By Dr. Burton W. Folsom,
published on May 1, 1997

Today, the Dow Chemical Company is an industrial giant, famous for its plastics, Styrofoam, and Saran Wrap. But when the company first went into business 100 years ago, in May 1897, almost no one took it seriously. The occasion of the company’s centennial offers a timely opportunity to retell an important economics lesson.

Herbert Dow, the founder, had already started two other chemical companies: one went broke, and the other ousted him from control. “Crazy Dow” was what the folks in Midland, Michigan, called him, as he pursued his entrepreneurial vision of an American chemical industry. Like David fighting Goliath, he actually believed he could throw stones at the large German chemical monopolies and topple them from world dominance.

In the story of Herbert Dow, not only do we see the spirit of freedom that helped America become a world power, we also learn how a small company can overcome the “predatory price cutting” of a large cartel.

Dow invented a process to separate bromine from the sea of brine underneath much of Michigan. He then sold bromine to other firms, which made it into sedatives and photographic supplies. With gusto, Dow sold it inside the U. S., but not outside—at least not at first.

The Germans had been the dominant supplier of bromine since it first was mass-marketed in the mid-1800s. No American dared compete overseas with the powerful German cartel, Die Deutsche Bromkonvention, which fixed the world price for bromine at a lucrative 49 cents a pound. Customers either paid the 49 cents or they went without. Dow and other Americans sold bromine inside the U. S. for 36 cents. The Bromkonvention made it clear that if the Americans tried to sell elsewhere, the Germans would flood the American market with cheap bromine and drive them out of business.

By 1904, Dow was ready to break the unwritten rules: He was so strapped for cash that he decided to sell in Europe. Dow easily beat the cartel’s 49 cent price and courageously sold America’s first bromine in England. After a few months of this, Dow encountered an angry visitor in his office from Germany—Hermann Jacobsohn of the powerful Bromkonvention. Jacobsohn announced he had “positive evidence that [Dow] had exported” bromine. “What of it?” Dow replied. “Don’t you know that you can’t sell abroad?” Jacobsohn asked. “I know nothing of the kind,” Dow retorted. Jacobsohn was indignant and left in a huff.

Above all, Dow was stubborn and hated being bluffed by a bully. When Jacobsohn stormed out of his office, Dow continued to sell bromine to countries from England to Japan. Before long, the Bromkonvention went on a rampage: It poured bromine into America at 15 cents a pound, well below its fixed price of 49 cents, and also below Dow’s 36 cent price.

The imaginative Dow worked out a daring strategy. He had his agent in New York discreetly buy hundreds of thousands of pounds of German bromine at the cartel’s 15 cent price. Then Dow repackaged the German product and sold it in Europe—including Germany!—at 27 cents a pound. “When this 15-cent price was made over here,” Dow said, “instead of meeting it, we pulled out of the American market altogether and used all our production to supply the foreign demand. This, as we afterward learned, was not what they anticipated we would do.”

Indeed, the Germans were befuddled. They expected to run Dow out of business; and this they thought they were doing. But why was U. S. demand for bromine so high? And where was this flow of cheap bromine into Europe coming from? Was one of the Bromkonvention members cheating and selling bromine in Europe below the fixed price? Powerful tensions surfaced from within the Bromkonvention. According to Dow, “the German producers got into trouble among themselves as to who was to supply the goods for the American market … .”

The confused Germans kept cutting U. S. prices—first to 12 cents and then to 10.5 cents a pound. Dow meanwhile kept buying the stuff and reselling it in Europe for 27 cents. Even when the Bromkonvention finally caught on to what Dow was doing, it wasn’t sure how to respond. As Dow said, “We are absolute dictators of the situation.” He also wrote, “One result of this fight has been to give us a standing all over the world … . We are in a much stronger position than we ever were … .”

When Dow broke the German monopoly, all users of bromine around the world could celebrate. They now had lower prices and more companies to buy from. This victory propelled the remarkable Dow to challenge the German dye trust, and, after that, the German magnesium trust. His successes in these industries again lowered prices and helped liberate the American chemical industry from its European stranglehold.

