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Economic View: Why Innovation Is Still Capitalism’s Star

August 17, 2013 by

The decisive role of the “spirit of capitalism” is an old concept, going back at least to Max Weber, but it needs refreshing today with new evidence and new thinking. Edmund S. Phelps, a professor of economics at Columbia University and a Nobel laureate, has written an interesting new book on the subject. It’s called “Mass Flourishing: How Grassroots Innovation Created Jobs, Challenge and Change” (Princeton University Press), and it contains a complex new analysis of the importance of an entrepreneurial culture.

Professor Phelps discerns a troubling trend in many countries, however, even the United States. He is worried about corporatism, a political philosophy in which economic activity is controlled by large interest groups or the government. Once corporatism takes hold in a society, he says, people don’t adequately appreciate the contributions and the travails of individuals who create and innovate. An economy with a corporatist culture can copy and even outgrow others for a while, he says, but, in the end, it will always be left behind. Only an entrepreneurial culture can lead.

Is the United States really becoming corporatist? I don’t entirely agree with such a notion. Even so, President Obama has been talking a lot about innovation as a job creator this year, and while some of his intentions may be good, I’m afraid that some of his proposals look a little corporatist, and might suppress individual initiative.

In his State of the Union address in January, for example, the president proposed that the government should create 15 new “innovation institutes,” modeled on a public-private partnership that he helped start in Youngstown, Ohio, that is devoted to developing 3-D printers. There was more in this vein in his administration’s 2014 budget, offered in April. And in a speech on July 30 in Chattanooga, Tenn., Mr. Obama suggested extending the number of innovation institutes to 45, or almost one for every state. The institutes, he said, would be “getting businesses, universities, communities all to work together to develop centers of high-tech industries all throughout the United States.”

Will such measures work? Should the government really be trying to start a 3-D printer center? And why in Youngstown? It is easy to be skeptical of such a plan, especially when it was started in a swing state just before the presidential election. Web sites of the two senators and two representatives introducing bills this month supporting the president’s latest proposals are suggesting, in not-too-subtle terms, that the legislation would bring jobs to their own states.

Successful companies aren’t usually started this way. Professor Phelps, citing a McKinsey study, suggests that in free-market capitalism, “from 10,000 business ideas, 1,000 firms are founded, 100 receive venture capital, 20 go on to raise capital in an initial public offering, and two become market leaders.” It is easy to doubt, as Professor Phelps does, that the odds are favorable for a Youngstown 3-D printer center.

How you view the innovation institutes, and the topic of capitalism and culture, may depend on your own experience. Many people have never seen the hatching of a successful business idea. That makes it hard to judge the subtle changes that may be occurring in the nation’s culture and in its potential for innovation.

My own business experience has certainly helped shape my thinking. Yale, like many other universities, sensibly allows its professors to spend limited time in business, providing the opportunity for faculty members to gain valuable experience outside of the ivory tower and to offer their technical skill to the business world.

In 1991, I started a business with Karl Case, an economics professor at Wellesley College, and Allan Weiss, a former student of mine at Yale. We called it Case Shiller Weiss, Inc., and it was devoted to an innovation we dreamed up. The idea was a new “repeat sale” home price index — which would track the changes in the value of the same houses over time.

At the time, this was an entirely new line of business. And, at first, that posed a problem: we were spectacularly unsuccessful in raising money. We talked to venture capitalists and their committees, to no avail. They just didn’t seem to get our business plan. We must have appeared odd to them — overly academic, perhaps. One remarked that we’d do better proposing a new shopping center.

But we went ahead with our idea anyway. At first, Allan worked without pay. A friend of Professor Case, Chuck Longfield, contributed some money. And in 1995, I took out a home equity line of credit on my house in New Haven so I could personally lend more money to help keep our business afloat. The experience was stressful, especially when adding it to the burdens of my main job, as a professor. I have much to thank my wife, Virginia, for her tolerance of my overwork and my worrying, and for allowing me to put our family savings at risk.

