Growthology

Deonstructing GDP Updated ... 3.3 percent!

Answer: a lot.  The growth rate for the U.S. economy in the second quarter was revised upwards to 3.3 percent -- almost double the initial estimate. I'd guess the odds are the final figures will be even higher.  Why? Inventories were a drag, but not as bad as initially reported -- meaning firms are re-stocking. Exports boomed, adding a half a percentage point of growth in the preliminary revision alone.

Compare the updated figures to the original we published a month ago...

Unbelievably, the gloomy folks who refuse to believe the good news are calling the 3.3 percent rate a mirage. They say Q2 was an anamoly fueled by the "stimulus" from Congress. But look at the components and you see the mirage is a mirage. Consumption did not change from advance to prelim. The big movers are the improving trade numbers -- pretty strong data in favor of at least considering a vote on trade agreements with U.S. allies Korea and Columbia. Hello?  Congress?

What I am Reading / A Question

I've been reading a lot of different things these days -- not very focused on any one -- political coverage at realclearpolitics.com is hard to ignore with all the drama of the two major party conventions.

Meanwhile, I worked up a slide deck in powerpoint for an upcoming speech in Detroit, and have been doing some reading around that, mainly reviewing the Roadmap literature. I am tempted to post the slides up here this week, as I would love to get your feedback. My guess is that maybe 5 percent of the audience at best will see the slides here before the formal speech, so the odds of me trumping myself seem low.

The whole issue -- whether to pre-publish or not -- seems fascinating in its own right. People still flock to live concerts for $100 a ticket when they could alternatively use the same money to purchase 10 CDs on iTunes, right? Does it harm concert attendance that all the songs are available electronically months and years before the event?  Let me leave it at this: if I can get three comments expressing interest in seeing the slide deck, I will post the powerpoint. By the way, the topic is : What local policies can enhance and retain innovative companies?

Other reading:

• Gallup's World Poll (October 2007)
• VOX - a high power econ blog. Especially this essay by Heckman on soft skills (a.k.a. non-cognitive)
• Who Serves in the Military? An updated and deepended extension of my demographic research on U.S. troops. Better than the original! Kudos to James Sherk and Shanea Watkins.

Warsh on America's economic soul

David Warsh has an elegant essay that focuses on what I might call America's economic soul. The essay touches on the Easterlin paradox, the history of economic thought, and American literature, all wrapped around a book review of Still the New World: American Literature in a Culture of Creative Destruction, by Philip Fisher:

But what does he know about economics?  The answer, of course, is plenty.  Being a sharp observer can take you a long way in a field that has relatively little instinct for introspection.

* * *

Turner [originator of the idea that the closing of the frontier would change America into a quasi-European state--Kane edit] was wrong, Fisher says.  The unmistakable newness of America in the nineteenth century made it possible for its authors to sketch a philosophy for living permanently with newness, in the form of competitive technological capitalism.  It was in those years that “America became a culture willing to pay the deep costs of obsolescence and lost towns as part of what might be called the bargain of invention,” he writes. And in a series of chapters on the Charles River Bridge decision, on Emerson and Whitman, on Melville and slavery, on Twain, Henry James, William Dean Howells and the rise of professionalism, on regionalism and realism in literature, he produces one compelling insight after another from the cornucopia of American literature, none more dazzling than the gloss he puts on the famous episode in which Tom Sawyer paints his Aunt Sally’s fence.

The Henry Ford of Health Care

Paul Howard tells us that entrepreneurs are fixing health care, if only government would get out of the way:

Henry Ford didn’t invent the automobile. He just found a way to mass-produce it, allowing him to sell an affordable, reliable form of transportation to middle-class Americans. Can twenty-first-century entrepreneurs do the same for health care, which seems defined by expensive, labor-intensive services? In a word, yes—by “unbundling” inexpensive services from expensive settings like hospitals and by moving from a reactive medical model that treats already sick patients (very expensive) to a predictive, personalized model that monitors patients for disease predispositions and keeps them healthy (far cheaper).