Those who value the spirit of freedom and the rise of America as a world power can thank Herbert Dow for what he started in Midland, Michigan, 100 years ago.

The Vons grocery store two miles from my home in Los Angeles, California sells 12 cans of Coca-Cola for $6.59 — 54 cents each. The tool chain that created this simple product is incomprehensibly complex.

Each can originated in a small town of 4,000 people on the Murray River in Western Australia called Pinjarra. Pinjarra is the site of the world’s largest bauxite mine. Bauxite is surface mined — basically scraped and dug from the top of the ground. The bauxite is crushed and washed with hot sodium hydroxide, which separates it into aluminum hydroxide and waste material called red mud. The aluminum hydroxide is cooled, then heated to over a thousand degrees celsius in a kiln, where it becomes aluminum oxide, or alumina. The alumina is dissolved in a molten substance called cryolite, a rare mineral first discovered in Greenland, and turned into pure aluminum using electricity in a process called electrolysis. The pure aluminum sinks to the bottom of the molten cryolite, is drained off and placed in a mold. It cools into the shape of a long cylindrical bar. The bar is transported west again, to the Port of Bunbury, and loaded onto a container ship bound for — in the case of Coke for sale in Los Angeles — Long Beach.

The bar is transported to Downey, California, where it is rolled flat in a rolling mill, and turned into aluminum sheets. The sheets are punched into circles and shaped into a cup by a mechanical process called drawing and ironing — this not only makes the can but also thins the aluminum. The transition from flat circle to something that resembles a can takes about a fifth of a second. The outside of the can is decorated using a base layer of urethane acrylate, then up to seven layers of colored acrylic paint and varnish that is cured using ultra violet light, and the inside of the can is painted too — with a complex chemical called a comestible polymeric coating that prevents any of the aluminum getting into the soda. So far, this vast tool chain has only produced an empty, open can with no lid. The next step is to fill it.

Coca-Cola is made from a syrup produced by the Coca-Cola Company of Atlanta. The main ingredient in the formula used in the United States is a sweetener called high-fructose corn syrup 55, so named because it is 55 per cent fructose or “fruit sugar” and 42 per cent glucose or “simple sugar” — the same ratio of fructose to glucose as natural honey. HFCS is made by grinding wet corn until it becomes cornstarch. The cornstarch is mixed with an enzyme secreted by a rod-shaped bacterium called Bacillus and an enzyme secreted by a mold called Aspergillus. This process creates the glucose. A third enzyme, also derived from bacteria, is then used to turn some of the glucose into fructose.

The second ingredient, caramel coloring, gives the drink its distinctive dark brown color. There are four types of caramel coloring — Coca Cola uses type E150d, which is made by heating sugars with sulfite and ammonia to create bitter brown liquid. The syrup’s other principal ingredient is phosphoric acid, which adds acidity and is made by diluting burnt phosphorus (created by heating phosphate rock in an arc-furnace) and processing it to remove arsenic.

A much smaller proportion of the syrup is flavors. These include vanilla, which is the fruit of a Mexican orchid that has been dried and cured for around three months; cinnamon, the inner bark of a Sri Lankan tree; coca-leaf which comes from South America and is processed in a unique US government authorized factory in New Jersey to remove its addictive stimulant cocaine; and kola nut, a red nut found on a tree which grows in the African Rain Forest (this may be the origin of Coca-Cola’s distinctive red logo).

The final ingredient is caffeine, a stimulating alkaloid that can be derived from the kola nut, coffee beans and other sources.

All these ingredients are combined and boiled down to a concentrate, then transported from the Coca-Cola Company factory in Atlanta to Downey where the concentrate is diluted with water infused with carbon dioxide. Some of the carbon dioxide turns to gas in the water, and these gas bubbles give it effervescence, also know as “fizz,” after its sound. 12 ounces of this mixture is poured into the can.

