Not to worry, your eyes aren't playing a trick on you. The graphic illustrations that figure in this article also appeared in full-dress form in the previous article. Why their rebirth here?

Well, for one thing, if you've read the previous article in this series on the innovative performance of the US economy --- a sustained effort to explain why the US has been the richest country in the world since 1880, a good half the time since the industrial revolution of the late 18th century --- it might not hurt to focus your attention anew on the US's superior ability to innovate in ICT, information and communication technologies, compared to Japan or the EU, its main rivals. For another thing, the buggy prof wanted to stick the diagrams on the home buggy page; nothing more, nothing less.

As you'll see, the gaps in innovation and --- no less important --- the pay-off in rising labor productivity between the US on one side and the EU and Japan on the other aren't due to differences in the percentage rates of investment in either ICT or overall R&D. Those differences are generally negligible across the three regions. What then accounts for the big differences? The answer to that, sketched in already in earlier articles in this series --- and spelled out briefly once more at the end here --- lies in what we can call different systems of national innovation, the main subject of this series (now in its 8th article) and the focused theme of the next three articles.

BRIEF INTRODUCTORY REMARKS

The main twist in the previous article's argument can be crisply summarized: US superiority in technological innovation is a puzzle for standard neo-classical (mainstream economics).

In perfectly competitive markets, if other firms are doing something better than your firm, either you quickly emulate those best practices --- whether they're more advanced technologies or better managerial practices, including superior marketing, or a better quality product --- or your own firm will suffer a loss of customers and profits and eventually go bankrupt. Competitive processes in such markets should guarantee that outcome. The same then applies to the firms in other countries, particularly those close to your own leading-edge ones near the frontier in technology. Best practices should quickly radiate through an emulation-effect across national boundaries.

If they don't, then all neo-classical economists can infer is that something is preventing perfect competition from operating. The inference isn't so much wrong as either tautological or platitudinous. Apart from everything else, perfectly competitive markets --- large numbers of firms, easy entrance and exit, no excessive long-term profits ("rents" in technical terms) --- are rare in the world. Almost all markets reflect degrees of monopolistic competition, nothing less; and there are good reasons why that's the case: above all --- the key reason for our concerns --- the need to reward risk-taking entrepreneurs who innovate boldly by enabling them to earn "rents," higher-than-average profits. (Its those "rents" that cover all the costs of innovation and risk-taking and benefit success. That success, in turn, emboldens other entrepreneurs to dream their dreams and seek fame and fortune in the future.)

What we want to know is what, precisely, those barriers are in Japan and the EU that prevent emulation effects from operating. As it happens, the concept that we'll be using in the next articles to explain these barriers --- different systems of national competition --- is anything but platitudinous. Such systems, as we'' see, are a combination of three influences that vary noticeably across countries:

• Institutional structures: political, administrative, legal-and-regulatory, financial, corporate governance, and educational;

• Policy differences, especially in the degree of openness to foreign trade and investment, regulations that further or block market competition at home, vividly different levels of taxation and welfare transfers, and social expenditures in general;

• Cultural attitudes toward two related things: 1) toward risk-taking and entrepreneurship; and 2) toward radical economic and social change that, if adapted to quickly, allows the Schumpeterian forces of creative destruction to operate freely, for all the dislocations such change entails to the status quo.

 

Sidebar Clarification These cultural attitudes, to the surprise of most economists, vary markedly across countries: more precisely, if such variation does exist, it should be overshadowed by proper market-oriented incentives that all rational economic agents will respond to in a similar manner. That's just not the case. And the fall-out from such cultural differences can be severely retarding for innovation.

In particular, without support for risk-taking entrepreneurship, radically restructuring innovations will be rare in a society. Failures --- which are inevitable --- will likely be seriously punished; success will be scorned as a sign of brash pushiness and social-climbing . . . money-grubbing by the awful arrivistes, the upstart parvenus. In Britain today, as we'll see in the next article in this series, the vast majority of people turn out to regard entrepreneurs in this snobby way. Similar remarks apply to attitudes toward change. Without widespread social and cultural flexibility and an optimism about change in a society, the dislocating tumult that almost always accompanies revolutionary technological breakthroughs --- which change drastically the ways we live and work and leave well-established firms and industries increasingly obsolescent or bankrupt --- will tend to swamp the benefits of these breakthroughs and lead to sharp backlashes among the defenders of the status quo.

Among those intransigent defenders, note quickly, will figure those at the top of existing social hierarchies, the main beneficiaries of the status quo. No surprise. Successful entrepreneurs --- the gauche, ultra-pushy upstarts --- will invariably threaten their inherited status-and-prestige, itself a source of wealth and power. They're to be scorned, these brash new-rich --- put down and ostracized. Or worse; yes, much worse. A good deal of the support among European aristocrats for extremist right-wing movements in the 19th and early 20th centuries --- fascists, Nazis, violent reactionaries: almost all of them virulently anti-Semitic --- derives from these wrought-up fears about new challengers and sources of wealth and influence in their societies.

For some elaboration of these remarks, see the final part of this article.



