Tag Archives: innovation

The political economy of horses for courses

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It was the fact of a lecture by Dan Breznitz at the University of Manchester for National Productivity Week that alerted me to his book Innovation in Real Places. Sadly I couldn’t get to Manchester for the lecture but I really recommend the book. Its core argument is that the shape of innovative businesses depends on the specifics of their economic context, making the hope to become the next Silicon Valley a forlorn one for most places, and requiring innovation policy to be appropriately tailored.

The aims of innovation policy are common: make sure companies and individuals concerned have the capabilities they need, and support the whole cosystem in which they operate. There are also several policy fundamentals: ensure local firms are plugged into production networks (including internationally); provide the necessary public goods (skills, prototyping production facilities, trade shows…); focus on the whole local ecosystem including whether financing and business models cohere; adjust policy over time as the ecosystem grows.

Given the basics, the book sets out four different pathways with examples about how specific places have followed each. The one that dominates the innovation policy imaginary is the Silicon valley model – frontier innovation, VC finance, star entrepreneurs. (This is looking less good than it did a while ago. And as the book comments in the introduction, “There is nothing like a dosage of competition to shake comfortable oligopolies out of their stranglehold on power.”) Tech startups – like all startups – require extensive social networks, but in this sector they are geographically extended rather than locally-rooted. So even if a Silicon-whatever gets going, the people involved may end up moving to Menlo Park or Mountain View when they succeed – the book gives an example of a tech cluster starting successfully in Atlanta, Georgia, but subsequently moving away. The book argues that the conditions for such clusters are rare in any case, and that the model leads to inequality rather than broad-based prosperity and good jobs in the region.

The second model is the design, prototyping and production engineering stage, with Taiwan being the exaplar. The third is innovation in components and second generation products, “the unsung and despised hero of economic growth,” with examples in Germany and some in China. The final model is production and assembly, so successfully adopted in China’s Pearl River delta region, with extremely successful innovation in modes of production, assembly and also logistics.

Having set out these broad models, the rest of the book is packed with examples of innovation policies both good and bad. As it points out, much policy thinking is lazy. If it gets beyond the aim of being the next Silicon Valley, “one of the most comon ways for regions to fail is to focus on the trendiest complementarity, be it venture capital, university parks, green tech or AI.” Prof Breznitz’s key message is that there is no substitute for detail, and indeed constant willingness to adjust policies as circumstances change. The book identifies a core political challenge: successful innovation policies often succeed by flying below the radar of political attention, but if they do succeed there’s no avoiding that politicization – and rightly so in many ways. Innovation policy is hard enough to get right, but the political economy challenge may be harder still.

Anyway, a wise book, lots of great examples, and hopefully the lecture will go online before long.

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What stops good innovation happening?

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On the train this week I read a slim NBER volume, Entrepreneurship, Innovation Policy and the Economy edited by Benjamin Jones and Josh Lerner. There are some interesting papers covering pharmaceuticals innovation, green innovation and distributional issues – specifically, race and place.

The first paper makes a strong case for government support for new vaccine development as the combination of a low probability of any single vaccine being needed and the cost of clinical trials make it impossible for a commercial case to stack up. (It does not tackle the question of why and whether trials need to be so long and costly.) Therefore something like advance purchase commitments are needed. The second paper sets out a trilemma between low price, sufficient quantity and adequate quality including safety for off-patent drugs. Written by US lawyers, it implies the real problem is the unwillingness of the authorities to let generic producers charge enough for their products; absent too low a price cap, quantity and quality can both be assured.

On green tech, one paper looks at the role of venture capitalists in financing science-based rather than incremental innovations as (as Will Baumol also described in The Free Market Innovation Machine) big companies do small innovations and small companies do big innovations, for the most part. The second paper argues for continuing to invest in ‘dirty’ companies to exercise ‘voice’ – Hirschman’s insight pops up everywhere these days.

The final papers find, respectively, that there is a clear racial gradient in access to capital for innovation; and that the benefits of spatial agglomeration outweigh the costs of congestion and by a large margin on average, but by a zero margin in the most R&D concentrated cities such as San Francisco/Silicon Valley.

All very nice papers, of interest to people studying innovation. Almost entirely US-focused however.

