Category Archives: diversification

Why America needs more than Venturesome Consumers

I encountered a subtle but deeply disconcerting idea in a recent book entitled, “The Venturesome Economy”: America will prosper as long as American consumers are venturesome.  I’ll try to balance brevity with justice and summarize the author’s main points as the following:

  • First, more wealth is created by recombining technologies (building our capacity to benefit from them) than by making new technological breakthroughs.  Therefore, government should get out of the way, avoid distortionary and inefficient subsidies for pure scientific R&D, and allow firms to take greater risks with more freedom from over-regulation.
  • Second, outsourcing and offshoring are no causes for alarm because our venturesome economy will create new jobs through a process of “nondestructive creation,” i.e., innovation that creates new jobs without eliminating existing ones, especially in the nontradeables services sector where jobs tend not to migrate overseas.  Protectionism is the wrong approach.
  • Third, the American consumer is assertive, adventurous and capable – in a word, venturesome.  The author asks where else do customers exist who have been so anxious to buy products such as the iPod, willing to pay prices that justify significant upfront investments in R&D, and open to being ‘guinea pigs’ in the innovation process.  Innovative firms thrive in the U.S. because new ideas are given a chance; in fact, the social, cultural, psychological and historical roots for America’s venturesome consumption run so deep that they will nourish innovative activity for many years to come.

I can agree, in part, with the first point.  A growing body of economic literature does indeed find that “countries tend to converge to the level of income dictated by the complexity of their productive structures, indicating that development efforts should focus on generating the conditions that would allow complexity to emerge to generate sustained growth and prosperity” (Hidalgo and Hausmann, 2009).  In other words, wealth is created by deploying a distinctive and sophisticated combination of capabilities to satisfy human needs.

Beyond that, how visionary or inspiring is venturesome consumption?  Why not just say, “The key to prosperity: keep buying new toys, and he who dies with the most toys wins.”  But wait a sec…

  • Were Americans being “venturesome” when Wall Street engineered innovative new financial products to provide loans to anxious and willing consumers in Sarasota that would inevitably default?
  • Were Americans being “venturesome” when the Detroit Big Three discovered innovative new designs for wasteful, high-end automobiles and sold them to eager consumers?  What is “non-destructive creation” if not the discovery and deployment of clean technologies in auto manufacturing, and why do we lag so far behind?  Isn’t it the utter failure of these firms that makes it necessary for the DOE alone to spending more than $40 billion in loans and grants to encourage private firms to develop green technologies, such as electric cars and new batteries?
  • Is it wise to assume that the demand stemming from venturesome American consumers will sustain our national competitive advantage?

Clearly, I’ve got issues.  In particular, I’m also disturbed by the notion that somehow pure scientific inquiry pales in comparison to entrepreneurship.  Technologies come from somewhere!

And regarding the overtones of free-market fundamentalism, aren’t “perfect storms” becoming the norm?  Don’t we need publicly elected stewards of economic activity to help guard against market failures (including inter-industry coordination failures) more now than ever?  While the author’s repeated expressions of anti-industrial policy sentiment are loud and clear, let’s not forget some of the great successes of industrial policy, like the Internet, a DoD research project dating back to 1969.  Last summer, Dani Rodrik reminded us in an online debate that the Chilean government has played a crucial role in developing every significant new export that the country produces, South Korea’s POSCO is possibly the world’s most productive steel firm (state-owned until 2000), and Dubai’s Jebel Ali port is one of the largest and most successful ports in the world.  Go figure.

Of course, absolute protectionism is not the answer, but at the same time, we need more than just venturesome consumers.  Why is it so hard to hold two competing ideas simultaneously and still retain the ability to function?  A better path to prosperity involves lengthening our time horizon for investment and entrepreneurship; it involves both intellectual curiosity and genuine empathy; and it involves a process of de-bottlenecking along the way.  If we truly believe and spread the idea that the venturesome American consumer can sustain innovation across the U.S. economy, then we are doomed to wander a dark path toward more perfect storms, armed only with our hopeless optimism.

On the other hand, if the goal is to create a better world for both ourselves and the next generation, then firms, governments and civil society need to think hard about the co-evolution of scientific inquiry and human needs, not only in our own venturesome economy, but all around the world.  After all, “As American consumers spend a little less and save a little more, it has never been more important to connect U.S. businesses to the 95 percent of the world’s consumers who live outside our borders” (U.S. Commerce Secretary Gary Locke, Sep. 16, 2010).

Advertisements

The Velocity of Economic Diversification

As a total newb to blogging, I suppose I’ll begin on a productive note and publish my recent thesis, submitted to fulfill the graduation requirements of the Master of International Business (MIB) program at The Fletcher School.  The topic reflects my long-held personal and professional interests in the evolution of economic complexity and the controversial roles of institutions of economic development.

ABSTRACT

Is there a speed limit to productive diversification?  What does rapid diversification entail in terms of resource requirements for economic governance? Complementing existing literature on the benefits of diversification for economic development, I examine the public sector labor requirements associated with the diversification of output across economic sectors.  Evidence from time-series and panel data for 16 countries, as well as the case of Abu Dhabi’s economic transformation since 1975, suggests that aggressive diversification may lead to problematic imbalances between public and private sector employment.  In view of these potential imbalances, I argue that policymakers should be less aggressive and more deliberate in their pursuit of productive diversification and adopt priorities to optimize the pace of achieving their economic development aspirations.

Full text: MIB Thesis – Fabyanske – 2010.