In the end, our business was successful, and I think a big part of it was that we relied on our own ideas and energy and, to a large extent, our own money. In 2002, we sold the business to Fiserv Inc., then licensed Standard Poor’s to create what are now known as the SP/Case-Shiller Home Price Indices. In 2006, the Chicago Mercantile Exchange began trading futures on 11 of our indexes. Fiserv sold the index business to CoreLogic early this year.

In short, our business made its mark without any help from the government.

This little real-life experiment convinces me that committees of experts, even at smart venture capital firms, will often not recognize real innovation. I think that America’s business success through the decades has occurred because we have so many people with specialized knowledge who are willing to put their money, time and resources on the line for ideas that can’t be proved to a committee.

THAT experience may also help explain why I think the new crowdfunding initiative, started by the Jobs Act that the president signed last year, is an exciting step forward. It’s all about finding and mobilizing people who really understand specific, hard-to-prove ideas for important investments.

At the same time, other of my experiences incline me to think that government-appointed committees of experts can help set the stage for an entrepreneurial culture, under certain limited circumstances.

Long before I started any commercial ventures of my own, I received some federal government support — in the form of National Science Foundation research grants, awarded to me decades ago as a young professor. They allowed me to do research, and though it was not directly related to my later business endeavors, the process developed my expertise and reinforced a sense of entrepreneurial opportunity.

These grants were awarded competitively, based on the quality of the proposals, and gave me experience with a system focused on creating opportunities for those who try hard. Later, from 1983 to 1985, I evaluated others’ proposals when I served on the foundation’s panel for economics. Observing the process from the government side convinced me that the foundation really works. Maybe it’s because the panelists are chosen from successful scientists, who serve anonymously out of public spirit.

In any case, as Professor Phelps has argued, direct government involvement in capitalism is a delicate thing. The system’s success depends on subtle cultural factors — and these require careful nurturing.

Robert J. Shiller is Sterling Professor of Economics at Yale.

Article source: http://www.nytimes.com/2013/08/18/business/why-innovation-is-still-capitalisms-star.html?partner=rss&emc=rss

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Economic Scene: Economic Statistics Miss the Benefits of Technology

May 1, 2013 by Leave a Comment

I traveled to Japan with a TRS-80 portable computer, which ran on AA batteries and had plastic cups to put over the phone receiver. It transmitted copy at the blistering speed of 300 bits per second. And I wrote about Mexico’s tequila crisis of 1994 without the benefit of a full set of Mexican financial statistics a few clicks away.

From my perspective, the evolution of the tools of journalism between then and now has been nothing less than breathtaking.

Articles are more thorough — informed by complementary data and analysis, enriched with links to things like interactive charts, videos and slide shows. They get to readers much more quickly. Most important, they reach many more of them.

For all its financial troubles, never has The New York Times been read by more people: 44 million unique viewers online in the United States every month. Yet if you were to rummage through American economic statistics you would find little evidence of journalism’s technological leaps. Measured by its contribution to gross domestic product, the most prominent indicator of the nation’s economic well-being, much of this new journalistic value enabled by information technology is not worth much.

This is true not only of journalism. The failure of I.T. to deliver measurable value has been a popular meme among economists for years. Back in 1987 Nobel laureate Robert Solow posed a now famous paradox: “We can see the computers everywhere except in the productivity statistics.”

The meme is back. The burst of productivity during the dot-com revolution of the 1990s gave skeptics pause. But as productivity has slowed substantially in recent years, doubts have re-emerged about whether information technology can power economic growth like the steam engine and the internal combustion engine did in the past.

Last year, Robert J. Gordon of Northwestern University proposed that the I.T. revolution has pretty much exhausted its promise. He asked, provocatively: “Is U.S. economic growth over?” And he forecast stagnating living standards for the vast majority of Americans for decades to come.

Government statistics lend support to his skepticism: Value added by the information technology and communications industries — mostly hardware and software — has remained stuck at around 4 percent of the nation’s economic output for the last quarter century.

But these statistics do not tell the whole story. Because they miss much of what technology does for people’s well-being.

News organizations that take advantage of computers to let go of journalists, secretaries and research assistants will show up in the economic statistics as more productive, making more with less. But statisticians have no way to value more thorough, useful, fact-dense articles.