Wal-Mart, for all the fire that labor activists direct at it, is quickly becoming the Henry Ford of health care. It took a bold stride into health-care markets in 2006, rolling out a Florida pilot program offering dozens of generic drugs at just $4 for a month’s supply. The program quickly spread to other states and added many new generics, including medicines for glaucoma, attention deficit disorder, fungal infections, and acne. As of May 2008, Wal-Mart estimates, the program has saved consumers over $1 billion in prescription drug costs. Competitors like Target and Kroger have rushed to match its offerings.

This topic bores me to tears, and yet I loved Howard's essay in full.

Spoiler alert: national health care is not the answer.

Rhee's education incentives

The mayor of Washington, DC, Democrat Adrian Fenty, appointed a policy innovator to run the DC school system. DC is famous for having some of the worst performing students and schools in the nation, while also spending more per pupil than most other districts. Rhee has overcome huge bureaucratic obstacles to implement some exciting incentive-based reforms:

Last week, D.C. Schools Chancellor Michelle A. Rhee unveiled a pilot program in which middle school students will be paid to meet academic and behavioral goals. Starting in October, 3,000 students -- half of the middle school population -- will be able to earn as much as $100 every two weeks (officials expect the average will be $50 every two weeks) as part of a $2.7 million program being offered with Harvard University. 

Hat tip: WaPo.

My question: Why aren't there more experiments like this?  Whether it works or not, it seems to me that the path to progress in education is having entrepreneurial districts not national standards, or to have empowered teachers not accredited teachers, or to have education markets not education mandates.

Modeling Entrepreneurship

New research (by Joop Hartog, Mirjam van Praag, and Justin van der Sluis of the University of Amsterdam) seems to show that there is a less than optimal number of entrepreneurs. Here's analysis by Portfolio.com's Zubin Jelveh:

But while earnings for skilled entrepreneurs are indeed higher, merely possessing greater general abilities doesn't drive people into entrepreneurship. Using a survey which regularly tracked 4,500 teenagers and young adults through part of their adult lives from 1979 to 2000, the researchers found that a person with higher general abilities was no more likely to choose to start his/her own business than someone with lower general abilities.

Possible explanations? (Jelveh offers the first two, I add two more)

• Risk aversion is uncorrelated with skill.
• Potential entreps are ignorant of the opportunity.
• Barriers to riches are real, especially non-financial regulatory burdens, making entrep effort less rewarding.
• Opportunity costs are exponentially higher for skilled salaried workers.

WALL-E is progressive & a must-see

WALL-E, The Pixar movie about the last robot on a despoiled Earth and obese tech-dependent humans is wonderful. I took the whole family to see it months ago, and have been thinking about it ever since.

There is ample reason for real progressives to dislike the film's premise: technological advancement destroy's the Earth's capacity to support life. Conservative / entrepreneurial critics made arguments that normally I would agree with - too often political "progressives" warn that progress is bad. But the question is whether kids who see this movie leave the theater feeling pro or anti technology? Are you kidding me?  Two robots have a love dance in space!  It's cool. Besides, there is a happy ending that soundly trumps the doom-and-gloom crowd.

I think viewers need to remember that the apocolypse is a plot device, not a commentary. The creators take advantage of an age-old (and probably innately human) concern - the end of civilization. So did Planet of the Apes, which most sane people agree is the greatest film of all time (my wife being the exception).

What impressed me is that WALL-E is brutal in its portrayal of obesity, despite treating it with humor. It pulls no punches. I can only imagine how uncomfortable this might have been for some families to explain to their kids, and Pixar deserves real kudos for making folks think about it.

WALL-E is a parable that at its core says that technology is anything but cold and lifeless. It reminds us that the challenge to humans in handling an explosion of technology is not to lose our humanity.

