Now I think that the smaller firms are much less likely to report doing research and development, and a lot of these sectors where this innovation is occurring don’t really report R&D at all. Wal-Mart doesn’t really report doing R&D, for instance. And very few firms patent, so I don’t want to use patenting and R&D as some end-all be-all measure of innovation. But if you did look at that, it certainly looks like big firms and incumbent are very important for innovation.
So ex ante, it’s hard to just decide what we want. Do we want these big, national firms that do a lot of research? Or do we want lots of entry and exit? I think we want both, but I think one of the keys is that —even though by my estimates with some research I’ve done with colleagues, we estimate the majority of growth comes from incumbent research —maybe one of the reasons they keep doing research is that they fear creative destruction from a competitor. If Apple was very comfortable with its market share and felt like it was impenetrable, it might not continue to innovate as much as if it feared losing its market completely.
So creative destruction may play a one-third role directly, but then also play a very important role at spurring incumbents to continue to innovate, continue to make what they do better instead of resting on their current products and services,
And is it different if you’re in an economy, like the US economy, which is supposed to be on the leading edge, the technological frontier? We’re supposed to be coming up with the new inventions and the new way of doing things. Is that role of creative destruction more important for us than some other kind of economy, which is may be a perfectly kind of economy but isn’t the one really generating a lot of new technological progress?
I actually might push back on that and say that countries that are outside the OECD tend to have lower allocative efficiency, meaning they don’t seem to have capital and labor flowing to the highest use as quickly as places like the United States. The United States is kind of like a ruthless, capitalist economy where firms are driven out. Amazon driving out lots of mom and pop retailers or brick and mortar retailers more generally — not just small ones but big ones — the US economy has a lot of that.
Rich countries in general have more of that than some middle-income countries. They tend to, and even some rich countries like Japan, protect a lot of its retail sector and its distribution sector from foreign direct investment. I think Japan’s really shooting themselves in the foot in not allowing that creative destruction that comes from having new foreign retailers come into their market. Mexico opened up to a lot of foreign retailers and there were big gains, on the order of three to seven percent income gains over a decade for the average person from being able to shop at these big box retailers they didn’t have access to before.
So I think creative destruction is in a way being suppressed more in middle income countries and developing countries than it is in rich countries. I’d be more concerned about it there from what I see. You have a lot more monopolies there that should be facing more competition. They should have more entry that they have to deal with.
What would you like policymakers to understand about trade and how it impacts innovation and growth? Obviously, it seemed like we had sort of decided that trade was good, the more free trade the better. Now people don’t seem to be quite as sure anymore. So what would you want policymakers to understand that maybe you think they don’t get about trade?
I would say that trade is a positive-sum game. I don’t think about it like a global Parkers Brothers game, where there’s a winner and loser and a fixed amount of resources. And I think this is classically described as “cloth for wine” but there are dynamic benefits that are even bigger. And by dynamic benefits, I mean, for example, Japan comes up with lane manufacturing and US auto firms imitate it. US firms come up with some leading edge semiconductors and South Korean firms imitate it. So products and ideas are flowing back and forth across countries in a way that is spurred by trade. That’s because when you trade, you can see the people figure out how products are used and then start to figure out how they can develop a better version that serves their purposes even better.
So I think more trade actually spurs more ideas flowing across countries, and that’s a very positive-sum thing. So in the same way I was saying the US could benefit from high-skilled immigration that could do research here, we could benefit from research being done in their countries of origin.
I think the rise of Western Europe, Japan, and Korea has been a boon to the US. There’s a channel through which it’s been a boon, even as there’s been a bunch of people who have suffered. So I think the thing I really want to communicate to policymakers is not to think about this as “This is our national champion versus their national champion, so either we win and they lose or they win and we lose.” We can both succeed at this with an even playing field, good property rights, trying to prevent countries from stealing intellectual property but also subsidizing some firms over others, as well as with policies like what you could implement through things like the World Trade Organization, you could make this a positive-sum game with big benefits.
Do you worry China is going to make the big breakthrough in AI, or the breakthrough in 5G, or the breakthrough in some other technology? Do you worry that they’ll have the technology and we’ll be behind and they’ll be the leading economy and we’ll be the laggard economy? I think that’s a really natural way that a lot of people think about it: Some country comes up with a technology so they’re the winner — and if it’s a big technology then they’re the big winner — and then all the other countries have to buy that technology from the country that originated it, and they’re the followers and no longer the leader.
I think we should worry to the extent that there’s any intellectual property theft. And I think part of what you’re saying is being a leader has some huge benefits associated with it, so of course we want to be the leader. That’s why I’m emphasizing the level-playing field. If they’re the best at coming up with the next generation of cell phone technology, for example, or wireless technology, then at a level playing field and enforced intellectual property rights, that’s going to benefit US consumers more than if the US put barriers on importing or using those technologies from foreign firms.
Now I also have to add another cautionary note there. I’m talking about narrow economic considerations. I’m not considering any broader national security or privacy considerations that obviously need to be factored in, but that I know very little about.
I always think of that 1980s Clint Eastwood movie called Firefox, where the Soviet Union had developed super-advanced airplane technology and therefore the US was at some sort of unbelievable strategic disadvantage so we had to go steal their technology so they didn’t win the Cold War. I think a lot of people think there will be some massive leap forth in technology that will put us at a massive national security disadvantage, though I understand that you’re looking at it more from an economic perspective.
Sort of winding down here, one criticism of economists is that you’re just worried about GDP growth. That the number one goal of economic policy is to generate fast GDP growth. Is that an accurate criticism?
I don’t think so. I think economists are incredibly narrow — so that’s a fair criticism — in the sense that we think about people as maximizing some utility and that we often have a pretty narrow notion of utility that involves utility from consumption, leisure, and maybe over time and maybe for your family. So clearly that misses a lot of things that make life worth living, to borrow one of my favorite scenes from Dead Poets’ Society. I think the line in that movie was something like, “Business and law” — and presumably economics as well — “are really important for sustaining and promoting life, but they’re not necessarily describing why we want to live.” So I think that broad criticism of economics is fair.
But I think the specific criticism that we fetishize GDP growth is more narrow than we are, it’s too specific and too narrow. We have this view that it would increase GDP if you banned retirement, but we think that would lower welfare. Or if you had forced labor of any kind, that would increase GDP but that would be a bad thing. So we’re thinking of welfare in terms of optimal trade off of things like leisure and retirement versus work and consuming now versus consuming later. So we’re not so obsessed with promoting GDP later at the expense of leisure or consumption now, or aspects that people might care more about now. We’re less one-sided in favor of GDP growth than people usually think.