Romesh Vaitilingam interviews Amar Bhidé for Vox

January 2009

Transcription of an VoxEU audio interview [http://www.voxeu.org/index.php?q=node/3300]

Romesh Vaitilingam: Welcome to Vox Talks, a series of audio interviews with leading economists from around the world. My name is Romesh Vaitilingam and today's interview is with Professor Amar Bhidé from Columbia University.

We met in London in November 2008 where we spoke about his recently published book, The Venturesome Economy: How Innovation Sustains Prosperity in a More Connected World. He began by explaining what he meant by the term the ‘venturesome economy’.

Amar Bhidé: I use the term ‘venturesome economy’ in contrast to simply a technologically focused economy. So, there is this train of thought in Western Europe and in the United States which says, all we need to do to prosper in a world where we are facing immense competition from China and India is to crank up our high-level scientific and technological capabilities.

And I say that's precisely the wrong thing to do in response to increased competition and particularly in response to the increased production of science and research coming out of China and India, because what's really important is the venturesomeness of innovators and users of innovations to take advantage of products and services that are derived from high-level science and engineering.

And that we should really be thinking about enhancing and protecting and nurturing our capacity to take advantage of high-level technology and science in an entrepreneurial venturesome sort of way rather than training more engineers, training more scientists, increasing our R&D budgets.

Romesh: So, that's your starting point is, really, to look at the fear of China and India, the fear that’s in the US now of falling behind?

Amar: Or and has been that in Europe for the longest time as well. In Europe, the concern has been more about falling behind the US and Japan. And the Lisbon agenda, which says that Europe must increase its R&D spending, is the initiatives to train more engineers, to start a European Institute of Technology. So, that's long been a train of thought in Europe and it's periodically flared up in the United States.

It flared up at the time of the Sputnik crisis. It flared up again when productivity slowed down and the Japanese were on the ascendance in the early '80s and here we are again. And it's a strain which is supposedly more progressive than protectionism. And I suppose it is more progressive than enlightened protectionism, but it's not necessarily sensible.

Romesh: And the proposed policy response is to invest more in R&D public spending and encourage more business R&D and very much have that R&D based at home, based in the US or based in Europe.

Amar: Yes, and what I say is that know-how is developed at very many levels, ranging from basic science to R&D, down to the know-how that's used by the user of a spreadsheet to use the spreadsheet effectively, or the know-how that's used in Wal-Mart to use IT effectively.

And all of these levels of know-how are important. And managerial and sales and marketing know-how is as important as technical know-how. And frequently you sort of have more of one than is usable by the other. And if indeed China and India are going to be producing more of the high-level stuff, that means the world is going to be awash in this high-level know-how. And then we should in fact be focusing more of our attention on to their level of know-how. So instead of training more engineers, maybe we should be training more managers to take advantage of the technology that is derived from this know-how.

Romesh: So, tell me how you have gone about reaching these conclusions? What was the research strategy that you've used to explore these issues?

Amar: Well, I stumbled into this, so I didn't mean to do any of this. I got interested in globalization around 2000. And by globalization I meant the integration of China and India to the world economy. That was the feature of globalization I was most interested in.

There was a lot of noise about outsourcing. I've spent most of my professional academic life studying entrepreneurs and entrepreneurship. And so I said, let me go look at what entrepreneurs and entrepreneurial firms are doing in this world of greater off-shoring and outsourcing. And I found they are doing very little. And then I broadened my inquiry to say what they are doing with respect to anything else connected to international trade, labor flows, capital flows and so forth.

And so I built up this story from the ground up. And I found that there was much less globalization than met the eye in this supposedly sort of cutting edge set of firms and indeed there was much less very high level of R&D than met the eye. And then I began to ask why and I got quite a different perspective on how innovation proceeds and how globalization is proceeding.

So, for instance, doing these interviews really brought home to me the importance of having venturesome consumers for new technologies because without them these venturesome producers of new technologies wouldn't get very far, and I mean that seems fairly obvious in retrospect now.

Romesh: Can you explain that idea little bit more? It's a nice term, the venturesome consumer. How does that work?