 

Back To Mainstream Economics: The Solow Twist

The argument in the previous article, you might recall, also looked at the alternative neo-classical explanation of why something like US superiority in technological innovation shouldn't be sustained for very long, let alone 125 years now. It comes out of Solow growth-theory, for which Robert Solow of MIT would justifiably win a Nobel prize. For our purposes, what counts is that the theory that technologies are like public goods: once one private firm generates them in any country, it is virtually impossible, the Solow claim goes, to prevent the firms in the same country or elsewhere from using it too.

A variety of transference-mechanisms assures that result, in particular:

1) Licensing the technology from the innovative firm (which is protecting it with a patent),

2) Or inviting the firm to implant itself as a multinational extension in your country,

3) Or using reverse engineering around the new machines that embody the innovative technology (a Japanese specialty for 125 years too),

4) Or simply ignoring patents and letting your firms pirate it --- a Chinese speciality these days.

Our Conclusion Here?

The Solow variant doesn't account any better than standard neo-classical micro-economics for the failure of EU or Japanese firms to innovate with nearly the same speed as American firms . . . this despite their own impressive level of R&D spending, their engineering and scientific talents, and their overall investment levels. No need to delve into the reasons why. If you're interested, see the previous article in this buggy series.

A brief sidebar clarification of a different sort is in order. The Solow growth model, you'll remember --- these days usually just dubbed the neo-classical growth model --- stands in contrast to endogenous growth models that seek to directly account for technology's role in explaining the growth rates of per capita income. These endogenous models emerged in the 1980s, mainly to deal more effectively with the impact of technological progress --- especially innovation --- in driving economic growth forward in the long run, over generations and centuries. Paul Romer of Stanford is rightly regarded as the pioneer theorist. By endogenizing the impact of technological progress as an explanatory variable of growth, Romer's work --- and that of hundreds of others these days --- is able to focus directly on what institutions and policies facilitate both technological innovation and imitation (transfers of the innovations).

In the Solow growth model, by contrast, technology influences economic growth as an exogenous variable. Operating from outside the model's explanatory variables --- capital investment and labor force growth --- it offsets the invariable tendencies over time of diminishing returns to exceed new investment levels as an economy's capital stock accumulates. Thanks to such technological innovation, an economy is kept from becoming stuck in a postulated stationary end-state of slow or zero-growth. More technically put, in growth-accounting models that use the Solow variables, technology's beneficial impact shows up as the error-term in the statistical results; at any rate, that is how it is usually interpreted. The Solow model, you might recall, was briefly explained in the previous article.

For an excellent, easy-to-read summary of the Solow and Romer models, see the informative interview with Romer that appeared in 1999.

In it, he claims that Solow --- a much older economist --- told him that he had tried to endogenize technology in his original modeling; but given the methodological toolkit of the mid-1950s, he couldn't figure out how to do this. Romer also notes that technology isn't a public good. It's a private good; the innovating firm can appropriate the gains and exclude others from freely acquiring the innovative technology, at any rate as long as the patents around it last. Technology, though, differs from an ordinary private good in a key respect. Like public goods in that respect, its use by others is non-rivalrous: when two or two thousand firms around the world uses it by either legal or illegal means, the technology isn't exhausted in the least. Jointly consumed, by the way, is another name for a non-rivalrous good.

If it helps to grasp this last point about non-rivalous usage, think of technological innovation as progress in applied knowledge --- either embodied in machines or entirely new products and industries, or showing up as better work-force skills and managerial know-how in running firms and marketing products. Knowledge isn't exhausted if 2 or 200 million or 2 billion people use it simultaneously.

 

PART TWO:
SOME EXPLANATIONS FOR THE GAPS IN US, EU, AND JAPANESE INNOVATION
THAT DON'T FULLY WORK

If Standard Neo-Classical Economics Can't Explain The Gaps In Innovation, What Might Then
Do The Trick?.

As simple observation shows, most advanced technologies don't clearly radiate quickly around the world, or even --- for about two-thirds of the countries in the world that are not much developed in per capita income --- slowly so. And that, in turn, leaves the main issue at stake unexplained by neo-classical theorists, including the Solow model and its practitioners. After all, if technologies are truly public goods, then we want to know what, precisely, are the obstacles operating in most countries that prevent them from all being at or near the technological frontier?

That there are barriers to even the rapid diffusion of ICT in the EU and Japan --- at any rate compared to the US --- can be easily shown by a series of . . .

 

Graphic Illustrations of Barriers To Innovation In The EU (and Japan)
Compared To The USA In ICT

Note: these three diagrams are taken from an EU Commission Study, The Role of ICT Investments in Solving Europe's Economic Problems, by Erkki Liikanen, September 23, 2003. All references should be strictly made to the EU study, one of a series of impressive comparative works that the EU Commission regularly publishes, much to their credit.

 

(i.) Consider initially the growth of GDP, employment, and labor productivity in
the three regions since 1996.



OUR CONCLUSION?

This, the 7th article in the series on the US's economic performance --- especially its remarkable innovative prowess, technologically and otherwise --- is a direct continuation of the previous article. Originally, when that 6th article was written two days ago, the argument that's about to unfold right here would be tacked onto the end there, starting with Part Four. Why the change? Well, as it turned out, the summary of the main points in the first five articles took longer than the buggy prof had initially thought. No surprise really. In the flitting vagaries of a bugged-out professor's mind, the surprise really is that a sustained line of analysis can be snatched out of the tumbling ideas and their twists-and-turns and set down in hard print as frequently as they appear to do so on this site.