Wildavsky reviews Charles Murray

My friend Ben Wildavsky has a must-read review in today's WSJ of Charles Murray's latest book, Real Education. I could not agree more with Ben's basic argument:

One can accept the idea that inherent academic abilities are unevenly distributed while also believing that many low-achieving kids -- and high-achieving kids, too, for that matter -- could learn a lot more than they are learning now. International tests show that students in many other nations bypass American kids in reading and math. Could such comparative results really be a function of higher raw intelligence overseas -- or are they more likely to reflect superior educational practices? It is telling that hard-headed education reformers like Eric Hanushek, Chester E. Finn and Jay Greene believe that we can do much more to boost the academic achievement of children upon whom Mr. Murray would essentially give up.

Murray has a lot of great ideas about certification, and anyone with experience in public schools will agree with much of his assessment. The government (monopoly) run school system is broken in all the ways that socialized markets fail, despite the heroic efforts of most teachers. Pushing unqualified kids into college is bad public policy. High achievers are bored.

But I believe that all American kids are not being challenged enough by the public school system, especially in math and science.  It's disappointing for high-achievers, sure, but the failure of early public education is a lifelong tragedy for poor kids who have been told by the government that they are allowed no other option.

Advantage, Canada

In the global race to have the best policies for economic growth, Canada just scored big time:

Intended to fast-track foreign students and skilled workers currently in Canada from temporary migrant to permanent resident status (and potentially to Canadian citizens), this new program continues a series of recent changes implemented by Citizenship and Immigration Canada (CIC) seeking to enhance Canada’s economic competitiveness through the attraction and retention of highly educated migrants.

The entire post at GlobalHigherEd is balanced and worth reading in full.

I've heard that the Governor of Kansas, Kathleen Sebelius (D), likes to suggest that any science or engineering degree from an American university given to a foreign student should come stapled with a U.S. green card. Not a bad idea!

You Cannot Be Serious, Part I

Two little kids selling home-garden fruit and veggies from a stand in front of their home have been shut down by the local police because they lacked a permit, violated zoning, caused traffic delays, and posed a health risk. My instinct: You Cannot Be Serious.

Katie and Sabrina Lewis' veggie stand, in the town of Clayton, Calif., where they sold homegrown watermelons for $1, has been shuttered by town officials who told the girls' parents that their daughters' venture violated local zoning ordinances. ...

Manning [the mayor] said he's not trying to be the bad guy in this situation, but that he has to consider the residents' best interests. "It's not like we're the Gestapo going out and closing down fruit stands," he said.

I beg to differ. This is a sad story on many levels, starting with the loss of common sense in favor of "rules" in modern society.

Look, there is a reason that the U.S. Constitution could not be written today.  Contemporary lawyering and governance are all about exceptions, carveouts, caveats, fine print, and explaining everything out to the Nth detail. A founding document written by today's finest minds would be thicker than the Lord of Rings Trilogy.  The Founders understood the power and importance of brevity in a free, democratic society and produced a document of (by my count) just 4501 words.  But their brevity was part of a bargain, which was that the law would be simple and accessible to the citizenry in exchange for a citizenry (and their progeny) which promises to exercise common sense in self-governance and withhod from abusinve litigiousness.

Mayor Manning, in drawing the analogy of the Gestapo, fails to see that he shares their obedience to (and love of) orderly rules over human judgment: I am just following orders; everybody has to follow the same rules.

He offers the same logical absurdism that rule-makers commonly use: what if somebody gets sick eating one of the unregulated cucumbers? What if they sue the city for failing to enforce the law? Yes, yes, what if! We can't trust the courts either. Our legal system is caving into the "not one drop of death" reasoning that has zero tolerance for accidents. Everything has a blameful cause (and its corrolary - every criminal with intent has a blameful cause as well).

My question: how soon before schools start banning tag and kickball?  Oh wait, they already have. How soon before kids are arrested for playing unsupervised sports in the park?  Oh wait, the parks are being chained off to avoid liability risks.

Sigh.

The larger tragedy for those who care about economic prosperity is this case exemplifies a loss of America's entrpreneurial culture. The younger a person learns the "hard lessons" of real life, the stronger the odds are that they will become an entrepreneur and create jobs. When the bureaucratic impulse overwhelms the entrepreneurial impulse, meaning that a majority of the people thinks some kind of orderly system should be (or is!) in place to give everybody a job, then a soceity begins to begins its great and subtle collapse.