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De-gilding the age

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I’ve been reading Mordecai Kurz’s The Market Power of Technology: Understanding the Second Gilded Age, in between more summer-holiday type books (half way through Paul Murray’s excellent The Bee Sting now). Kurz’s underlying argument is one I find plausible: Technical innovation by corporations (on a platform of publicly-funded basic scientific research) drivers growth, but corporations translate innovation into monopoly power and rents. Policy alternates between lax and tough competition enforcement, the latter limiting the period of monopoly power. In between, there have been gilded ages.

The book distinguishes the return to capital productively employed from wealth, the accumulation of those rents. It argues that “all intangible assets are just different forms of monopoly wealth” – clearest for IP assets that explicitly guarantee firms’ monoplies. The book argues for prevention of tech mergers, break-up of vertically integrated parts of big corporations, and limitations on the granting of patents and copyright. Tech-based market power cannot be avoided but it should be contained.

The book combines economic and business history with an extended formal model of Kurz’s approach (and this means it is probably not a book for the general reader). The formal modelling is actually the part I found least compelling – particularly in Chapter 5, which for example assumes the monopoly producer has a constant returns to scale production function. This chapter estimates that monopoly power led to delays of 12-15 years in the diffusion of electricity in the US, but – unless I missed a key step –  the calculation seems not to take account of the impact of scale effects, which would shorten those estimates.

The previous chapter has an intriguing chart (4.9): the 50s-late 70s are reported as a period of high monopoly profits – like the 20s and the 2000s on – yet were obviously a period of strong productivity growth and rising living standards. Kurz explains these decades as not being designated a gilded age because policy ensured rising real wages and high employment. But actually if monopoly wealth brings about rapid growth through self-reinforcing technological innovation, it would be nice to have more of that. The policy lesson seems to be more about redistribution and labour market policies than about competition enforcement to limit the monopoly rents. The periods of low welath and low market power in this historical chart were periods of weak growth or worse.

I’d also like to have had more about countries other than the US, and indeed some other examples – is Walmart a tech monopoly? Or Nike? Few other countries span as much of the technology frontier as the US, so diffusion becomes the more important issue, and market power protected by IP and other tactics can be deployed anywhere. But wealth inequality is high in many countries – are all characterised by companies garnering monopoly rents and if so how?

Still, the book does set in a coherent theoretical framework the many recent books that have addressed the issue of market concentration and particularly big tech. It’s an interesting framing of current growth challenges, and one I broadly agree with. And Kurz’s call for tougher competition policy echoes many others. We will see whether it will translate into tougher enforcement and an ened to this second gilded age.

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Use it or lose it – semiconductor version

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I highly recommend Chris Miller’s Chip War: The Fight for the World’s Most Critical Technology. It starts with the history of the development of semiconductors, which might be familiar from other Silicon Valley histories (such as Margaret O’Mara’s also excellent The Code). But the book then goes on to less familiar and more recent territory, encompassing the technological changes needed to manufacture ever-more precise chips and the huge scale, complexity and sophistication of their fabrication. This introduces companies that have recently become familiar (AMSL in the Netherlands, making the machines that are needed to do the fabrication, and TSMC in Taiwan, which produces more than 90% of the most advanced chips) – and also others key to the process that are still not very well known in general.

The narrative arc is a steady shift from US leadership in both technology and manufacturing, to Asian leadership in manufacturing and rapid catch-up – especially in China thanks to large-scale subsidies and IP theft – in some slices of the technology. The result is an extraordinarily complex global supply chain with a number of very narrow 1 or 2 firm bottlenecks. The best to hope for seems to be a version of the Mutually Assured Destruction doctrine: no country can afford disruption. The worst? Massive disruption of all aspects of modern economic life.

That there would be some shift seems inevitable: as East Asian economies developed in the late 20th century they would always try to move up the value chain into more sophisticated sectors. However, the book is quietly but strongly critical of the pro-globalisation philosophy of the US (and rest of the west) that gave up on retaining core manufacturing and engineering competencies at home – their loss didn’t matter until it really did, with the re-emergence of geopolitical strife. As the book puts it, there was a “liberal internationalist ethos that guided officials of both political parties amid America’s unipolar moment.” Yet Andy Grove’s paranoia was valid, when he said in the early 2010s: “Abandoning today’s ‘commodity’ manufacturing can lock you out of tomorrow’s emerging industry.” (One of the best summary articles making eactly this point is Gregory Tassey in JEP in 2014.)