Or so it seems to my not entirely bias-free quirky view.

PART ONE:
THE SUPERIORITY OF THE US ECONOMY'S INNOVATIVE SYSTEM

Why This Superiority Is A Puzzle For Mainstream Economics

Our jump-off point here is why the US --- the richest economy in the world in per capita income for 125 years or so, roughly half the time since the industrial revolution of the late 18th century --- has been able to achieve a superior growth rate in its people's material standard-of-living for so long. It defies the theory of convergence catch-up growth, however interpreted. It also is a big problem for maintstream economics --- AKA, neo-classical theory, a term that will be clarified in a moment or two.

In standard neo-classical economic theory, to be blunt, the US's superior success shouldn't persist: if its economy does things better in certain key respects than other economies --- especially revolutionary innovative technologies, and the speed with which they are brought to the market-place by start-up firms --- then those other national economies ought to quickly emulate each and every one of American best practices . . . whatever their substance: 1) the ways we organize R&D, or 2) the links between university, government, and business R&D, or 3) the manner in which we train managers and scientists and engineers, or 4) the scope and vigor of entrepreneurial risk-taking here. For that matter, the best practices --- we're just ticking off some of the more important ones --- include 5) the ability of new financial institutions in the US to fund risky start-up firms like Microsoft, Apple, Walmart, Home Depot, MacDonald's, CNN, Amazon, Yahoo, or Cox.net . . . just as, by extension, best practices in finance also include 6) the ways in which the stock markets here have exerted unprecedented pressures on well-established corporate enterprises, if they're performing poorly, to restructure or risk unwanted mergers or take-overs from outside share-holderrs.

Essentially, there are only two reasons why mainstream economics --- another name for neo-classical theories --- that could explain the US anomaly.

A sidebar clarification: Neo-classical economics refers to big advances in micro-economic theory in the late 19th and early decades of the 20th centuries: more specifically, such theoretical breakthroughs as

*Carefully analysis of supply-and-demand curves, including the notions of consumer or producer surplus;

*The introduction of marginal analysis and the notion of opportunity costs to explain them, including substitution and income effects;

*The concerns with allocative resources efficiently and incentive systems to that end, and

*The identification of market-failures, such as monopoly or externalities or public goods or information problems, and debates about what to do with them. Technically, a market-failure is anything that prevents an economy from reaching a Pareto optimal-frontier .

*The ways in which a capitalist market economy can be organized to maximize such efficiency in allocation . . . a movement to the Pareto frontier, given an initial distribution of income and perhaps a once-and-for-all lump-sum redistribution.

*The creation of public choice theorizing as a counter to market-failures. It postulates a whole series of government-failures, the bulk of which derive from the lack of competition within the provision of public goods and public decisions, together with the motives of politicians to be re-elected and bureaucrats to expand their agencies' budgets and tasks irrespective of their performance. The ability of certain producer groups to organize more effectively than other groups (even the vast majority of consumers in an economy ) --- hence lobby and influence politicians for special privileges such as winning tariffs or quotas to protect themagainst foreign competition --- is also part of public choice theory. It emerged in the 1960s and 1970s, winning a Nobel prize for one of its founders, James Buchanan.

*More recently, work for which three US economists won a Nobel prize in 2002, certain kinds of new information and coordination problems within national economies --- including agent-principal problems. Such work has also influence theorizing about the growth of national economies.

Back now to our main concerns, in particular . . .

 

Reason One In Mainstream Economics Why Best Practices
Don't Spread As Postulated:

If the best practices of any one firm, say managerial, aren't emulated by other firms within the industry in question, either quickly or easily --- even within the domestic economy of one country --- it's because markets aren't perfectly competitive, and forms of monopolistic competition prevail.

Most markets, of course, aren't perfectly competitive. That recognition is part of neo-classical economics too. It was first explained and elaborated on in the 1930s, both in this country and in Britain, by some gifted economists --- Edward Chamberlain at Harvard, Joan Robinson at Cambridge, Ronald Coase, an Englishman who would get a Nobel prize at Chicago --- and refined then at greater length with further concepts about transactions costs and information problems and the use of game-theoretical bargaining models making lavish use of the Nash equilibrium (remember, A Beautiful Mind?). In such imperfectly competitive markets, to focus on our present concern here, the dominant firms --- a monopolist, a duopolist, possibly an oligopolist (3 or more giant firms in the industry) --- will earn economic rents : a return on their investment capital and costs of production higher than a perfectly competitive economy would bring about in the long run. The latter is characterized, of course, by two things: by large numbers of firms and by free entry and exit that, over time, will compete successfully to reduce the profits of the dominant firms to just cover all marginal costs.

In the end, then, what are we left with as an explanation for the failure of best practices to be emulated, whether quickly abroad or at all?

