The lagging increase of productivity despite enormous advances in information technologies remains the fantastic conundrum of economic life from the West through the past twenty decades. This is definitely the most pressing issue of the time. Disappointing productivity growth translates into substandard growth in family income as well as the marginalization of once-prosperous parts of the American inhabitants.
It summarizes the essential data and relevant research on a vast array of issues with clarity and common sense, without tripping over governmental stumbling-blocks.
America has a long if restricted tradition of state intervention into public life. Alexander Hamilton, the father of American economic policy, urged”internal improvements” (what we currently call infrastructure) as well as protection for infant industries and inducements for entrepreneurs to adopt new technologies. “Restricted” is the important word: By focusing government spending on infrastructure and basic R&D, the United States avoided a number of the cubes of government interventionism. We haven’t gotten the formula quite right.
The authors argue that the solution to stagnation, though there’s one, will require greater government intervention, but of an extremely discerning kind, such as subsidies for key sectors and anti-trust measures contrary to the prominent technological monopolies. Their capitalist credentials are impeccable. However they see that capitalism demands government actions under particular circumstances.
The Schumpeterian Contradiction
Creative destruction, clearly, was the watchword of the Austrian economist Joseph Schumpeter (1883-1950). The writers hailed Schumpeter’s complicated thinking into three simple statements. The foremost is that”the diffusion of knowledge will be at the center of the growth process.” The second is that”invention depends upon incentives and protection of intellectual property” The next is that”new inventions render former inventions obsolete… growth by imaginative destruction sets the stage for a permanent battle between the older and the new” They mean by this that”creative destruction consequently creates a dilemma or a contradiction at the heart of the growth process. On the one hand, rents are essential to reward invention and therefore motivate innovators; on the flip side, yesterday’s innovators must not use their own rents to impede new inventions.”
Schumpeter’s limitation, as Edmund Phelps finds in his book Mass Flourishing, proceeded from the perspective of the German Historical School that”all material improvements in a country [are] driven by the power of science.” He”added only a new wrinkle into the institution’s version: the demand for the entrepreneur to develop the new system or homemade possible by the newest scientific knowledge.” Exactly what Phelps calls”mass flourishing” appears when people throughout society are ready to innovate. Under such circumstances, the”contradiction” mentioned by Aghion could vanish.
As an example, American venture capitalists incorporate successful innovators that are interested in protecting the rents from their prior inventions, but who still invest in new companies which may replace their earlier, successful ventures. In actuality, Aghion et al. comprise an superb chapter on the importance of venture capitalists which highlights the decisive purpose of economic culture.
In the United States, the typical venture capitalist started out as a creative entrepreneur that received venture capital financing. The royal road is to get the entrepreneur to market her business by means of an IPO. She utilizes the profits of the IPO to become a venture capitalist himself. Her personal experience as an entrepreneur has provided her with the expertise and know-how required to select the most promising projects and also to advise wider entrepreneurs pursuing these jobs.
An individual may add that the vast majority of venture funds returns accrue to some small percentage of VC investors. According to a survey, half of all venture capital funds shed money, an extra 35 percent of capital return 1 to 2 times investors’ money, and 15 percent return double or more. This lopsided distribution of results underscores the importance of entrepreneurial expertise.
Rather than a virtuous cycle originating from Ricardian comparative advantage, as free-trade dogma called , the US entered a vicious cycle of decreasing incomes and lower innovation.The writers include,”In contrast, In France, venture capitalists are usually fund professionals whose career has been in banking or insurance and who, therefore, have the entrepreneurial entrepreneurial experience nor the technical knowledge to advise a startup.
Exactly what Phelps calls economic dynamism averts the so-called Schumpeterian contradiction because the owners of rents created by previous invention spend the profits in future inventions. That’s a cultural and political issue; France lacks the venture capital culture that predominates in the United States and Israel, as an example.
Schumpeterian antagonism involving owners of past rents and would-be challengers has reappeared with a vengeance from the Information Technology industry. Aghion and his coauthors cite studies that blame the”decrease in dynamism of the American economy as the start of the 2000s” on”an increase in industrial concentration and at markups.” The dominant companies,”having already accumulated the most patents, are the ones that continue to submit the most patents. These exact businesses purchase the greatest number of patents for defensive purposes, that is, to dissuade new innovation by prospective entrants within their respective sectors.” That makes it more challenging over the years for the laggards to catch up with the leaders” Thus,”generation ends up becoming more concentrated in the hands of these leaders, whose rents thus increase”
They conclude,”It’s therefore crucial to rethink competition policy, specifically antitrust policy regulating mergers and acquisitions, and so that technological revolutions, for example IT and artificial intelligence, boost growth in both the short run and the long run.”
An October 2020 report from the House Subcommittee on Antitrust, Commercial and Administrative Law saw the Exact Same issue:
To put it simply, businesses that once were scrappy, underdog startups that challenged the status quo have been the kinds of monopolies we last saw at the era of oil barons and railroad tycoons. Even though these companies have given clear benefits to society, the dominance of Amazon, Apple, Facebook, and Google has come at a cost. These companies typically operate the market while at the same time competing in it–a position that enables them to write one set of principles for others, while they perform with another, or to take part in a kind of their own private quasi law that is unaccountable to anyone but themselves. The impacts of the important and durable market power are costly. The Subcommittee’s string of hearings generated significant evidence that these companies wield their dominance in a way that hamper entrepreneurship, hamper Americans’ privacy on the internet, and undermine the vibrancy of the free and diverse press. The result is less invention, fewer choices for customers, and a weakened democracy.
The contemporary equivalent of starvation in the midst of plenty is stagnant productivity in the presence of fundamental technology shift driven by the IT industry.
