Category Archives: Economics

Open Innovation Enables Service Platforms

Source: MIT Technology Review, May 2016

how innovation plays out in service businesses. Most of the top 40 economies in the Organization for Economic Cooperation and Development (OECD) get half or more of their gross domestic product (GDP) from that sector, and many companies are witnessing a shift to services as well.

More generally for services, innovation must negotiate a tension between standardization and customization. The former allows activities to be repeated many times with great efficiency, spreading the fixed costs of those activities over many transactions. The latter allows each customer to get what he or she wants for high personal satisfaction. The problem is that standardization denies customers much of what they prefer, while customization undermines the efficiencies available from standardization.

The resolution to this dichotomy is to construct service platforms, which invite others to build on top of your own platform offering. This allows economies to emerge from the standardization of the platform, and it creates customization through the addition of many others to the platform.

A fundamental premise of open innovation is that “not all the smart people work for you.” That means that there’s more value in creating the architecture that connects technologies in useful ways to solve real problems than there is in creating yet another technological building block. System architecture, the system integration skill to combine pieces in useful ways, becomes even more valuable in a world where there are so many building blocks that can be brought together for any particular purpose.

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Paul Romer: Chief Economist @ the World Bank

Source: FT, Jul 2016

The World Bank is set to appoint Paul Romer, a longtime advocate of the economic power of human capital and student of urbanisation.

Mr Romer is an ardent supporter of the power of economic growth to reduce poverty and will be joining the World Bank at a time when slowing emerging economies are presenting it with a host of new challenges. Economists at the bank last month warned that slowing developing economies had set back their efforts to catch up with rich economies like the US by decades. 

“We often lose sight of how important even small changes in the average rate of growth can be,” Mr Romer wrote in a blog post published on Saturday. 

Too often, he argued, the need for data to prove a theory led economists in the path of small ideas and projects rather than bigger bolder ones whose eventual impact on poverty were exponentially larger. 

“Our goal should be to recommend treatments and policies that maximise the expected return, not to make the safest possible treatment and policy recommendations,” he wrote. 

“We have to weigh the trade-offs we face between getting precise answers about such policies as setting up women’s self-help groups [against] other policies [like] facilitating urbanisation or migration that offer returns that are uncertain but have an expected value that is larger by many orders of magnitude.” 

Innovation Slowdown …

Source: MIT Tech Review, Apr 2016

In a three-month period at the end of 1879, Thomas Edison tested the first practical electric lightbulb, Karl Benz invented a workable internal-combustion engine, and a British-American inventor named David Edward Hughes transmitted a wireless signal over a few hundred meters. These were just a few of the remarkable breakthroughs that Northwestern University economist Robert J. Gordon tells us led to a “special century” between 1870 and 1970, a period of unprecedented economic growth and improvements in health and standard of living for many Americans

The explosion of inventions and resulting economic progress that happened during the special century are unlikely to be seen again, Gordon argues in a new book, The Rise and Fall of American Growth. Life at the beginning of the 100-year period was characterized by “household drudgery, darkness, isolation, and early death,” he writes.

By 1970, American lives had totally changed. “The economic revolution of 1870 to 1970 was unique in human history, unrepeatable because so many of its achievements could happen only once,” he writes.

Between 1920 and 1970, American total factor productivity grew by 1.89 percent a year, according to Gordon. From 1970 to 1994 it crept along at 0.57 percent. Then things get really interesting. From 1994 to 2004 it jumped back to 1.03 percent. This was the great boost from information technology—specifically, computers combined with the Internet—and the ensuing improvements in how we work. But the IT revolution was short-lived, argues Gordon. Today’s smartphones and social media? He is not overly impressed.

Indeed, from 2004 to 2014, total factor productivity fell back to 0.4 percent. And there, he concludes, we are likely to remain, with technology progressing at a rather sluggish pace and confining us to disappointing long-term economic growth.

 

A Productivity Problem

Source: Brookings, Mar 2016

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After 2004, measured growth in labor productivity and total-factor productivity (TFP) slowed. We find little evidence that the slowdown arises from growing mismeasurement of the gains from innovation in IT-related goods and services.

First, mismeasurement of IT hardware is significant prior to the slowdown. Because the domestic production of these products has fallen, the quantitative effect on productivity was larger in the 1995-2004 period than since, despite mismeasurement worsening for some types of IT—so our adjustments make the slowdown in labor productivity worse. The effect on TFP is more muted.

Second, many of the tremendous consumer benefits from smartphones, Google searches, and Facebook are, conceptually, nonmarket: Consumers are more productive in using their nonmarket time to produce services they value. These benefits do not mean that market-sector production functions are shifting out more rapidly than measured, even if consumer welfare is rising.