This, the 6th article in a series on the performance of the US economy --- viewed comparatively, especially against its major rivals in West Europe and East Asia --- takes up the argument that was left hanging fire in the 5th article, published a week or so ago. The argument there wound its way back and forth through three parts, worth briefly summarizing here . . . not least for some new survey data to reinforce the key point made in part three.

PART ONE:
SUMMARY OF THE ARGUMENT IN ARTICLE 5



(i.) Declinism and Alice-in-Wonderland's Looking Glass

In part one, the analysis set out and probed the once chic declinist polemics of the late 1980s and early 1990s. Their overall thrust? The US economy, it was claimed, was performing poorly compared to Japan and Germany, two large countries whose economic systems were far more heavily regulated and subject to cartel-like arrangements in industrial manufacturing . . . with far different arrangements for mobilizing capital and allocating it for investment purposes.

As it happened, those polemics got everything topsy-turvy. Since the start of the 1990s, the US performance has far outclassed those of other industrial countries (save tiny Ireland) in per capita income growth. Meanwhile, their economies buried under small mountains of market inefficiencies, all adding up to rigidities and vested interests around the status-quo, Germany and Japan have racked up the worst growth performance of any industrial economy since the Great Depression of the 1930s. The average EU per capita income is now slightly less than 65% of the US's --- where it was more than three decades ago. Japan's is slightly higher; Germany's slightly lower.

 

What went wrong with the declinist predictions?

For one thing, its advocated ignored the major reasons for the gradual narrowing of the gap in per capita income between the US, the lead country for generations, and dynamic follower countries like Germany and Japan since the early 1950s: convergence catch-up growth. For another thing, ignoring the Schumpeterian thesis that radically restructuring technologies washed over capitalist countries in long-term waves --- roughly, in gale-like force every 50-60 years since the industrial revolution --- the critics of Anglo-American style capitalism, especially its American variant, couldn't understand that the US was caught up in the throes of creative destruction, another Schumpeterian concept, as its economy shifted equilibrium and spearheaded the revolutionary breakthroughs in information and communication technologies, plus bio-tech.

 

(ii.) The US and Radically Restructuring Technological Innovation

In the second part of article 5's argument, the superior innovative performance of the US economy --- which has enjoyed the highest per capita income since the 1880s, roughly half the time since the industrial revolution of the late 18th century --- was briefly sketched in. It comes down, in the end, to a more efficient system of national innovation . . . another Schumpeterian concept overlooked by most mainstream economics until the bursting impact of the new revolutionary technologies in ICT and biotech made themselves felt in hard-to-deny ways, including more than a doubling of the growth rate of productivity in the US economy after 1995.

The causes of this performance, it was claimed, add up to a matchless system of national innovation in the US --- a series of inter-acting institutions and policies, reinforced by certain cultural habits such as optimism about change, however dislocating the change might be . . . especially in its initial stages. Economic disruption and social dislocation are precisely what radically restructuring technologies will do. Every 50-60 years, they have surged over existing economies with turbulent intensity. The faster they're introduced, the more disruption to the status quo will be inflicted.

 

In the immediate wake, what will happen to the economic status quo within a country?

Tersely put, numerous old industries will be left entirely obsolete: think of the horse-and-buggy trade when Ford motor company introduced the Model-T Ford in 1907. Bankruptcies will likely be numerous. Lots of regions within a national economy will be rattled. Other well-established industries will no doubt survive, but the new revolutionary technologies --- almost all brought to the market-place by entrepreneurial start-up --- can make their existing inventories, equipment, work-force skills, and managerial styles outmoded . . . in drastic need, if the established giant corporate firms are to survive, of costly restructuring the ways they are organized and operate. That's been true in the US since the 1980s even in the retail business: think of Walmart and its revolutionary impact on Sears or Penny's or Safeway, or the no less disruptive impact of Amazon on the book business.

Without a clear rupture in the institutionalized economic status quo --- including, as Schumpeter noted back in the mid-1930's, a clean break with the established routines in the business world --- radical technological innovation would be impossible.

Enter the forces of creative destruction. Only by letting these obsolete or uncompetitive industries and the firms in them shrink or disappear --- or at a minimum, carry out havoc-causing restructuring --- will these forces do their work and sweep through the status-quo. In this way, they will free financial capital, managerial talent, engineers and scientists and skilled-workers for the newer, more profitable industries on the technological frontier. Over the long haul, such radical change is essentially the only way a rich economy, with high-cost labor, be able to bring bold innovative ideas to the market-place successfully, at home or abroad, and stay competitive . . . especially in a system of rapidly globalizing capitalism, with new, swiftly growing industrial competitors in East Asia and now India.

Here, on these scores, economic and social flexibility are at a premium. So is a widespread acceptance of change, which includes a willingness to cut ties to established organizations, prevailing routines, and habitual ways of thinking. Without flexible institutions and habits of thought and behavior, those who would be hurt by major changes in the economic status quo --- call them, for simplicity, the losers (whether firms, workers, or regions and the politicians representing them) --- will almost always be able to block creative destruction and hamper shifts in market structures, in market power, and in wealth, wages, and prestige that the potential winners hope to gain.

Little more needs to be said by way of summary here, not least because the thrust of the current article's argument is to clarify the meaning of a system of national innovation and set out the evidence for the superior innovative capacities of American capitalism.

