Financial Globalization And Endogenizing Technical Change: The Agriculture of Technology (To be published in the upcoming Journal of Transformations, Volume 2, 2013)

By Chandrashekar (Chandra) Tamirisa, (On Twitter) @c_tamirisa

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Introduction

Imagine the hunter-gatherer before what was sown could be reaped. Agriculture was Schumpetarian. Timely meals was a hit and miss. Man could not relate the change of seasons, the rise and fall of rivers and most importantly the dispersal of seeds to sow in order to reap. Harvest was a fantasy. And then came the genius of civilization.

If there was an X-Prize to be given for that first man who worked out when to sow a seed he spit out from a fruit he gathered and to wait patiently for that seed to sprout into a sapling to then flower and fruit, it would be difficult to imagine its value. That single innovation is worth about a third of today’s global economy (or about $20 trillion) and the rest is history.

Economists today debate ad nauseum the improbability of harnessing the horse of technical change. The classicists say that innovation is creative destruction. The Keynesians (and now the Chinese Marxists) say that government can do it all. The X-Prize Foundation is attempting to create competition to innovate to strike the lottery of disruptive technical change more often than less, unable to cultivate technical change. If ideology is transcended, it is not difficult to understand that innovation is not as much about money first as it is about ideas, for ideas are the seeds that must be sown in the fertile soil of a culture of intellectual ferment of  imagination that is funded. To see how this can be done, recourse must be taken in basic economics.

A long time ago when telephony was invented, there was a monopoly known as AT&T Bell Laboratories of Alexander Graham Bell who had conceived, patented and commercialized that disruptive device. Another company that made business calculators known as International Business Machines got started similarly, steadily versioning their products by replacing the previous version with the new one as profits on the old began diminishing because of market saturation. Wall Street never bothered to understand the business strategy. Disruptive innovations came and went on their own time. AT&T Bell Labs and IBM yielded Nobel Prizes in the sciences because the monopoly power produced staggering profits from the economies of scale which were reinvested in research to get ready for the next big thing, lest the corporations die because they had nothing to follow what went before.

AT&T, in the 1990s, tried a new corporate strategy that had not caught on: it spun off its research arm as Lucent Technologies. And Wall Street did not pay attention. It was a seed that drifted off the dry land of intellectual apathy without germinating because economic policy makers did not think that the seasonality of the business cycle could be understood at all, let alone be resolved. It is now, therefore, time for the government to pay attention, not to create another Manhattan Project, with a legion of Nobel Laureates and future Nobel Laureates-in-waiting, as Secretary of Energy Steven Chu and columnist Thomas L. Freidman seem to be thinking, but to create a market structure that promotes innovation to ensure that valuable financial capital is not dissipated.

The academia are in the business of agriculture of geniuses, but the industry is not yet in the business of the agriculture of technology. There are more PhDs today than there were 125 years ago, at the peak of the industrial revolution in Europe and in the United States, even if we control for the growth of population, disproving any claims of endogenous growth theory in economic science.

Regulatory policy solves the problem, not Schumpetarian business decisions that follow the occasional serendipity of Kekulé’s Benzene ring by the fire place in scientific labs.

The Market Structure Model

Let M(A) be the set of corporations comprising the Dow Jones Industrial Average (DJIA) but with current technologies. Let us assume a mirror set M(B) of the same corporations focused on research to introduce the next big thing in the time horizons t=2 to t=10 years, the economic short run to the Solowian economic very long run. Further, let us introduce the law of diminishing returns on M(A).

The relationship between M(A) and M(B) is such that as each M(A) corporation in the set {i=1 to i=30}, in the time frame t=0 to t=2 years, tracks the returns on its products and services, which are generally expected to diminish during this period (all returns always diminish in time, lock-in effects of increasing returns only varying by product or service), and introduces new versions or disruptive products once every 2 years. It can be reasonably assumed that the markets will price-in the transfer of the innovation from M(B) {i=1 to i=30} to the corresponding M(A) {i=1 to i=30} for the investors to profit both from M(A) and M(B).

The novelty of this approach is four-fold: (1) the market structure, as a matter of regulation, requires each one of the 30 global corporations on DJIA to spin-off their research arms; (2) The mirror corporations in M(A) and M(B) finance their investment in human and/or physical capital separately; (3) the government closely tracks, as it currently does, for example, gross domestic product, labor market and inflation data, returns on technologies over time; and (4) M(B) would almost be entirely financed by the Federal Reserve through monetary policy by employing a post-Keynesian portfolio approach that expands and contracts money supply by trading it for a variety of financial instruments, not merely US Treasury bonds, mirroring how Wall Street investment banks create and trade financial instruments. This can carefully control for the quality of these financial instruments through their Fed demand for them.

Conclusion

The contention of this paper is that M(B) introduces market competition and a more efficient utilization of human capital toward innovation simply through proper regulatory design, a pure public good (that regulation is a pure public good is in and of itself another innovation in public finance), but not government ownership or financing of new investments through tax revenues.

The uncertain process of creative destruction is, thus, harnessed as follows: (1) versioning produces incremental innovation; and (2) the probability of disruptive innovations is endogenized because it increases considerably through the distinct market focus on research and development, separate from current technologies. The outcomes of such a market structure are also two-fold: (1) structural change can be brought under the purview of stabilization policy primarily though time consistent monetary policy; and (2) technical change will lead to fewer or no deep cycles over time as the market model stabilizes, dampening economic fluctuations.

The benefit is the achievement of time consistency in fiscal policy, that lifts the onus off the shoulders of the government to produce innovation as is currently the case, for example, through the Department of Defense (DoD) and the National Aeronautics and Space Administration (NASA).

Most importantly, this model resolves the problem of risk concentration (or booms and busts or irrational exuberance or cycles of euphoria and despondence or manic depressive or herd behaviors) that has been known to develop in financial history since Tulipomania, by better allocating financial capital in the market place through a portfolio-based approach to monetary policy.

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About Chandrashekar (Chandra) Tamirisa

http://www.thecommonera.com/Common_Era/Me.html
This entry was posted in Economics, Finance, Financial Regulation, Government, Monetary Policy, Transformations LLC and tagged , , . Bookmark the permalink.

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