What’s more, gross domestic product only values the goods and services people pay for. It does not capture the value to consumers of economic improvements that are given away free. And until recently this is what news media organizations like The New York Times were doing online.

The Commerce Department is in the process of revising the way it measures G.D.P. to take better account of the contributions of investment in research and development and artistic creation. But even though the revisions to be announced this summer are expected to make the economy look bigger, they are not devised to capture the value that Americans get from digital technologies.

“G.D.P. is not a measure of how much value is produced for consumers,” said Erik Brynjolfsson of the Massachusetts Institute of Technology. “Everybody should recognize that G.D.P. is not a welfare metric.”

G.D.P. misses what Americans gain from sharing information on Facebook or finding information on Google or Wikipedia. It misses how dating sites reduce the cost and increase the odds of finding a mate. It misses the time saved by drivers who use Google Maps and the time gained by consumers from shopping online. Measured in money — what it contributes to G.D.P. — the recording industry is shrinking. Yet never before have Americans had access to so much music.

E-mail: eporter@nytimes.com;

Twitter: @portereduardo

Article source: http://www.nytimes.com/2013/05/01/business/statistics-miss-the-benefits-of-technology.html?partner=rss&emc=rss

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In Europe, Arguing to Apply Some Stimulus Along With the Austerity

January 24, 2012 by Leave a Comment

On a concrete wall in Oporto, Portugal, where a tough austerity effort has hit hard, a somber graffiti mural depicts a submarine in a nose dive.

“Austerity doesn’t save,” the caption warns. “It sinks.”

As Western countries grapple with lingering economic malaise, even some traditionalists within the policy-making fraternity are starting to worry that such slogans might be right. But as a phalanx of politicians, academics and other experts gathers this week at the World Economic Forum
in Davos, Switzerland, perhaps the biggest question they will face is whether it is possible to develop policies to revive growth even as Western countries seek to reduce debt.

Europe and the United States are both locked into fiscal strategies based on curbing government debt and paring borrowing. Europe has been following a German prescription intended to save the euro zone. Meanwhile, Washington, which is in the throes of a heated presidential campaign, is divided over whether to extenda payroll tax cut
for the rest of the year and has committed, at least on paper, to cutting spending by $1.2 trillion starting this year.

Whether austerity will help revive economies over the long term is the subject of an intensifying debate, especially as much of Europe heads into what looks like its second recession in three years. The United States — where belt-tightening, though painful, has not been nearly so severe — shows glimmers of a recovery.

“It is clear that austerity alone is a recipe for stagnation and decline,” said Joseph E. Stiglitz, a Nobel laureate and professor at Columbia University in New York. “The likelihood that things would work out well is extraordinarily small.”

Recently, there have been signs the tide is shifting. In the past several weeks, European politicians have begun to insist quite publicly that austerity can no longer be the sole answer to putting even the most heavily indebted economies on the path to a brighter future.

After months of talk of almost nothing but cuts, Prime Minister Mario Monti of Italy and President Nicolas Sarkozy of France delivered such a message to the German chancellor, Angela Merkel, during recent visits to Berlin, with a surprising result: “Growth” has become the new watchword on everybody’s lips — even Mrs. Merkel’s.

“Budget consolidation is one of the legs Europe’s future must be built on,” Mrs. Merkel said this month after meeting with the Italian and French leaders. “But of course we need a second leg,” she added, which is “economic growth, jobs and employment.”

Germany is still insistent that the most foolproof path to sustainable recovery is through structural change, including the overhaul of rigid labor markets and changes to pension laws, much like those Germany painfully pushed through in the 1990s.

But the fruits of such labors often take years to emerge. In the meantime, the concern is that economies that are already in a slowdown will be weakened further by large cuts in national spending and by tax increases that governments are embracing to satisfy lenders and to placate the financial markets.

“You could say that if there’s no austerity, growth might be higher,” said Stefan Schneider, the chief international economist at Deutsche Bank in Frankfurt. “But then again, no austerity would probably escalate the bond crisis in Europe, and then you would wind up with total chaos.”