 

(iii.) Superior Innovation and Per Capita Income Growth Isn't Necessarily
The Same As Superior Well-Being or Happiness

Above all, in part three of the 5th article, the point was stressed that a superior innovating economy with a peerless record of per capita income growth does not necessarily add up to superior well-being or satisfaction. The latter notion is much more subjective, a matter largely of different values and preferences across countries.

Almost all the EU peoples seem to prefer more leisure to income and hard work, and more job-security and welfare transfers, than Americans; the trade-offs for the West Europeans are not just lower income --- roughly a third lower than the US average worker's --- but also higher taxes, a much larger underground economy (2-3 times higher in the EU than in the US), and much less flexibility and dynamism when it comes to the combined forces of adapting to revolutionary technological change and globalizing forces. Japanese tend, on the whole, to prefer job-security and social stability every bit as much as the West Europeans, and accept a much greater role of bureaucratic regulations and hierarchies in their lives than Americans.

The original communication from someone called "Del" appears at the end here. It was sent directly to me, rather than posted as a comment on the buggy site here. My replies might be of interest, especially since they concern both 1) his view of my underlying political beliefs and, more to the point, 2) whether or not our wars with the Taliban Afghanistan regime and the no less mass-murdering one in Iraq last year, along with our military and political policies in both countries since then, have been worth it.



FROM DEL:



More generally, the prof believes that American power in the world is basically a benign force; believes too that the US is a decent, unusually tolerant country with built-in capacities for steady if carefully conceived reform; and dislikes utopians and extravagant ideologues of the left and right extremes, whether in domestic or foreign policies. And, to be blunt, he not just dislikes but detests and stands flat-footed against the garbled silly pc-dogmas about American life and politics and our country's foreign policies that aging, grudge-laden professors of tediously self-righteous convictions have tried to impose on the rest of us in academia for three decades now.

Could you ask a heroin addict linked by need to our favorite warlords in Afghanistan to define "benign" above for me? Or you could ask one of the victims in Iraq?

THE BUGGY REPLY



Del:

Despite the sarcasm in the second paragraph, thanks for the comments. Here are some replies tossed out in semi-systematic ways off the top of my head.

1) Buggy views.

In your first paragraph, you've unraveled a good summary of my underlying convictions. Well done. Too bad you spoiled it with the follow-up paragraph.

You could have noted my being in favor of intervention to stop genocide, wherever it is. Hence the US State Dept alone --- unlike the EU countries, whose peoples are busy on long vacations, never mind the Arab countries whose populations can never, apparently, protest anything malevolent, however mass-murderous, if its perpetrated by Arab governments or terrorists --- has called for international action to stop the genocidal warfare against tropical Africans in the south and now the west of Sudan, Christians or animists, whose main crime is apparently to be black and not Muslim. That war has been waged with ferocity for two decades now by a militarist Arab government in power. Over two million people have died. The recent slaughter in Dafur, in the western part of Sudan, is being carried out apparently by local Arab auxilliaries of the vicious military government in Khartoum.

Even Kofi Annan has urged action once or twice, not more: don't want to ruffle the European peoples on vacation or the Arab countries, you see. To judge by the evidence, you can't expect the Arab governments or peoples to act at all to stop such genocide. If a few hundred thousand people are being slaughtered by vicious Arab regimes or militaries, or even millions as in the Sudan, they just don't seem to care . . . at any rate, as long as the victims are infidels or, in the case of Saddam Hussein, as long as he's the newest and latest strongman Arab champion full of bluster toward the naughty West.

France and China, joined by Algeria and Pakistan in the UN Security Council, ensured that the recent resolution on the Sudan was innocent huffing-and-puffing, nothing more. Nobody in the EU, apparently, wants to jeopardize their economic stakes in the Sudan, any more than China does. As for the Muslim members of the Security Council, their governments appear totally indifferent to any slaughter of the infidels. See this link for more.

 

2) Drug addicts.

For what it's worth, I'm opposed to legislation that outlaws drugs. People who want them will find ways to get them, while the illegality increases crime and makes urban streets unsafe. The real profits accrue to organized mobsters, whether in Columbia or the Middle East or Miami. We'd be much better off allocating some of the money in the war against drugs to education, starting early . . . as with cigarettes.

The rest of the money could be spent on far more productive and needed programs. Our streets will also be much safer, too, once addicts stop preying on innocent people around them to get money for an illegal fix. As with alcohol, drugs, of course, shouldn't be sold to minors. Another benefit as well, come to that: the organized gangs --- including now African-American and Hispanic ones now as well as those run by whites for decades --- will have fewer profits to share, exactly like the liquor-runners in Prohibition; so as they fight ever more fiercely for the shriking pot of money, they might begin killing off one another in droves . . . something that also happened to the mobsters after Prohibition ended in 1933.

 

3) Afghanistan:

More than 1 million political refugees have returned to the country; women are no longer treated as slaves; the brutal Talibans are no longer whipping them or forbidding music; and a consensual government has emerged for the first time in decades. The Taliban and Al Qaeda are hiding out in caves somewhere in the mountains, not openly training in terrorist camps. The war against terrorism, as the president has repeatedly argued, will go on a long time.