Amar: There is an essay by Paul Romer, which is incredibly eloquent. And he says, "The prices of transistors have collapsed and we the consumers have derived most of the benefit from this collapse and we the consumers have done absolutely nothing to deserve or pay for this windfall." And I say that's absolutely not true. We, t,he consumers have done a lot. There are some of us who are leading edge consumers, who participate in the experiments of the innovator to advance the technology, and without this dialog there would be no advance.

And even if we are not leading edge users, we are venturesome in two important ways. Any time we consume anything new, we are taking a lot of risk and it's not risk in the standard financial sense, it's risk in the Knightian sense because we are making a great leap in the dark.

Even if we are not the early users by the way, so Columbia University, Columbia Business School where I work at, just invested in a cost platform. And we spent a couple of million dollars buying the cost platform and we are certainly not the pioneers in using this cost platform.

And we did spend a lot of effort in analyzing which cost platform to buy and how we would use it, but neither before nor after the fact do we have the slightest idea what the monetary value of that cost platform is compared to its cost. We just took a leap in the dark.

Many, many of us have bought flat panel TVs and we maybe late to the game, but even if we are late to the game, we don't have the slightest idea what the monetary value of switching from our old TV set to this new flat panel TV set is. We just do it. We are venturesome, then. And if you add up this kind of Knightian risk-taking by all the consumers of new goods and products, it probably swamps the risk-taking by the producers of these new products.

Also we are venturesome and resourceful in using the products. So, I have spent possibly one or two years of my life since 1981 trying to use Microsoft's Office suite. And it's not like digging ditches. There is a lot of trial and error sort of trying this, trying that, going into Google, consulting user communities until I finally get it to work and when I get it to work, there is yet another generation of Office and I have to do this all over again.

And again, it's not just me. It's 50 to 100 million users of spreadsheets in the US have done this. And if we hadn't done this, if we hadn't taken the risk of buying successive generations of new laptops and successful generations of new Office suites and if we hadn't put in this effort, there would not have been a personal computer revolution. And if there had not been a personal computer revolution, the prices of transistors would not have collapsed the way Paul Romer says they would have collapsed. We played an essential role in bringing down the cost of these transistors in this.

And it's not just in PCs, I think as a general rule the venturesomeness of users is, first off, what creates the incentive for venturesome users of new technology to come around and produce new technologies because if people did not anticipate a progressive market, they wouldn't develop these innovations.

And even if they did, these innovations would not have any economic value because they wouldn't be put into use effectively. And I think one of the great strengths of the United States and of Europe as well, possibly to a lesser degree, is our capacity to take advantage of innovations no matter where they originate and put them to effective use.

And one of the comparisons I make in my book is between Norway and Japan. Norway is not at the cutting edge of any technology that I know of. Sweden maybe, Sweden may have a Karolinska Institute, Sweden may have Ericsson, Sweden may have lots of scientist and patents. Norway has virtually nothing. Japan on the other side is a technological powerhouse. Yet, the Japanese economy has been in a slump for a decade and the Norwegian economy has the highest labor productivity per hour of any of the countries in the world.

The Norwegian Central Bank, when it tried to address this conundrum as to why without producing any technology, it still had the highest productivity in the world, the Central Bank came to the conclusion it was because of the service sector. It was fantastic at using technologies and improving the productivity of the service sector and of course, the service sector employees are more than half of the workforce in most OECD countries. And if you don't increase the productivity of the service sector, you are not going to get widespread prosperity.

And Japan may have a fantastic manufacturing sector, but even in Japan the service sector accounts for less than half of the economy and the lack of venturesomeness in using the new technologies in the service sector is what has, I think, held back the Japanese economy.

Romesh: So, what are the policy levers we can pull in relation to venturesome consumers? Are there ways we can encourage consumers to be more venturesome as well as producers?

Amar: I think in specific industries you can identify specific issues. So, I think in Japan and Germany the anti-Wal-Mart laws, to put it bluntly, or the pro small shopkeeper laws, have made the retail link sector very unable and unwilling to adopt new information technologies that have made such a difference in the United States and, I think, even in Europe.

So getting rid of these laws will certainly increase the venturesomeness of an important sector of the economy. Beyond that, I think it's easier to identify what not to do to than what to do. So for instance, this obsession in the United States with being behind Korea and Taiwan in high school math and physics contests is silly, because a venturesome consumer of technology does not need to have a lot of calculus.

