Saturday, December 27, 2008

Innovation Economics and Creative Destruction

In an earlier post I talked about a NYT article and excerpted a couple of paragraphs. The piece included a criticism of Amar Bhide by Robert Atkinson at ITIF. Now Atkinson has a piece in Fast Company devoted to Bhide's book, The Venturesome Economy, one of the best books of 2008. Atkinson writes:
Where we disagree with Bhidé is that we believe he presents a false choice between the importance of innovation production and innovation consumption, for there is no reason why the United States should not seek global leader­ship in both the upstream development of new tech­nologies and inventions by scientists and engineers and the downstream activities that realize effective com­mercialization of innovations. To simply write-off leadership in innovation production as opposed to its application is to miss the point; innovation production remains at least as important as innovation consumption. In fact, there’s more than a passing relationship between innovation production and innovation consumption. It is not coincidental that the United States leads the world in use of information technology and also its innovation of it. The twain are not mutually exclusive, and in fact operate complimentarily.

Ultimately, Bhidé—and others who view the increasing technological competitiveness of foreign workforces and countries as an unalloyed positive development for American prosperity, even if it means a loss of U.S. jobs—fails to recognize that there is a difference between creative destruction and simply destruction. Their neoclassical-like view holds that if Boeing, for example, goes out of business, as long as America maintains flexible labor and capital markets, these resources will flow into other industries, including into expanding or new firms and sectors. In such a market environment, policies are needed only to facilitate resources from losing to winning companies.
The first paragraph contains many good and fair points. The next paragraph worries me, however. The danger in not letting bad firms fail is that resources will not be directed where they are most useful and the role of prices in a market economy breaks down. I had a long discussion with one of Atkinson's staff about the proposals to bail out GM and the other American auto companies. You can make an argument that during a severe recession, like we're in now, the economy can't handle another negative shock and the accompanying loss of jobs and confidence.

However, I instead got a lecture on innovation economics and increasing returns. I'm no expert but I see nothing in Paul Romer's work that would merit assistance. Bankruptcy for the big three would be very difficult, but they would be stronger in the end, at least those that survived. So when Atkinson warns that sometimes we just have destruction and no creation, we should take him seriously. But be careful what others say, since this argument can quickly degenerate into a push for industrial policy, and the government's never been good at picking winners.

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