 

4) Victims in Iraq?

1. Are you referring to the hundreds of thousands of bodies uncovered in Iraq mass graves since last year's war?

2. Or to the million deaths in the Iraq war with Iran? Or to the tens of thousands of Kurds killed in their villages in the late 1980s, first by biological agents (they didn't work well), then by poison gas, then followed up by elite Iraqi security forces that simply shot most of them?

3. Or maybe --- despite the exaggerations by the propaganda machine in Baghdad ---- you're referring to the tens of thousands of Iraqi children who died for lack of effective medical help and medicines during the oil-sanction period, first between 1991 and 1996 when Saddam refused to accept a UN offer to allow oil sales in exchange for food and medical purchases, or from 1996 until 2003 when tens of billions of dollars worth of oil sales were siphoned off by Saddam and his gangster regime, with the lavish help of UN officials, French, German, and Russian companies (and politicians most likely), and whoever else could be bought off easily by the dough.

Only fair to add that nobody knows the exact sums skimmed off by Saddam, thousands of other top-Baathist authorities, UN administrators --- or Kofi Annan's son in Geneva --- or hundreds and maybe thousands of foreign businessmen and bankers. All the money, we do know, was funneled through a French bank --- at the demand of Jacques Chirac, Saddam's friend and patron ever since Chirac was Prime Minister in 1976 and approved nuclear energy transfers to the Saddamite regime --- but we're talking at a minimum about several billion dollars, and most likely far more than that. Despite the subpoening of the bank's records by a US House of Representatives subcommittee, we'll probably never get to the bottom of this rotten barrel.

That said, the third key point here still sticks out: whatever the payola and kickbacks and outright lies surrounding the oil-for-food program, tens of thousands of Iraqi children died --- even if it's the fault of the Iraqi regime --- and yet nobody in France, Germany, or the rest of the EU, or on the left in the US, seemed to care.

The moral? Leave aside the grafters and gangster-politicians and businessmen and Saddamites in Iraq. During all these years of oil sales, the rest of the Europeans, Russians Arab street, US left, and others could always claim to have clean hands during all these years of oil sales . . . maybe, who knows? The most important thing for you.

This is the 5th article on the innovative capabilities of the US economy, comparatively viewed. Starting in mid-June 2004, the 1st and 2nd articles dealt with convergence theory: according to it, those follower countries with good institutions and enough human skills to import, adapt, and diffuse modern technologies will grow faster than the lead country, the main innovator on the technological frontier. A variety of complex convergence processes, each of them set out systematically, remember, in the first article in this mini-series, explain that faster catch-up growth. (Click here for that article.) How long will catch-up growth go on then? Until --- barring disruptions like wars or a great depression --- the follower countries end up converging on the leader in its levels of labor productivity and per capita income.

As we saw, the theory is generally sound . . . especially in a qualified version of what's called conditional convergence that needn't bother us in this series. The evidence here is clear.

In the EU 15, for instance, catch-up growth is very much alive today. Spain, Portugal, and Greece continue to narrow the gap with the rest of the EU in per capita income; come to that, Ireland --- once the poorest country in the region --- upped its rate of per capita income since the mid-1980s to the point that it is now the richest in the EU. . . roughly $32,000 (in purchasing power parity terms) compared to the EU average of around $26,000. Denmark, by the way, comes in second at $29,000.

In Pacific Asia, convergence is still going on at a fast pace as well. South Korea and Taiwan are still closing the gap with Japan; Singapore and Hong Kong have already surpassed its per capita income; and China --- at a much poorer level of per capita income (and hence growing especially rapidly) --- has been growing at about four or five times the Japanese GDP rate since 1979, when the post-Maoist reform era began. And then there's India. After market-oriented reforms in the 1980s again in the 1990s, it has also joined the convergence club in Asia, closing the gap with Japan and the others as well.



 

PART ONE:
THE EXCEPTION? IT'S A BIG ONE

Bluntly put, convergence catch-up doesn't apply to the overall US lead over all the other rich, fully industrialized countries. In per capita income, it has been the leader now since the 1880s . . . about half the total time that's elapsed since the industrial revolution of the late 18th century. Explaining the causes of this exception is what this and the next article are about.

Consider the Evidence

More specifically, consider what has happened go Germany and Japan, the US's two main competitive rivals, in recent times. By the late 1980s, both of them had closed the per capita income gap from around 50% of the US in the early 1950's (35% for Japan) to around 85-90%. Many observers in those days touted them as more dynamic, better organized economies; they had superior forms of capitalism --- more human too, it was argued. On current trends, it was further argued, they would equal US per capita income by the end of the 1990s, then surpass it in the next decade.

Such views also underpinned the widespread notion of American decline, a related theme. Some observers urged the US to shift to one another of these superior forms of capitalism as a way to reverse American decline, with its poorly performing, market-oriented economy and atomistic forms of self-interested behavior:

• Either Rhineland corporatist capitalism, based on a big welfare state and constant cooperation between government, organized labor, and big business and finance, all the agents here supposedly equal partners, fixated on the national interest and social harmony. The distinction between state and society, the public and the private sectors, was heavily blurred in such corporatism . . . as it is in all corporatisms. Germans and other West Europeans liked that blurring. It was purposeful; it contributed to greater cooperation between all organized groups; and it generated, or so the argument went, not just greater harmony but, as a direct result, a superior economic performance .