Regular growthology reads will note the title of this post. This is part I of a series that I hope to collect on the theme of dumb government following rules that snuff out entrepreneurship. It's a dangerous trend, but the anecodtes tend to be hilarious, too. No reason we can't have some fun while watching our ship of state sink, is there?

I will need your help in finding nominees, so please send in any stories you find!

Periodic Table of Innovation vs. Roadmap

Here's a great periodic table of U.S. innovation elements (the "eco-system") created by the folks at usinnovation.org.

The eco-system is composed of eight kinds of elements, and they seem pretty reasonable:

We at Kauffman have established a roadmap for national policymakers -- four issues that if acted upon would boost American entrepreneurship and economic growth. In my words, these four are:

1. Ensure a Skilled Workforce. Human capital is the key to economic growth. America's strengths are universal education and a culture of entrepreneurial risk-taking. But a major concern is whether the "mindset" of interest in science is waning. And the traditonal openness to immigration is also in decline, which makes least sense when America deports engineering Ph.D.s who want to stay.
2. Reform Health Care. This is about costs, not nationalizing medicine. The only way to cut the Gordian knot of health care costs is to treat employer health benefits as taxable income. If Congress removes gold-plated insurance deductibility from the tax code, it immediately reduces health care inequality and corrects a massive market failure.
3. Promote Innovation. Patent law, IP rights, low taxes, ease of doing business, and the whole parade of pro-growth institutions are American strengths. Well, some are (U.S. corporate taxes are second highest in the world ... and apparently Congress won't settle until we're number one). A nagging problem is the difficulty of commercializing university-based innovations.
4. Limit regulation and litigation. Abuse of the legal system in class action suits is a threat to employers. A larger movement is underway to balance costs and benefits of business regulation rather than focus on benefits alone.

I like the framework in the periodic elements. I think the Kauffman roadmap emphasizes many of the same things, but I wonder what things we might have missed by narrowing our messaging down to four points? And does their periodic table miss any elements?

Sayonara

Well, my time at Growthology is at an end. I'd like to thank Tim and Bob for this enjoyable experience. If, perchance, readers liked what they read, you can find me (and others) at www.boxscoreblog.com. And, of course, Tim and Bob may permit me to contribute again in the future.

The Future of Economic Growth

I recently ran across this essay, "How Fast and How Far Can China's GDP Grow?" from a few years ago, which included the following observation:

"An international comparison shows that the time needed for doubling per capita GDP is 58 years in England during the period of 1780-1838, 47 years in the United States during 1839-1886, 34 years in Japan during 1885-1919, and 11 years in Korea during 1966-1977. China has set a new record--per capita GDP in China doubled within only 9 years between 1978 and 1987, and doubled again in another 9 years between 1987 and 1996."

These figures fit into the broader picture that has emerged from the economic literature in the past two centuries trying to figure out why the last two hundred years have seen such rapid economic growth in countries across the world. And it seems probable that another country--India, an African nation--could match China's record of nine years or maybe even break it.

Expanding our purview, the astounding story of economic growth in the last two hundred years makes me wonder: (1) are we now in a permanent period of growth, and (2) what could that mean for human evolution, on multiple levels?

The first question will likely generate the most controversy, but it's really the less interesting one. It is impossible to definitively say we have (or have not) entered an era of unending growth. Things can always happen to derail such hope, and likely will happen. (If you believe the theory that the relative percentage of young men in a country determines that country's propensity for military aggression, then China's gender imbalance should worry you. Nb: I am not endorsing this theory.)

Likewise, growth remains absent in many countries--Paul Collier's recent book, The Bottom Billion, offers a very well-measured look at intractable stagnation.

Nonetheless, it's certainly at least possible to contemplate a future of continued growth: we know we can achieve sustained growth and, according to Robert Lucas, that's no longer the question economists should address. Again, I am not asserting that we have "solved" for economic growth and that the future is a limitless cornucopia. I'm simply saying that, given our experience over the last two centuries, it's at least a possibility that should be considered.