A venturesome consumer of technology needs to be open-minded, needs to be open to learning new things often since new technologies are adopted by organizations, to be able to communicate, to be able to convince other people to adopt new technologies. And it's this kind of open-mindedness, problem-solving, which I don't think would be necessarily enhanced by drilling more calculus and trigonometry at earlier ages.

But how a government sets about doing that is fairly elusive. So I think one of the great strengths of the US economy is it's liberal arts education because it really does broaden the mind. There are people like Charles Murray who say liberal arts education is being wasted on 80 percent of the people who take it, and let's make liberal arts education more elitist, and send only the brightest minds. I think that's dead wrong. Because I think even if people don't learn very much, they may not master economics, Economics 101 courses, but the learn the idea that they will learn something new. And they will learn something new every six months.

How one does this is incredibly difficult. Philip Aghion has this story, which says let's just decentralize. And if we have a decentralized college system, miraculously it will train hearts and minds more effectively. I don't think so. If you have a hidebound college education system, and you decentralize it, the people who are running a hidebound college education system will make sure that their way of educating people is perpetuated.

It's a hugely difficult problem. I don't know what the answer is. I know what the answer isn't. The answer isn't to focus maniacally on science and engineering. Now I am, by the way, I should emphasize that I'm not suggesting that we cut back on budgets for basic sciences. Nor am I suggesting that we cut back on existing engineering seats, nor am I suggesting that we stop teaching people math in high schools. I'm just suggesting that given the way the world is going, both technologically and in terms of how it's getting more connected, and how the new sources of science and technology originating, we're not going in the wrong directions. That's all.

Romesh: Final question, Amar. You say that the policy implications are tough to work out, but overall you seem to have a very positive, optimistic view of the power of technology and globalization. How do you see that fitting into what's going on in the global economy now? We've had the financial crisis. We're clearly going into recession. What's the relationship between the cycle and, if you like, the sort of structural issues of technology and globalization?

Amar: Not all consumption is venturesome. Some of it is just excessive. I mean eating a fifth bag of potato chips is not venturesome. It just makes you fat. And some consumption is simply -- what did Veblen call it -- conspicuous consumption. It's meant to show off.

Venturesome consumption is just one part of these different kinds of consumption. And the heartening part of venturesome consumption is historically, even in very hard times, people have been venturesome in their consumption. So they may have cut back on their excessive consumption, or the sort of consumption of staples. But they have continued to embrace new technologies.

The personal computer took off in the early 1980s when we had the deepest recession since the Great Depression. I spent $10,000 for my first personal computer in 1981. I didn't know whether I had my job or not. And so did hundreds of thousands, possibly millions, of people. So we were in a crisis, people were afraid of their jobs, yet they were taking chances on new technologies.

And, in fact, in some senses businesses were even more motivated to take advantage of new technologies in those hard times. Likewise, it is said that the decade of the highest rates of productivity increase in the 20th century was during the 1930s in the midst of the Great Depression. And that was the time when businesses felt impelled to put into place new labor-saving technologies, which might have been developed in the 1920s, but which were put into widespread use in the 1930s.

Now I hope we don't get a great depression, but I'm saying even if you take that extreme case, the advance of technology and the diffusion of new technologies which is as important as the development of new technologies, did not stop progress at a great rate. Now, if there's an outbreak of massive socialism, or if we really clamp down hard on the market economy and restrict people's choices and their willingness and ability to take advantage of these new technologies, then we could have a really rotten outcome.

Socialistic economies tend to be particularly bad at using new technologies, even though they may have a lot of technological capacity. I don't know who I'm going to offend, but I'd say that, historically, at least, Israel has had a quasi-socialistic economy. And Israel has a fantastic venture capital industry that produced lots of new ideas. Yet Israeli per capita incomes are below that of Slovenia and Greece. And I think that's because society is not organized to take advantage of new technologies, possibly because it's sort of old traditions of collectivism.

And so as long as we don't have an outbreak of that nasty kind of collectivism that we had, if we just have a deep recession, I think we'll be all right in the long run.

Romesh: Amar Bhidé, thank you very much.

Amar: Thank you.