• Or corporatist capitalism Japanese-style, based on a far more limited welfare state and lower taxation, but an even greater regulatory apparatus than that in Germany and the other Rhineland countries, including industrial targeting, a lavish use of subsidies for targeted industries, and trade barriers of an informal sort galore that limited foreign imports and multinational implants in the Japanese economy.

A few clarifying comments seem in order.

As in Germany, much of Japanese industry was and remains heavily cartelized. The interlocking ties that bind big banks and big corporate firms together in Japan also have their parallels in the Rhineland economies of Germany, Holland, Belgium, Switzerland, and (a slight way off) Austria . . . only in tighter, more formal ways, with the big Japanese banks owning most of the equity capital of the giant corporations like Sony or Mitsubishi or Toyota, and vice versa, those corporations simultaneously owning the banks' stock. The heads of the banks and corporate firms also sit on each other's boards. Both the Rhineland and the Japanese forms of raising and allocating investment capital, it went without saying, were superior to the helpless dependence of American corporations for investment capital on the fickle stock-market, with its built-in short-term profit concerns . . . . little else.

As for trade unions, though they are much weaker in Japan compared to their EU counterparts in the Rhineland areas or Scandinavia, as a compensation Japanese workers have enjoyed guarantees of life-time employment and lavish corporate welfarism and were therefore enthusiastic partners of Japanese CEOs and managers. In idealized form, so the proponents of the Japanese model claimed, the well-being of the corporate enterprise over the long-haul was what counted for the work force, not just promotions and pay increases. The cooperative relations between labor, finance, and corporate management were reinforced in other ways as well. In particular, Japanese CEOs and managers were as concerned as their German counterparts to develop consensual decision-making; they never let profit-motives or stock-market worries get in the way of their devotion to their employees well-being and that of the wider nation.

It was the well-being of their workers that counted most for the bosses, at any rate in the idealized version. (In reality, even in the 1980s believe it or not, repeated survey data showed that the Japanese work force was the single most discontented in the industrial world --- not that this bothered the admirers of Japan's economic system.) Then, so the version went, it was the well-being and satisfaction of their customers that mattered most for top management. As for the share-holders among the Japanese and German publics, they came in a poor third. By contrast, the allegedly short-sighted American corporate worlds reversed this order. Small wonder, then, that American firms not only were less competitive and innovative, or that the American economy was growing slower, but that in addition American products were inferior in quality to those produced by Japan or Germany



American Decline

Thanks to these superior forms of capitalism, not only would these two giant countries outpace the US in per capita income and levels of productivity within a decade or two, but no less important, they would zoom ahead of the US in the new emerging technology-based industries of the future: computers and information and communications. In the extremist forms, Japan with its strong mercantilist thrust --- huge trade surpluses on a global basis with the rest of the world year-in, year-own, but especially with the US --- would end up owning much of corporate America, starting with MGM and Rockefeller Plaza and moving on in blitzkrieg fashion to the rest of American corporations.

Then too, to compound all these worries, it was argued by some international relations specialists --- above all, Paul Kennedy of Yale and Richard Gilpin of Princeton --- that the US was tumbling into a global position that bedeviled all other former imperial and hegemonic powers: imperial over-stretch, excessive military spending that strained the economy while multiplying security commitments abroad. The clever Japanese were having none of these problems: they weren't spending more than 1% of their economy on defense compared to the US average in the four decades of the cold war to around 6%. Germany, a NATO ally, husbanded its spending and commitments too, and never allocated more than half the American percentage to defense.

Poor Americans. Either we changed our ways drastically and became ersatz Germans or made-in-Japan imitators, or we would be at best also-rans in the world economic league and at worst under the thumbs of Japanese owners and managers.



The Reality?

In the last 14 years, Germany and Japan have fallen way behind the US --- not all the way back to the gap that prevailed in 1950, mind you; but back to around 65-70%, essentially the gap that prevailed in the mid-1960s. Over that decade and a half, to be more concrete, Japan has compiled the worst economic record of any industrial country since the Great Depression; its industrial production by 2000 had actually fallen further than the US's did in the 1930 depression-era. Germany's performance has hardly been better. It has been the sick-economy of the EU, its worst growing country. The EU average in per capita income, by the way, is about the same as Germany's --- a little more than $26,000 in mid-2004, compared to the US's nearly $39,000.

As for the impact of defense spending, it too doesn't have the bad effects that declinists here and abroad insisted it did. Today, for what it's worth, Japan still spends a little more than 1.0% of GDP on defense, and Germany only slightly more (1.2%). The US, by contrast, is now is spending around 4% of GDP. Yet, despite this much higher % of spending, the US GDP has been growing the last decade at around 3.5-4.0% annually; the Japanese and Germans --- while continuing to roll up trade surpluses and keeping defense spending limited --- have grown less than a third that rate annually.)

And so?