Moreover, gains in non-market production appear too small to compensate for the loss in overall wellbeing from slower marketsector productivity growth.

Third, other measurement issues we can quantify (such as increasing globalization and fracking) are also quantitatively small relative to the slowdown. Finally, we suggest high-priority areas for future research

Related Resource: NBER, Feb 2016

The U.S. has been experiencing a slowdown in measured labor productivity growth since 2004. A number of commentators and researchers have suggested that this slowdown is at least in part illusory, because real output data have failed to capture the new and better products of the past decade. I conduct four disparate analyses, each of which offers empirical challenges to this “mismeasurement hypothesis.”

  1. First, the productivity slowdown has occurred in dozens of countries, and its size is unrelated to measures of the countries’ consumption or production intensities of information and communication technologies (ICTs, the type of goods most often cited as sources of mismeasurement).
  2. Second, estimates from the existing research literature of the surplus created by internet-linked digital technologies fall far short of the $2.7 trillion or more of “missing output” resulting from the productivity growth slowdown. The largest—by some distance—is less than one-third of the purportedly mismeasured GDP.
  3. Third, if measurement problems were to account for even a modest share of this missing output, the properly measured output and productivity growth rates of industries that produce and service ICTs would have to have been multiples of their measured growth in the data.
  4. Fourth, while measured gross domestic income has been on average higher than measured gross domestic product since 2004—perhaps indicating workers are being paid to make products that are given away for free or at highly discounted prices—this trend actually began before the productivity slowdown and moreover reflects unusually high capital income rather than labor income (i.e., profits are unusually high).

In combination, these complementary facets of evidence suggest that the reasonable prima facie case for the mismeasurement hypothesis faces real hurdles when confronted with the data.

FDR Policies Prolonged the Great Depression by 7 Years

Source: UCLA website, Jan 2016

After scrutinizing Roosevelt’s record for four years, Harold L. Cole and Lee E. Ohanian conclude in a new study that New Deal policies signed into law 71 years ago thwarted economic recovery for seven long years.

In the three years following the implementation of Roosevelt’s policies, wages in 11 key industries averaged 25 percent higher than they otherwise would have done, the economists calculate. But unemployment was also 25 percent higher than it should have been, given gains in productivity.

Meanwhile, prices across 19 industries averaged 23 percent above where they should have been, given the state of the economy. With goods and services that much harder for consumers to afford, demand stalled and the gross national product floundered at 27 percent below where it otherwise might have been.

“High wages and high prices in an economic slump run contrary to everything we know about market forces in economic downturns,” Ohanian said. “As we’ve seen in the past several years, salaries and prices fall when unemployment is high. By artificially inflating both, the New Deal policies short-circuited the market’s self-correcting forces.”

“The fact that the Depression dragged on for years convinced generations of economists and policy-makers that capitalism could not be trusted to recover from depressions and that significant government intervention was required to achieve good outcomes,” Cole said. “Ironically, our work shows that the recovery would have been very rapid had the government not intervened.”

Premature Industrialization

Source: Project Syndicate, Oct 2013

The economic, social, and political consequences of premature deindustrialization have yet to be analyzed in full. On the economic front, it is clear that early deindustrialization impedes growth and delays convergence with the advanced economies. Manufacturing industries are what I have called “escalator industries”: labor productivity in manufacturing has a tendency to converge to the frontier, even in economies where policies, institutions, and geography conspire to retard progress in other sectors of the economy.

That is why rapid growth historically has always been associated with industrialization (except for a handful of small countries with large natural-resource endowments). Less room for industrialization will almost certainly mean fewer growth miracles in the future.

Related Resource: Economist, Sep 2014

A standard route for poor countries to become wealthier is low-skill, labour-intensive manufacturing. Growth rates soar as people move from the land and into factories to sew T-shirts or assemble toys. Wages in manufacturing tend to catch up faster and more completely than in other sectors.

But in the 21st-century digital economy, basic manufacturing is becoming less important. The assembly of goods adds less value than the design and engineering work at which rich countries excel. Technology has made manufacturing less labour-intensive, giving firms less incentive to seek out cheap labour in poor countries.

Who Should Win the Next (2016) Nobel Prize in Economics

Source: Marginal Revolution website, Jan 2016
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The MRUniversity booth at the AEA meetings polled economists on a walk-by basis, as to who should win the next Nobel Prize.  The top five on the list were:

  • Robert Barro
  • Paul Romer
  • Esther Duflo
  • Partha Dasgupta
  • William Nordhaus