Now, the more interesting question is what effect, if any, sustained economic growth has had and will continue to have on human evolution. After years of controversy among biologists, it seems to nearly be settled that selection and adaptation can occur on multiple levels: genetic, cellular, epigenetic, individual, social, cultural. And it seems to me that it would strain credulity to believe that economic growth does not have an impact on human evolution.

For thousands of years, humanity enjoyed little to no economic growth in terms of living standards. To be sure, there were technological advances: fire, geometry, the wheel, the saddle, soap, the odd proto-machine here and there, etc. (By the way, I'm pretty sure soap was an innovation of those much-maligned Huns.) Some work has been done on the multiple levels of evolution involved in large historical events.

So when in desultory fashion humanity did begin to experience sustained economic growth, doesn't it make sense that it somehow affected the course of human evolution? And, at least for emergent levels of social and cultural evolution, what does that mean for the future?

Robert Fogel, inter alios, has done fantastic work charting changes in human physiology over time. So we know, then, that humans do adapt, in relatively rapid time, to changes in diet and lifestyle. Aside from the work of Fogel and the slightly related work of Robert Gallman and others, I'm not aware of much scholarship that is oriented toward the question of how economic growth has affected human evolution. (Michael Kremer published an interesting paper, "Population Growth and Technological Change: One Million B.C. to 1990," in The Quarterly Journal of Economics in 1993, showing that technological change increased at a constant rate with population growth until about 1800.)

This shouldn't be a surprise: we've never really had a reason to consider it because sustained economic growth wasn't part of the fabric of human reality for most of our existence.  Let's take the conventional time period of 200,000 years ago for homo sapiens: the period of sustained economic growth represents about one tenth of one percent of humanity's time as a separate species. To narrow it even further, if we take the last fifty years as the era during which growth really spread across the world, then it's only about 0.025 percent.

In other words, economic growth--in terms of improved living standards--is pretty new. So first we would have to wrap our brains around the fact that evolution could occur on that short of a time scale. If we consider evolution on multiple levels, however, this isn't as hard. (And Fogel's work helps here.) Then we would have to come to grips with the fact that humanity is evolving right now, and that the future holds "endless forms most beautiful" for humanity writ large, particularly (our interest here) in terms of social, cultural, economic, and institutional forms.

Update: A 2002 article in The Quarterly Journal of Economics, "Natural Selection and the Origin of Economic Growth," by Oded Galor and Omer Moav, is on point here, but looks at the reverse question: what role did natural selection play in human evolution in creating the growth acceleration of the last two hundred years?

Nb: I am in no way endorsing any notion that economic growth's effect on evolution has somehow caused different groups of people to evolve "better" or "higher" than others.

Decline, Refined

In response to yesterday's post on American decline, the ever-perceptive Barry Ritholtz of The Big Picture, had this to say: "By your analysis, this country can never move to the down side--its only numbers, and after all, we've always rebounded. Who can argue with logic such as that?"

A very good point. In light of this, I should refine my points. I'm not saying, of course, that the United States could never face decline: history, obviously, is Exhibit Infinity here.

My main point had more to do with what the recurrent declinists propose as remedies: almost unfailingly, a big-push government initiative. Yet when America did appear to face economic decline, we rebounded because of actions well below the radar, or a series of unconnected actions that came together to propel a new era of growth. There is, of course, a difference between absolute decline and relative decline (Kealey's book covers this well), and the proffered remedies might well hasten decline. In this sense, decline--when and if it came--might be like rebound: an unforeseen black swan.

And then there are various views of decline: economic, political, cultural, moral, etc. An oft-voiced complaint today, for example, is that our political discourse is too partisan and too polarized. I take the view that, while we certainly have issues, it's probably no worse today than, say, in 1800 or any other time in American history. Finally, there is the view, expressed by colleagues and in reader comments at our friend Paul Kedrosky's site, that perhaps the United States needs some sort of existential threat to spur it forward.

America in Decline, Again . . . and Again . . . and Again . . .

