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Nation should foster 'creative destruction' of firms, Business School's Romer tells audience

BY CATHY CASTILLO

Economic growth and change can be painful, but discovery and change are necessary for economic gain, Paul Romer, Business School professor of economics, told the audience at Stanford's alumni conference in London last week.

"If we had not tolerated disruption in the past, we'd still be traveling in oxcarts," he said.

Technological growth can cause companies to fall behind and fail, costing workers their jobs. But "trying to resist change by protecting ineffective firms, impeding flows of goods and ideas, and making high income an entitlement instead of a reward will cause an economy to fall even further behind," Romer said.

Government policies such as bailout loans, nationalization of failing firms and legal prohibitions on firing people can have a negative effect in the long run. "There is growing suspicion that high levels of long-term unemployment in continental Europe may be unintended consequences of policies designed to fight unemployment."

Romer said governments must resist demands from the electorate to shore up failing firms and guarantee that workers keep their current jobs. Instead, he said, governments must give individuals confidence and encourage the belief that economic change brings opportunity. Nations that can foster this process of "creative destruction" can count on sustained economic growth, he said.

"Perhaps the growth we get is not worth the disruption we have to endure to get it," mused Romer. "I believe that growth is worth the disruption -- but it would be healthier to be open about the costs and benefits associated with it." Growth -- for instance a net gain of .5 to 1 percent compared to the past century -- allows individuals to improve their personal economic status without having to make someone else worse off, he said.

The two-day conference, sponsored jointly by the Business School Alumni Association and the Stanford Alumni Association, drew 250 people from 21 countries. At a Friday night dinner, Percy Barnevik, Chairman of ABB Asea Brown Boveri Ltd., was recognized by the Business School's European alumni with the European Business Leader of the Year award.

Carbon paper, bureaucracy and a belief in the communist system combined to produce a wealth of historic documents in Eastern Europe, said Norman Naimark, the Robert and Florence McDonnell Professor of Eastern European Studies. As the Soviet Union disintegrated, East German secret police destroyed tons of documents "but since five or six copies existed of most of them, they couldn't destroy everything," Naimark said. Because of their belief in the success of the communist system in East Germany, bureaucrats maintained elaborate archives that are now providing a wealth of information for historians.

Naimark, who published his book The Russians in Germany in 1995, has compared archival records by East German and Soviet authorities that sometimes paint a different picture of the same events. East German records were virtually silent on hundreds of thousands of rapes of German women by Soviet soldiers immediately after the end of World War II. However, Soviet records included complaints by Communist officials to their superiors that the rapes were derailing efforts to sell German communities on new communist theories in the late 1940s.

Until the 1950s, Communist officials denied that they were mining uranium in East Germany, but Soviet records trace the radiation-related medical problems of tens of thousands of workers conscripted to work in mines near the Czech border. Naimark uncovered some interesting archival records about himself in his searches. He found copies of about 60 letters he had written to friends in East Germany that had been archived by that country's secret police. "I'd lost most of the copies myself," he said. "They just opened the mail, copied them, replaced them and sent them on their way."

In other presentations:

  • Daniel Diermeier, assistant professor of political economy at the Business School, described the 1995 protests by the environmental activist group Greenpeace that forced Shell Oil UK to reconsider its plan to dispose of the obsolete oil drilling platform Brent Spar by sinking it in the North Sea. Even though the environmentalists later admitted their estimate of the potential pollutants aboard the platform was wrong, their program of waterborne protests and helicopter raids forced Shell to tow the platform to shore and dismantle it there.

Greenpeace was successful, Diermeier said, in part because Shell did not act quickly to establish its case that sinking the rig at sea did not pose a great ecological danger. The protestors, who also launched a major consumer boycott of Shell gasoline in Germany, painted a picture of an oil company interested only in saving money.

"Activists can identify issues that the public cares about," he said. "Because of this, it can be in the interests of industry to consult environmentalists to see in advance what public reaction might be. In some cases, activists understand the political global aspects of a business better than business itself does."

  • William Barnett, associate professor of strategic management and organizational behavior, described how the strengths that created a successful company may not mean success when the firm expands into another country. For one thing, a firm may have built a reputation slowly over time using strengths that today are transparent to rivals who may copy them easily. "When you grow within a country, you may do so slowly over a long period of time. When you move outside you have to replicate the whole process at once to be successful," he said.

 

  • "With no one in charge, how do ants know to allocate the right number of workers to the right task?" asked Deborah Gordon, assistant professor of biological sciences, who has spent a large part of her research life unlocking the secrets of how ant colonies operate. When the nest needs cleaning because of an accident, more ants show up to haul out the garbage. When a surplus of food appears, extra work crews magically appear to haul in the bounty. The secret, says Gordon, is the distinctive chemical scents ants carry about their daily tasks. Ants communicate by touching antenna, identifying their sisters (all workers are sterile females) and the task each ant performs within the colony. When the number of ants needed for a specific task changes, members of the colony sense this by the scent of the ants passing them and may switch tasks to meet the challenge.

Even though they can tell what task extra workers are needed for, ants may ignore the call to change tasks, she said. Just knowing there are groceries to be carried in isn't enough to stir some of them from hanging out around the ant equivalent to the water cooler. SR