There is a lot of interesting detail. For example, I hadn’t realised how much Darpa focused on educational infrastructure – funding students and workshops, and university computer equipment, as well as futuristic tech research. There are lots of great examples of the difficulty of copying advanced chip technology because of the necessary tacit knowledge: for instance, every AMSL photolithography machine comes with a lifetime supply of AMSL technicians to tend to it. This is either hopeful – China will find it hard to catch up fully –  or not – the US or EU will not be able to catch up with TSMC because of the latter’s vast embedded know-how. Another example is the fact that defence dollars bought 72% of all integrated circuits produced in 1965, but Robert McNamara’s deffence budget cuts led Robert Noyce of Fairchild to bet on the consumer market and slash chip prices from $20 to $2. Annual US computer sales went from 1000 in 1957 to 18,700 a decade later.

All this and much more. The book has no easy policy solutions but is an essential contribution to current debates about industrial policy.

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From citizen to subject in cyberspace

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Vili Lehdonvirta’s Cloud Empires is a terrific book. As the title suggests (and the fashionably chatty subtitle spells out just in case), the subject is the political power of large/gatekeeper digital platforms and specifically how in their essential rule-making capacity they are steadily taking on more activities of the state – but doing so without a public service motive (profit instead) and without accountability: “The internet was supposed to free us from powerful institutions. … Then they delivered something different – something that looks a lot like government again, except that this time we didn’t get to vote.”

The book starts with the origins of the internet and digital platforms, including the early libertarian hopes. The first section concerns platforms as economic institutions. One focus is the operation of online labour markets, including mTurk, but also using oWork/Upworker as a case study; the platform become increasingly internally regulated as it grew, among other things setting a minimum wage – of $3 an hour, reflecting the globalisation of online labour. Another chapter concerns privacy, and its complete erosion as platforms increasingly grappled with the need to enforce social order online at massive scale.

The theme through this first section is the transition from libertarian optimism about the absence of control to a non-territorial but nevertheless tightly regulated series of platform domains, with platforms setting their own rules within their own jurisdictions – with the only accountability being people’s ability to leave. You might put it that Albert Hirschman’s ‘exit’ is the only option as neither voice not loyalty have any traction, and even that is limited by the power of network effects. Exit would have to be collective to be effective.

The second section concerns the political power of the platforms. It starts with a wonderfully astute chapter on crypto-currencies, making the point (it has always seemed clear to me but seemingly not to others) that these are not ‘trustless’ but simply relocate trust. And yet many or most are inherently untrustworthy (to use Onora O’Neill’s framing). “The crypto elite who run these organisations are, if anything, less accountable to people than conventional financial and regulatory elites.” The founders may be entirely sincere and nice, and they may even seem to give their communities voice, but in writing the take-it-or-leave-it code, they impose dictatorship. (And have clearly read none of the vast literature on incomplete contracts….) Other authors such as Lawrence Lessig have drawn the comparison between code and law, but I found the social science perspective here very helpful.

Another chapter considers the way the platforms have undermined the traditional public institutions providing health care and education. Neither platforms nor gig workers have an incentive to invest in training or a long-term relationship, and in the US at least that casualised workforce has to rely on GoFundMe campaigns to cover medical bills. “Internet empires are undermining industrial society’s mechanisms of building and maintaining human capital.” What will the essential social safety net look like in the platform economy?

The concluding chapter pulls the threads together in the argument that platforms are usurping the traditional nation state. “Silicon Valley technologists reinvented the economy only in the sense that through trial and error they rediscovered much of what states already knew. Instead of revolutionizing our social order, they reimplemented it with computer code.” Algorithms are bureaucracy. (And indeed, a lot of traditional statecraft depended on technology – including classifying and collecting data, monitoring behaviour). The book argues that states simply gave up some of their former territory of control through outsourcing, or ceasing to collect data in house. In addition, the digital platforms have advantages – they are fast and efficient, and in (narrow) ways provide a great service.

So what to do about it? The book makes the case for an online bourgeois revolution to develop collective action power that will make digital platforms accountable. I must say that the prior chapters don’t give me any optimism that might provide effective. My prescription would be for democratic states to regain the lost territory through a combination of rule-making over online activity and improved efficiency of traditional bureaucratic states. Though I’m not too optimistic about that either.

All of which makes the book an essential read. I have some quibbles (for example, I’d disagree that platforms are effective central planners), but perhaps I’m wrong. The book is firmly rooted in Vili’s own work and the wider literature on digital platforms, spanning economics, sociology and political science, while being very readable with lots of examples and case studies. A strong recommend.

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