Once again, the United States economy stands on the brink of historical irrelevance. That, at least, seems to be the consensus emerging from several books, reports, and public statements that have appeared in the last couple of years.

The din of the chorus has grown louder with the current economic turmoil. The latest salvo has come from Byron Wien of Pequot Capital Management, in the Financial Times a few days ago. Wien recounts the decline of American manufacturing, rising deficits, and our seemingly shoddy international performance in math and science. Wien has the facts right: yes, the U.S. has lost manufacturing jobs; yes, our debt and deficits have risen; yes, our students don't compare well to other countries.

The problem is that these are only numbers, and incomplete numbers at that. Declines in manufacturing employment are due in large part to productivity gains: China, remember, has also lost manufacturing jobs as its productivity has risen. Others have pointed to the danger of doing cross-country comparisons in test scores, as well as the possible explanations for discrepancies. In fact, I don't want to dwell on the general idea of decline here--others, too, have adequately covered that. (Here was a good response to Wien's column, and I hear Joel Kotkin is working on a book about persistent declinism in America.)

The most revealing thing about these periodic bouts of anxiety is that the proposed remedies are eerily similar. I offer two short book excerpts:

(1) "The National Innovation Council would be convened and led by the National Innovation Advisor. . . . This would be a 'guiding coalition,' setting direction and overseeing the innovation transformation process for our country. Its responsibilities would include adjudicating competing priorities, making useful exceptions, and orchestrating funding from multiple sources."

(2) "Solving our energy and growth problems demands that government gets more heavilty involved in the economy's major investment decisions. . . . To compete we need the national equivalent of a corporate investment committee. Major investment decisions have become too important to be left to the private market alone, but a way must be found to incorporate private corporate planning into this process in a non-adversary way."

(Wien's FT column echoes these.)

The last period of anxiety over the economic future of the United States was the late 1970s and early 1980s. One of the above excerpts is from 1980, the other from 2007 (answers below).  As Kauffman Foundation president Carl Schramm has chronicled (also explored in Good Capitalism, Bad Capitalism), the American economy in the last 25 years experienced a surge of entrepreneurship and growth driven by the confluence of a number of factors.

In 1967, for example, John Kenneth Galbraith published The New Industrial State. As Carl Schramm has written, "within a year of the first edition of The New Industrial State, Intel was founded out of Fairchild Semiconductor. The 1970s saw the appearance of firms such as FedEx, Microsoft, Apple, and Home Depot, and the expansion of companies such as Target and Wal-Mart, all of which became fast-growing parts of an entrepreneurial economy."

The rise of entrepreneurial capitalism began well before the economic troubles of 1980. By 1985, in fact, Peter Drucker was heralding the arrival of an "entrepreneurial economy." What happened was that far beneath the radar, the economy was transforming in a number of ways. The military, a major engine of the "bureaucratic capitalism" that grew up in the 1950s and 1960s, actually became a source of new discoveries and entrepreneurial opportunities. Thanks in part to deregulation, individuals and firms carved out new pathways of business in financial services and insurance. Some areas of manufacturing, even, enjoyed growth. (Take a look at the Inc. 500 list for 1983.)

It seems likely, in other words, that today the seeds of tomorrow's economic growth are being sown by individuals "out there" forging ahead, forming new firms, innovating, and seeking profit. We won't see them until they move onto the radar screen, but they're there for sure. I love analogies, and I have used this one elsewhere, but maybe we can think of this as the "dark matter" of the economy: we know it's there, expanding the economy, but we can't fully detect or measure it.

A side note: above I mentioned the military's role in in funding the research and development that helped give rise to entrepreneurial capitalism. That's not a new story. But what is often forgotten (or ignored) is the importance of the military in shaping what became Silicon Valley. When urban experts today discuss Silicon Valley and how other cities and regions can imitate it, they default to venture capital, research universities, and start-up firms. Those were all important, of course, but a very strong case can be made that the Pentagon was the sine qua non in creating Silicon Valley. You have to go back to about 1900 to see it fully play out, but the evidence is persuasive. I have yet to see, however, a mayor or urban planner propose the military as a strategic piece of economic development. (Although the Washington D.C. metropolitan area has certainly benefited from government contracting.) Anyway, this is turning into a separate topic--I'll leave it by saying that with thousands of returning veterans all over the country and the skills they are learning in the armed forces today, it is a rich but untapped resource for any city or region seeking a new avenue of growth.