Public policy will help, rather than simply in the form of anti-trust measures against monopolistic and predatory Big Tech. Republican dogma at the time held that cheap imports by China benefited Americans by reducing the cost of consumer products. That isn’t the case, according to studies cited by the writers. The higher the penetration of Chinese imports in any particular area of the United States, the greater industrial jobs were lost. Nor was the loss of industrial projects the inescapable result of labor-saving investments. More than a fifth of manufacturing job loss can be credited to the China shock. And worst of all,”The loss of industrial jobs wasn’t the only consequence of the Chinese import shock. Wages also fell. Thus the negative effect of Chinese imports on regional markets was worse, because the fall in wages decreased the requirement for local services while increasing the supply of work available for service-sector jobs”
Innovation also suffered: US patent software fell after Chinese imports into the US hastened following China’s admission into the World Trade Organization in 2001. Rather than a virtuous cycle originating from Ricardian comparative advantage, as free-trade dogma called , the US entered a vicious cycle of decreasing incomes and lower creation.
America’s tech industry has mostly abandoned manufacturing in favor of applications, which includes inherently greater profit margins, devoting the hardware into Asian producers. That has contributed Americans cheap means of entertainment but fewer industrial jobs.The issue, then, is the way to react to trade shocks. “There are two approaches to manage foreign competitors: one would be to raise import duties (tariffs): another is to incentivize domestic companies to innovate , especially with subsidizing investments at R&D,” the authors observe. Tariffs attempt to shield present businesses against changes in the world market, while support for R&D encourages domestic companies to leapfrog the competition and gain global market share. Citing studies from Marc Melitz and others, the writers note that tariffs suppress creation by eliminating the incentive for national firms to raise productivity to be able to deal with foreign competitors. Subsidies for research and advancement, though, help domestic companies to compete against imports, and help”expansionary creation” on the section of companies that are looking to export more.
This general principle”does not suggest that protectionist policies must always be rejected,” the writers allow. However,”tools such as public investment in the knowledge economy, infrastructure, and industrial policy are more inclined to yield productivity gains and longterm prosperity than a radical increase in export duties.”
Asia subsidizes capital-intensive business, and the United States subsidizes sports stadiums. America’s high-tech business is just one of the beneficiaries of such subsidies; it has largely abandoned manufacturing in favor of applications, which includes inherently greater profit margins, devoting the hardware into Asian producers. That has contributed Americans cheap means of entertainment but fewer industrial tasks. R&D subsidies encourage invention, as Aghion et al. observe, but it’s likewise true that Asian capital subsidies suck manufacturing jobs out of the United States. The apparent solution is a shift in the taxation structure to favor capital-intensive investment (as opposed to equity buybacks, which in 2019 surpassed total capital expenditure one of the S&P 500).
Immigration policy can be important, as qualified immigrants contribute disproportionately to American creation. One analysis of the period 1976-2012″shows that foreign-born individuals who arrived in the United States after age twenty were responsible for 23 percent of total [production ] outputsignal, which was more than their demographic weight of innovators (16 percent).” Immigration between 1995 and 2008″accounted for some 29 percent increase in the percentage of the US working population having a college diploma,” particularly in STEM fields.
The writers draw a bright line between the”investor state,” which supports invention, and the”insurer say,” that utilizes state resources to carry on the status quo. European welfare state and industrial policy is a baleful case of the policy state.
DARPA was created at the Sputnik Moment of 1957, when Russia beat America into space. “The DARPA version, they see, is particularly intriguing because it”combines a top notch approach using a half-dozen strategy. On top-down side, the Department of Defense funding the programs, chooses the application directs, and hires them to get a three-to-five-year period. On the bottom-up side, the application heads, that come in the private business… have complete latitude to specify and manage their programs.” They note that”DARPA has played a decisive part in the progression of high-risk projects with high social price, such as the internet… and GPS.”
That’s exactly correct, but does not quite capture what DARPA achieved. Two items characterized every one of the signature inventions of the electronic era, from integrated circuits to the world wide web to optical systems. The first is that they began as a DARPA project, and the second is that they stumbled upon game-changing technologies while looking for something different. DARPA not only provided financing for what the writers call”exploration” (instead of”manipulation”) R&D; it also allowed scientists and engineers from a huge array of corporate, national, and instructional labs the latitude to pursue the unknown unknowns.
The semiconductor laser that compels optical networks and a vast number of different software began with a Signal Corp project to illuminate battlefields through the nighttime. CMOS chip production (mass manufacturing of fast, light, and energy-efficient customized chips) began with a DARPA request to allow fighter pilots to conduct weather predictions in the cockpit but ended up trapping lookdown radar. Famously, the internet began as a way to secure communications from wartime and became the most universal medium of info.
The authors say the hope that peaceful economic rivalry instead of war will motivate rivalry among nations, and in doing this they miss a vital point about DARPA’s efficiency. The United States had to contend with Soviet breakthroughs, beginning with Sputnik but such as surface-to-air missiles that displayed devastating effectiveness throughout the 1973 Arab-Israeli war. By supporting research at the frontiers of science and computer science, DARPA motivated scores of corporate labs and lots of tens of thousands of scientists to push the envelope of sciencefiction.
Sadly, peacetime industrial policy is subject to the whims of governmental constituencies that want to secure jobs and profits for existing businesses. Defense R&D requires researchers to handle problems without any known solutions and create technologies whose peacetime software can’t be predicted. However, the push to acquire wars has generated virtually all the technologies that altered civilian life during the past generation. Our amazing bursts of invention occurred not only because the right number of dollars came out of Washington or the right number of graduates came out of universities, but because presidents like Eisenhower, Kennedy, and Reagan put great challenges facing us, such as the Apollo Program and the Strategic Defense Initiative. Political leadership provided not just the tools, but also the inspiration and dynamism to perform items that nobody had envisioned before.