Thursday, August 23, 2007

Rising Above the Gathering Storm

Much has been written about the advantages and challenges of globalization and out-sourcing. I was first introduced to the issues in Tom Friedman's fine book The Lexus and the Olive Tree. Specifically, I was introduced to the phrase "creative destruction" coined by economist Joseph Schumpeter:

Schumpeter, a former Austrian Minister of Finance and Harvard Business School professor, expressed the view in his classic work Capitalism, Socialism and Democracy that the essence of capitalism is the process of "creative destruction"---the perpetual cycle of destroying the old and less efficient product or service and replacing it with new, more efficient ones.

The essential point is that:

Those countries that are most willing to let capitalism quickly destroy inefficient companies, so that money can be freed up and directed to more innovative ones, will thrive in the era of globalization.

Historically, the US has been very good at destroying inefficient companies and directing capital toward more innovative ones. Which brings us to the current situation. Outsourcing of technology jobs and various business processes is well underway. That's the "destruction" part. But where's the "creative" part? What's going to be the next big thing that will create massive employment in the US? And what can the US do to ensure that this happens?

Congress asked the National Academies these very questions. In response, the National Academies put out a comprehensive report entitled Rising Above the Gathering Storm (the Executive Summary of this report is worth reading). In this report, they take as their starting point Tom Friedman's assertion in The World is Flat that:

...the international economic playing field is now "more level" than it has ever been.

and that

...whether global flatness is good for a particular country depends on whether that country is prepared to compete on the global playing field...

The National Academies identified two key challenges for the US: creating high quality jobs and responding to the nation's need for clean, affordable, and reliable energy. They propose four high-level recommendations and twenty specific implementation steps to address these challenges. The four recommendations are:

  • 10,000 teachers, 10 million minds and K-12 science and math education.
    The idea is to increase the talent pool by vastly improving K-12 science and math education.

  • Sowing the seeds through science and engineering research.
    The idea is to sustain and strengthen the traditional commitment to long-term basic research that has been the engine of innovation.

  • Best and brightest in science and engineering higher education.
    The idea is to make the US the most attractive place to study and perform research so that it can attract and retain the best students from within the US and around the world.

  • Incentives for innovation.
    The idea is for government to take actions to modernize the patent system, to enact tax policies that encourage innovation, and to ensure affordable broadband access.

Congress and the President seem to have taken these recommendations seriously. As noted in an op-ed by two authors of the above report, earlier this month the 21st Century Competitiveness Act was signed into law with strong bipartisan support. This law substantially increases the basic research and development budgets of key federal agencies (like NSF, NIST, and DoE's Office of Science), and authorizes $43 billion for STEM education: science, technology, engineering and math. Thus, it appears to follow the first two recommendations.

There is, however, a catch. The authors of the op-ed end with:

We are under no illusions. What is authorized by this act is not necessarily what will get funded. If the appropriations committees fail to follow through, the country will lose the opportunity to take a page from its own playbook of 50 years ago and assure American leadership in the world of technology and innovation.

Hopefully the appropriations committees will follow through.

1 comment:

Narayan said...

a few thoughts:
- creative destruction is fine as long as the creative process serves the same people the elements of whose economy it destroys. as a result of destruction "money can be freed up and directed to more innovative ones" but if those innovations happen to be halfway across the globe, the pain of destruction is not offset by the benefits of creation, at least not within the borders of a country.
- the four recommendations don't seem to address the challenges posed by globalization. is it ever good for any economy to downplay the importance of sound fundamental education? to suppress innovation? to reject talent? i'm not saying that these recommendations are bad; they simply don't address the core issue.

let me offer an alternative view:

firstly, i don't believe that globalization is a recent phenomenon.

- the forces of colonialism fostered their own brand of creative destruction, the destruction coming at the expense of the colonized, the benefits of creation going to the colonizers.
- in more recent decades, the economies of america, western europe, and japan have grown to benefit from the existence of each other. the forces of creative destruction have helped strengthen each of these economies over the past century by spurring the pace of innovation among them.

the key change in this picture has been the suddenness of the arrival of huge players like china and india. because of the opening of these economies, capital released by destruction in western economies has flown across borders to find new homes on the other side of the globe.

the violence of the resulting changes has come to resemble the effects of a dam-burst. releasing the pent-up energies of 2.3 billion people is bound to rock things severely. i would go so far as to venture that some changes for the worse (from an american perspective) are irreversible. the global economy has to find a new equilibrium. i won't claim to know what the world will look like when all this shakes out but i don't see any startling insights in the recommendations from the national academies.

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