Neo-mercantilism

Update on the Chinese company Lenovo's offer to buy IBM's PC business: the Committee on Foreign Investment in the United States, "a multi-agency group," has, according to Steve Lohr in today's New York Times, okayed the deal, which had rung alarm bells at the highest levels of the Bush administration and prompted "a full investigation, which occurs in far fewer than 1 percent of cross-border deals." The agency's deliberations are secret -- not much of a surprise there.

Steve Lohr, "Sale of I.B.M. Unit to China Passes U.S. Security Muster," New York Times, 3/10/05, C7.

The article ends on an interesting, rather cryptic note (perhaps due to poor editing?). The second-to-the-last paragraph offers a comment from a member of a Congressional group, suggesting that "Congress [should] . . . review the authority of the investment committee, which dates from the cold war [sic]." The last paragraph quotes an Illinois Republican who "plan[s] to push for hearings to see if the committee's role should be expanded to 'take more account of economic security as well as military security.'"

There's a slippery slope -- defining "economic security." It's difficult these days to discern a coherent Republican position on the role of government; or is this it: minimal in rhetoric; maximal (neo-mercantilist) in practice?

H. Potter unit

Update on my beautiful Toshiba R-100 ultra-ultralight laptop (codename Sherlock), on which my husband inadvertently sloshed some chicken soup: it arrived at the hospital (Toshiba Notebook Depot) in Louisville, KY, a week ago (3/2/05), is still there, and is still in a coma.

I know this because I can check its status on the web (as I do several times a day), where I can read the (rather cryptic) notes that the technicians have entered. (Techno-twits like myself love this kind of thing -- kudos to Toshiba!) When the technicians got to it last Friday (3/4/05), three entries appeared in rapid succession. The first two entries were labeled "Repair in progress" with various notes about keyboard failure, will not power up, and the like. The last entry was more ominous: "On hold," a string of parts information including "sysbrd" (I recognize "system board," the heart and soul of a computer, when I see it), then "H. Potter unit." Hmmmm, I said, frowning, what could this be.

Thinking it might be code of some sort related to Harry Potter (yes, I read one), maybe to suggest that Sherlock had taken on magical properties, I googled various permutations: no results. So yesterday I called Toshiba's support number to see if I could find out more. The gentleman I spoke with, looking at the same info on the web, didn't know what "H. Potter unit" might mean, but he put me on hold, called the Depot, then returned to inform me that they expected the system board to arrive next Wednesday -- a week after it was ordered: is it coming from Japan?!

Shortly after this, a friend called to inquire about Sherlock and I mentioned this cryptic reference to Harry Potter. His daughter, now 14 years old, has been a Harry Potter nut since the first novel was published. A little later he called me back to tell me that he told her about it and she said -- I can just hear the knowing way in which she said this -- "Oh, 'Harry Potter unit': that means it takes a wizard to fix it." I'm sure she's right. What a powerful impact a little chicken soup can have.

Monopsony and vertical integration

For the last week or so, I've been teaching about the history of vertical and horizontal integration and their many ramifications in the late 19th century. Vertical integration was the new strategy of the period, developed by men such as Andrew Carnegie (iron and steel) and Philip Armour (meatpacking) who strove singlemindedly to drive costs out of the production process (to put it in today's parlance). The way that Wal-Mart, its core business focused on retailing, uses its great market power vis à vis its suppliers (see earlier post) to drive costs out of the supply chain seems like the functional equivalent of vertical integration in this respect.

Which is the "better" strategy--outright control or preponderant market power? There's no universal answer; it depends on the context, says the historian (an economist may answer differently). Carnegie's markets in the late 19th century were sufficiently large and stable that the risks of investing in control of supplies, labor, and distribution facilities were minimal and the reductions in unit costs that could be achieved by controlling all aspects of the process were substantial. Market conditions since the 1960s have become much more volatile for a variety of reasons, so investing in dedicated facilities/capabilities carries a much higher risk that market conditions will shift and render those facilities/capabilities useless. In this context, it makes more sense to retain the flexibility of contract relationships, using market power instead of outright control to force cost reductions.