In the United States, where the budget deficit remains high and President Barack Obama has pressed for more stimulus, there are tentative signs of an economic comeback. The unemployment rate fell to 8.5 percent in December, its lowest level in nearly three years, after about 200,000 jobs were added.

The outlook remains fragile. The phaseout of an earlier stimulus program cost the United States an estimated half a percentage point in growth last year, and could further reduce potential gains in 2012. Washington is also likely to provide less government support this year amid continued wrangling between Republicans and Democrats over economic policy.

But the U.S. Federal Reserve has been more accepting than the European Central Bank of keeping interest rates low and of pumping extra money into the banking system in a bid to restart the engines of the economy.

“The U.S. government has been willing to provide more stimulus than the Europeans, and the Federal Reserve has been more accommodative on monetary policy,” said Paul De Grawe, a professor of economics at the Catholic University of Leuven in Belgium. “So America’s environment is easier right now because its macroeconomic policies are less contractionary than in Europe.”

In Europe, Mr. De Grawe added, “excessive austerity, no fiscal stimulus and a European Central Bank not willing to do the same as the Fed is the wrong policy mix.”

Article source: http://feeds.nytimes.com/click.phdo?i=2e49ed226c0c75beca8e4ffe8b9f208f

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Independent Panel to Start Inquiry Into Japan’s Nuclear Crisis

January 16, 2012 by Leave a Comment

The bipartisan panel with powers of subpoena is part of Japan’s efforts to investigate the nuclear calamity, which has displaced more than 100,000 people, rendered wide swaths of land unusable for decades and spurred public criticism that the government has been more interested in protecting vested industry interests than in discovering how three reactors were allowed to melt down and release huge amounts of radiation.

Several investigations — including inquiries by the plant operator, Tokyo Electric Power, and the government — have blamed the scale of the tsunami that struck Japan’s northeastern coast in March, knocking out vital cooling systems at the plant.

But critics in Japan and overseas have called for a fuller accounting of whether Tokyo Electric Power, or Tepco, sufficiently considered historically documented tsunami risks, and whether it could have done more to minimize the damage once waves hit the plant.

Questions also linger as to the extent of damage to the plant caused by the earthquake even before the tsunami hit. Any evidence of serious quake damage at the plant would cast new doubt on the safety of other reactors in quake-prone Japan. Tsunamis are far less frequent.

In his first interview since the panel was appointed last month, Kiyoshi Kurokawa, chairman of the new Fukushima Nuclear Accident Independent Investigation Commission, said his investigation would have no sacred cows.

Mr. Kurokawa, a former leader of Tokyo University’s medical department and a professor at the National Graduate Institute for Policy Studies, has lined up a prominent team, including the Nobel laureate Koichi Tanaka. The committee will have its first full meeting on Monday.

“For Japan to regain global credibility, we need an investigation into the disaster that is completely independent,” Mr. Kurokawa said. He said he was aware of questions raised about quake damage to the plant, and that the committee “would investigate that issue vigorously.”

“The lessons Japan can learn are globally relevant, because such a disaster can happen again,” he said.

Mr. Kurokawa’s committee has garnered attention because some members have been openly critical of Japan’s nuclear policy, including Katsuhiko Ishibashi, a seismologist who has long warned of the risks Japan’s volatile geology poses to its 54 nuclear reactors.

The panel includes Mitsuhiko Tanaka, a former nuclear engineer at Babcock Hitachi who has argued that the quake was likely to have damaged reactors at the plant to the extent that meltdowns would have occurred without the tsunami. Tepco disputes that view. Mr. Tanaka worked on the design of the reactors.

The panel is also the first such group of outside specialists to be named by Japan’s Parliament, supported by members of the ruling Democratic Party and its main opposition, the Liberal Democratic Party.

“If the panel can truly distance itself from political pressure, then it could be a powerful exercise,” said Yoichi Tao, a visiting professor in physics at Kogakuin University who has been working with Fukushima residents to clean up the radioactive fallout. “They must make sure that having bipartisan support does not mean they have to listen to everyone.”

Article source: http://feeds.nytimes.com/click.phdo?i=1e09857d5f6bedce708ba1e0c9b69204

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