Answer to book excerpts: (1) is from Innovation Nation by John Kao (2007); (2) is from The Zero-Sum Society by Lester Thurow (1980).

Science and Entrepreneurship

Last month's cover story in Wired was "The End of Science." It included a prefatory essay by Chris Anderson (author of The Long Tail) and a series of short, illustrated pieces on why the "data deluge makes the scientific method obsolete." The basic idea was that we have entered "The Petabyte Age," in which massive amounts of data and data analysis have replaced Karl Popper's conception of science as a desultory process of conjecture and refutation. Here is the pitch:

"Sensors everywhere. Infinite storage. Clouds of processors. Our ability to capture, warehouse, and   understand massive amounts of data is changing science, medicine, business, and technology. As our collection of facts and figures grows, so will the opportunity to find answers to fundamental questions. Because in the era of big data, more isn't just more. More is different."

Obviously, Wired is out to sell magazines, and extravagant claims like "The End of Science" are one way to do that. (It certainly caught my attention on an airport newsstand.) But when you scan a site like Many Eyes, or read about massive Philip K. Dick-sounding server farms in rural Oregon, you begin to wonder about the impact of unimaginable amounts of information on science and, inevitably, entrepreneurship and economic growth.

It is clear that science, writ large, is an important component of growth. In the early decades of the Industrial Revolution, many innovations came from what we would today call amateur or applied scientists. In the late nineteenth century and into the twentieth century, corporate research labs were prominent. And in the last fifty years, academic research and its role in commercialization has moved to the center of entrepreneurial growth. (Here is an interesting article attempting to relate Kuhnian paradigm shifts to waves of entrepreneurship.)

I'm not saying we have arrived at the "end of science"--it seems highly doubtful that such a milestone would ever be reached while humanity exists--but science clearly goes through transitions and this would have to affect entrepreneurship and growth. I don't pretend to know how, to any degree, massive data analysis will shape the paths of future entrepreneurs, but they will. (And, of course, several of the vignettes in the Wired story are examples of entrepreneurship.)

But it's probably something worth pondering. Entrepreneurship itself can be seen as a form of science, at least in the Popperian sense, or as an example of abductive reasoning.

I don't really have a conclusion here, other than to say that there are often deep, long-term forces that shape economic change, notwithstanding contemporary policy debates that seem to assume, in my mother's words, that we were all born yesterday.

Just When You Thought We Were Out of Innovation . . .

Readers are undoubtedly familiar with the debates raging over American competitiveness and whether China or India or both will overtake the United States and consign us all to the dismal service sector tasks of burger-flipping, hair-cutting, and retail cashiering.

I exaggerate. But this is a not-so-subtle subtext running underneath debates over the continued decline in manufacturing jobs, as well as the persistent exhortations from the scientific and policy establishments that we need to train more scientists and engineers.

There often appears to be a disconnect, however, between the public debate and what is going on in the American economy. Such a disconnect is nothing new, but I sometimes think we only dimly grasp the shift beneath our feet.

By sheer coincidence today, I came across this chart on The Big Picture, showing a growing gap between world GDP and oil production, and this Resilience Report from Strategy+Business about "digital oil fields." One way to jointly read these is with the expectation that digital oil fields will help boost oil production. Maybe.

The more interesting tale here is the transformation of the oil industry: facing a labor crunch and spike in demand, it's responding by developing a "new breed of engineer and technician." The oil industry is becoming, or already is, an example of a "service system." Our friend Jim Spohrer over at IBM has been a leader in developing the science of service systems, management, and engineering.