And so, to repeat, figuring out why the US has again increased its lead is what this and the next article are about. More specifically, what is there about American capitalism and American society that have continued to defy the logic of convergence theory for half the time since the industrial revolution?

A Useful Table and Diagram

Meanwhile, before we tackle this question, here are two useful ways to systematically set out the US performance compared to others.

Consider the evidence in the following table and diagram, both of which appeared in an earlier buggy article last month. The table is the buggy prof's: note that per capita income is estimated through 2004 (based on OECD projections for the last six months of the year); most of the other figures are for the start of 2004. The diagram is from IMD, a prominent Swiss Business School that, for years now, has annually ranked dozens of countries in terms of their overall competitiveness, and on four composite sets of quantitative measures: economic performance, government effectiveness, business effectiveness (including labor markets), and infrastructure quality. Generally, it and the World Economic Forum --- another Swiss-based institute (with links to Harvard) --- put out the best overall rankings of comparative economic performance . . . including prospects for the future.

	Population in Millions	GDP PPP$ $Billions	% of World GDP	GDP per capita PPP 2004 Est.	Defense Spending $Billions	Defense Spending % of GDP
World	6300	$50,000	-------	$7, 900	$900	1.8%
USA	280	11,200	22.0%	$39, 400	$390	3.8%
EU-15	380	9,900	19.0%	26, 300	140	1.4%
Germany	80	2,300	4.5%	27, 200	38	1.4%
France	60	1, 800	4.0%	27, 900	45	2.5%
Britain	60	1, 900	4.0%	28, 100	32	1.7%
Russia	140	1,400	2.5%	9,400	55	4.5%
Japan	129	3, 700	7.0%	28, 700	45	1.2%
China	1200	7100	14,.0%	6,000	100	1.4%

Sources: OECD, EU, The Economist, CIA WorldFactbook

Here's the IMD rankings: to save space, only the first half of the 60 countries evaluated are found in the diagram. Note how large the US lead is over the 2nd, 3rd, and 4th countries. Note too that Germany --- ranked 20th last year --- is now in 21st place; the UK is ranked just behind it, 22nd place; and Japan is ranked 23rd.

PART TWO:
WHAT EXPLAINS THE SUPERIOR US GROWTH PERFORMANCE?

The main reasons were hinted at in the 1st article, then touched on further in the last two articles. Five causal influences stand out, all interrelated. Together, they add up to an economy in the USA that is both more innovative and adaptive to change than that of its rivals in Asia or Europe. Call it if you like a superior national system of innovation, a concept that will be clarified in a moment or two.

The Causal Influences To Be Analyzed

1) The institutionalized ability to repeatedly pioneer radically restructuring technologies that have erupted in long-term waves every 50-60 years since the industrial revolution . . . including unusual links between universities and businesses for R&D purposes and imaginative high-powered R&D;

2) The benefits of an unusually flexible set of economic institutions, backed by socio-cultural trends, that repeatedly enable Americans to carry out and weather the highly disruptive forces of creative-destruction . . . an essential part of bringing revolutionary technological breakthroughs successfully to the market-place.

Joseph Schumpeter, the Harvard economist of Austrian origins, was the pioneer theorist of both radical long-wave technologies and the related idea of creative destruction.

The latter, creative destruction, means that you can't generate wholly new profit-making industries that incorporate new revolutionary technologies without letting older industries run down or totally disappear. The aim here? To switch financial capital, managerial talent, skilled line-workers, engineers, scientists, marketers, and the like out of these old-line, standardized industries --- where innovation has generally slowed down and become limited mainly to incremental improvements in production processes --- and redirect them to these newer, more promising industries full of innovative opportunities and entirely new products. Efforts to block creative destruction in this sense will retard an economy's ability to innovate or adapt to globalizing forces.

3) Matchless entrepreneurial energies and risk-taking. As we'll see, 1 out 11 American adults start a new business every year; the equivalent in Germany and Japan is about 1 out of every 50 adults. Failures too are far more severely punished in Japan and the Continental EU countries, which makes risk-taking all the more hazardous.

4) The powerful work ethos and the mobility of American workers --- the latter reflected in an unusual willingness to move around the country in search of better jobs or livelihood that is rooted in the immigrant status and history of the US for centuries now. One British study in the late 1990s showed that American workers were 50 times more ready to move to other parts of our country for these purposes than were European workers. Yes, 50 times . . . however hard it is to believe.

5) The last influence? Globalizing forces have accelerated the speed of creative-destruction in the US economy: the growing obsolescence of old technologies and industries as new innovations in biotech and information and communication technologies multiply, freeing up capital and human talent ---managers, skilled workers, engineers, scientists, and entrepreneurs --- for bringing new bold ideas to the market place, first in the US economy and then quickly through trade and multinational activity to other countries.

 



PART THREE:
A KEY REMINDER: SUPERIOR ECONOMIC GROWTH AND INNOVATION DON'T NECESSARILY ADD UP TO MORE ECONOMIC WELL-BEING



Note that the key term we'll be using in Parts Four and Five here --- found in the next article in this series --- is a superior form of innovation-system, not overall economic well-being. It produces better economic growth, especially in per capita income. That is measurable and easy to work with.