The top of the can is then added. This is carefully engineered: it is made from aluminum, but it has to be thicker and stronger to withstand the pressure of the carbon dioxide gas, and so it uses an alloy with more magnesium than the rest of the can. The lid is punched and scored so that a tab opening, also made of aluminum, can be installed. The finished lid is put on top of the filled can, and the edges of the can are folded over it and welded shut. 12 of these cans are then packaged into a painted paperboard box called a fridge pack, using a machine capable of producing 300 such packs a minute.

The finished product is transported by road to a distribution center and then to my local Vons. This tool chain, which spans bauxite bulldozers, refrigerators, urethane, bacteria and cocaine, produces 70 million cans of Coca-Cola each day, one of which can be purchased for about two quarters on most street corners, and each of which contains far more than something to drink. Like every other tool, a can of Coke is a product of our world entire and contains inventions that trace all the way back to the origins of our species.

The number of individuals who know how to make a can of Coke is zero. The number of individual nations that could produce a can of Coke is zero. This famously American product is not American at all. Invention and creation is something we are all in together. Modern tool chains are so long and complex that they bind us into one people and one planet. They are not only chains of tools, they are also chains of minds: local and foreign, ancient and modern, living and dead — the result of disparate invention and intelligence distributed over time and space. Coca-Cola did not teach the world to sing, no matter what its commercials suggest, yet every can of Coke contains humanity’s choir.

You’ve already won (or you’ve already lost). Right now, you can choose to do what’s in your heart, you can bring your real work to the world, instead of a lesser version, a version you think the market wants. After all, what do you have to lose?

By: Adrian Wooldridge | Economist | 9 February 2013

THE basic facts of the case seem clear—and as dramatic as any performance of Prokofiev’s “Ivan the Terrible”. Sergei Filin, the Bolshoi ballet’s artistic director, arrived home shortly before midnight on January 17th. A masked man emerged from the shadows and flung sulphuric acid in his face. A car-park attendant tried to wash away the acid with snow. But it was too late. Mr Filin’s face and eyes had been badly burned. He is now recuperating in a German hospital.

Making sense of this horrific assault is tricky. One school of thought blames artistic squabbles. The Bolshoi has seen several nasty incidents. Mr Filin’s tyres have been slashed and his e-mail hacked. In the past, needles have been inserted into costumes and broken glass into the tips of ballet shoes. A dead cat has been tossed onto the stage in lieu of flowers and an alarm clock set off during a quiet scene. Ballet is not for sissies.

A second school focuses on money and power. Scalpers have made wodges from buying and selling tickets—perhaps with inside help. Bigwigs use their muscle to get their pretty daughters jobs as ballerinas. A lavish renovation of the Bolshoi theatre suffered epic delays and went wildly over-budget.

A third school focuses on sex. The ballet is a hothouse of passion and intrigue. Anastasia Volochkova, a former prima ballerina, once called it a “big brothel”. Two years ago Gennady Yanin, a ballet director, resigned when pictures of him engaged in gay sex appeared online. The heterosexual Mr Filin is so good-looking that men and women alike are infatuated with him.

All this is gripping stuff, but what does any of it have to do with business? Why is Schumpeter, whose subject is people in suits, fussing about people in tights? One answer is that peculiar institutions can tell us a lot about more run-of-the-mill ones. And dysfunction is more common in the business world than you might think. Clayton Christensen, of Harvard Business School, says that he has been struck, at alumni reunions, by how many of his fellow HBS graduates and Rhodes scholars had made a mess of their lives. Jeff Skilling, for example, had gone from making $100m a year as boss of Enron to a federal prison.

A quick glance around any office suggests that dark passions lurk everywhere. Gossip and back-stabbing are rife. (Schumpeter could tell you a thing or two about his editor.) In all companies, bosses wield power, which tends to corrupt. One delightful study shows that giving people power makes them more likely to cheat at games. It also makes them keener to suggest harsh punishments for others who are caught cheating.

All these problems are evergreen. However, three modern trends are making them worse. The first is the enthusiasm for rewarding employees for performance. This is driven by the reasonable insight that paying everyone the same spurs no one to excel. Alas, paying for performance can also have perverse consequences. Banks that pay big bonuses for big profits give traders an incentive to take big risks. Institutions that reward relative performance (ie, did you perform better than your colleagues?) encourage unscrupulous co-workers to sabotage each other. Dancers at the Bolshoi are paid primarily according to the amount of time they spend on stage, so an understudy may not be completely heartbroken if the lead ballerina breaks an ankle.

