’ve never read anything by business guru Clayton Christensen, the author of a series of self-help business books beginning with The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail, in 1997. Now, however, an interesting brouhaha has erupted surrounding Harvard historian Jill Lepore’s systematic evisceration of the arguments of Christensen last week in The New Yorker.

Lepore describes the Harvard Business School professor’s “disruption theory” as the product of a particular mood and moment in time – “the manufacture of an upsetting and edgy uncertainty,” as she puts it, a “competitive strategy for an age seized by terror.”  In the end, she says, it turns out to be an unreliable guide to action. “Transfixed by change, it’s blind to continuity. It makes a very poor prophet.”

Christensen immediately responded in an interview he gave to Bloomberg Businessweek. “I hope you can understand why I am mad that a woman of her stature could perform such a criminal act of dishonesty—at Harvard, of all places.”  The American Enterprise Institute, Paul Krugman and Salon's Andrew Leonard oeach chimed in. Harvard computer science Prof. Harry Lewis, himself something of an expert on disruptive change, added a couple of illuminating posts, "The Bogosity of Disruption Theory'' and "Clayton Christensen is Mad''.  Meanwhile, Harvard Magazine dubs Christensen a "Disruptive Genius" in a lengthy story in its summer issue.

To understand the contretemps, it helps to begin with a profile by staff writer Larissa MacFarquhar that appeared in The New Yorker two years ago.  To describe ''When Giants Fail: What business has learned from Clayton Christensen'' as credulous is an understatement; it is, in fact, a modern-day hagiography. It begins this way:

'“You can tell from the way I speak. I had a stroke about eighteen months ago. I’ve been learning how to speak English again, and you’ll see I still can’t come up with the right words sometimes.” The most influential business thinker on earth looked up and smiled apologetically. He stood with his hands in his pockets. His hair was neatly parted on the side. He was very tall. “I have a tendency to speak to the floor,” he said. “It’s because if I look at you, you distract me.”'

I would like to have been in the room when the magazine fact-checker asked for the source on the “the most influential business thinker on earth.” Later in the article, it turns out to depend mainly on a magazine cover story at the height of the dot.com boom:

"Andy Grove [CEO of Intel] stood up at the Comdex trade show in Las Vegas, holding a copy of The Innovator’s Dilemma, and told the audience it was the most important book he’s read in ten years.  The most important book Andy Grove had read in ten years! A man from Forbes was in the audience that day, and in 1999, Grove and Christensen appeared together on the cover of Forbes, and things were never the same for Clayton Christensen again.''

Thereafter, Michael Bloomberg sent copies of the book to 50 friends.  Bill Gates invited the professor to his home. Christensen partnered (for a time) with technology writer George Gilder.

By 2012, a couple of former columnists for The Times of London had invented Thinkers50, a biennial poll seeking to identify top management “thought-leaders” Christensen won twice in a row.

To that point, MacFarquhar’s article had been a chronicle of the early studies of computer disc drives and steel mini-mills (no mention of unions or foreign competition) that sparked Christensen to write The Innovator’s Dilemma, plus an account of his growing up Mormon on the wrong side of the Salt Lake City tracks. Well-managed businesses frequently remained too close to their customers’ needs to recognize, much less develop, new technologies that anticipate future needs, he had discovered; it was at the less profitable low end of the market where disruptive innovations most frequently emerged. Like his innovators, Christensen was “a low end kind of a guy,” MacFarquhar wrote, a diamond in the rough who nevertheless attended Oxford University as a Rhodes Scholar.

A key moment in MacFarquhar’s exposition came when Christensen is hired to find a way to grow the market for milkshakes at one of the big fast-food chains. Survey data were extensive, but no improvement the company made seemed to increase the market. The consultant took a different approach, asking himself “what job is a customer trying to do when he hires a milkshake?” Extensive observation and interviewing followed; it turned out that most purchasers wanted a breakfast drink, one that wouldn’t spill and  that would last longer on the drive to the office.  Thus more viscous, not less, was the answer, along with tiny chunks of fruit to surprise and briefly stop up the straw. The implication is that the market for milkshakes began growing again, though how much, MacFarquhar didn’t say.

Christensen concluded that the only way a big company could avoid being disrupted would be to start a “skunk works” – a small spinoff unit located far away from headquarters, staffed by out-of-the-box thinkers who are charged with entering new businesses inimical to the interests of the company’s main business. This is not exactly a new idea, but Christenson applied it with greater abandon than ever before. He told Then-Defense Secretary William Cohen his parable about mini-mills and sheet steel, whereupon the Defense Department sets up a counter-terrorism unit in Norfolk, Va., Later, Christensen himself became Harvard University’s skunk works, taping a lecture for the University of Phoenix to demonstrate the potential of massive open online courses.  Harvard promptly entered into a joint venture with the Massachusetts Institute of Technology to pursue the possibilities.

So much for Christensen, New Yorker release 1.0. MacFarquhar is an accomplished writer, but in dealing with business history, she was operating outside of her comfort zone. Her Christensen article was one of a series of profiles of “moral saints,” part of a book about extreme morality that began with a 2009 New Yorker article about a series of persons who donated kidneys to others whom they did not know.

Harvard’s Lepore on the other hand, approaches her topic as a professional historian.  She is the author of several well-received books, beginning   Name of War: King Philip's War and the Origins of American Identity (Knopf, 1998). She is at pains to establish the sources of her background knowledge as well. For a short time at the end of the 1980s, as an assistant to an assistant, she answered phones for Harvard Business School’s Michael Porter, the business guru whom Christensen has gradually displaced.  (Before Porter there was Peter Drucker, and before Drucker there was Bruce Henderson, of the Boston Consulting Group.)

Lepore does a good job of marshalling evidence against Christensen’s more sweeping claims as an industry analyst.  His sources, she writes, are “often dubious and his logic questionable;” his theories lack predictive power. His stylized graphics may provide the underpinning of the analysis of The New York Times “Innovation Report.”  but most of its would-be disrupters have yet to turn a profit. And his 2011 book, The Innovative University: Changing the DNA of Higher Education from the Inside Out, with Henry Eyring, contributed to a frenzy for MOOCs, which hasn’t begun to live up to expectations.

Hooray for The New Yorker for permitting one staff writer dispute another, even obliquely (MacFarquhar is married to fellow staffer Philip Gourevitch). Hooray, too, for Harvard University, for merely wincing as one professor attacks another, and, from the citadel of the faculty of arts and sciences, mocks the methods of the business school.  Disruption vs. continuity?  Lepore has broached an important topic. You haven’t heard the last of it.

David Warsh, a long-time financial journalist, is proprietor of economicprincipals.com and an economic historian.

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