This type of evolutionary transformation is occurring across the economy, as old and new technologies, new knowledge, software platforms, and continuous learning keep coming together to create ever-greater levels of integration that require new approaches (entrepreneurship), new ways of thinking, and new forms of business.

In this sense, the steady drumbeat for 'more scientists and engineers' begins to appear a bit shallow. We need them, of course, but before simply recruiting more students into the existing disciplines, maybe we should think about restructuring those disciplines. In an odd way, the age-old story of specialization, increasing returns, and greater knowledge that continues to shape the economy, may push us toward an educational system that emphasizes integrative, consilient thinking.

More on Inequality

After the last post on inequality and different ways to look at it, I came across this entertaining post by Mark Perry on scoring inequality in the NBA. He also applies this method to Olympic medals and home runs in baseball.

Anyway, all this talk about inequality reminded me of something Hayek once wrote: "From the fact that people are very different it follows that, if we treat them equally, the result must be inequality in their actual position, and that the only way to place them in an equal position would be to treat them differently. Equality before the law and material equality are therefore not only different but are in conflict which each other; and we can achieve either one or the other, but not both at the same time." (From The Constitution of Liberty.)

And that, of course, is reminiscent of Vonnegut's famous short story, "Harrison Bergeron," in Welcome to the Monkey House. (There was a thought-provoking essay on Vonnegut, by the way, in the Winter 2007 issue of the Claremont Review of Books.)

Inequality is not a simple issue conducive to Gordian solutions, and proves at least two things: (1) the once seemingly dead discipline of "political economy" is not dead, and (2) discussions of economics are perhaps inevitably informed by philosophy. Namely, why type of justice should we have?

Entrepreneurship in America: An Equal Opportunity Endeavor?

We like to think of America as a land of equal opportunity, but we know that for all the progress we've made, we still could do better.

The entrepreneurship data help illustrate the point. Every year the Kauffman Foundation reports the rate of new business formation by sex and race, among other demographic characteristics (See the Kauffman Entrepreneurship Index, or KEI, at www.kauffman.org). African-Americans and women consistently rank behind whites and men.

If you want to know much about these disparities -- especially the reasons for them -- there's  a new book out from MIT Press, Race and Entrepreneurial Success, by Robert W. Fairlie and Alicia M. Robb, you'll want to read (full disclosure: Professor Fairlie does the calculations for the KEI, and Dr. Robb is now a senior research fellow at Kauffman).

I won't give away the ending entirely, but a few nuggets are worth noting:

--Having an entrepreneur in the family (or not having one, as the case may be) does not really explain who becomes an entrepreneur (or does not). What is important is whether an individual has worked in a family business (and thus because many minorities do not get that chance, they don't have the experience or the inclination to start a business of their own).

--Education and money matter in explaining start-up rates and success. That makes a big difference, since minorities (excepting Asian-Americans) lag in both.

For more details, read the book -- one of the most comprehensive studies of entrepreneurship by race and ethnicity ever done. 

Brain Drain: Americans Leaving To Be Entrepreneurs Elsewhere

Several decades ago, it was fashionable for developing countries to worry about the "brain drain" of their best and brightest leaving to come to the United States. India certainly as proved that concern to be misplaced. Successful Indian venture capitalists like Vinod Khosla are now funding new companies in their home country. Other Indians are returning home to work there or found new companies.

But, as a recent US News article (http://www.usnews.com/articles/news/2008/07/28/a-growing-trend-of-leaving-america.html) highlights, the "brain drain" is now on the other foot, as it were. Up to 3 million Americans already have left to seek their entrepreneurial fortunes in other countries.

I have mixed views about this. On the one hand, it's great that we are exporting the virtues entrepreneurship through living examples -- entrepreneurs themselves. This will help transform the destination countries, providing entrepreneurial role models for the residents -- and the governments there.

On the other hand, as the article suggests, the Americans who are leaving are among our most creative. Doesn't it say something about the future of this country when many of our most talented people not only believe than do better by living and opening businesses elsewhere than by staying here? I think it does, and I'm uncomfortable with the implications.

Do readers have the same mixed reactions?