The second is the economic downturn. Towers Watson, a consultancy, says it has created a class of “trauma organisations” that must take drastic measures to survive. Staff at such companies tend to be pessimistic and cliquish—they huddle together for comfort in the storm. Even in non-traumatised companies, many workers resent having to work harder for stagnant pay. Towers Watson reports that only 44% of British workers have confidence in their leaders.

The third trend is the rise of knowledge-intensive companies that run on “economies of ideas” rather than economies of scale. These companies are all hungry for the best and brightest: for the brilliant pharmacologist who can create a blockbuster drug, for the extraordinary investment banker who can engineer an industry-changing merger or for the razor-sharp accountant who can shave millions off a firm’s tax bill.

The need to hire the best means firms have to put up with prima donnas. That has costs. Talent-driven firms can be torn apart by feuds or rendered dysfunctional by egocentric behaviour: clever people are as clever at finding reasons to argue with each other as they are at thinking up new ideas.

Stars can burn you

A creative environment can often be a toxic one. You may have noticed that films about Hollywood always show beautiful people doing ugly things to each other. One assumes that the directors and screenwriters know whereof they speak. Outside Tinseltown, too, some of the most toxic companies have also been some of the most creative. Enron was once revered for revolutionising the energy business. Lehman Brothers was regarded as the smartest of the smart.

Steve Jobs, the founder of Apple, was a genius. He was also “frequently obnoxious, rude, selfish and nasty to other people”, according to Walter Isaacson, his biographer. He crushed rivals who stood in his path. He enjoyed humiliating people who were less than A-players. He once stormed into a meeting with suppliers and bellowed that they were “fucking dickless assholes”. Joe Nocera, a journalist, commented on his “almost wilful lack of tact”. But this very abrasiveness was essential to Apple’s success—it kept the company passenger-free and relentlessly focused on producing the next big thing. As the poet John Dryden once put it: “Great wits are sure to madness near allied/And thin partitions do their bounds divide.”

In the early industrial age, buildings began to spring up all over the east coast. Many of these new buildings were taller than anything ever built before and most had elevators. As buildings got taller and taller, more people began to use elevators. Elevators in those days were pretty darn slow. People were constantly complaining about how slow the elevators were. 

Elevator companies were challenged with this problem and came up with the typical problem statement elevators move too slow. So they went off to design elevators that were faster and safer, but at the time it was very expensive to do so. Several companies went off and running to build a safer and faster elevator, and one elevator company proposed a different problem statement. They may have had a different name for the approach, but they were using the fundamentals of the est problem statement tool. One engineer said, I think our elevator speeds are just fine, people are crazy. 

Then an engineer proposed that they work on a different problem statement. He proposed that the problem was people think elevators move to slow. He inserted two words people think into the problem statement which allowed the design team to approach the problem from a completely different angle and thus a whole new set of ideas. Instead of concentrating on larger motors, slicker pulley designs and such, they concentrated on the passenger in the elevator.

When they looked at the problem from this angle, the ideas started to snowball. Is it really too slow? Why do they think it is slow? How can we distract them? How can we make it more comfortable? Are customers scared of heights?

This lead to some first hand customer research. They found that a lot of people thought the elevators were a lot slower then they actually were. 

They also discovered that people had an exaggerated sense of time because they had nothing to do but stare at the wall and think about the safety of the elevator being suspended in the air, and preoccupied with the fear of falling. 

There wasn’t room for additional equipment of any sort, so they brainstormed on that. This lead to the idea of mirrors in elevators so people would think about something else besides danger. Was their hair combed properly? Did her makeup look okay?

By installing mirrors in the elevators, people became distracted and were no longer preoccupied with the fear of falling. On a follow up survey, customers commented how much faster the new elevators were even though the speed was exactly the same. The elevator design itself had not changed at all.