TCS Daily


The Tech Imperative

By Kenneth Silber - July 16, 2004 12:00 AM

The idea that technological innovation plays a key role in economic growth does not come as news to readers of TCS. But it is a point, argues Business Week chief economist Michael J. Mandel, that has received surprisingly little attention and emphasis from his fellow economists. Technology, he notes, is often relegated to the backs of economics textbooks or placed low on lists of factors affecting growth.

Mandel's new book Rational Exuberance: Silencing the Enemies of Growth and Why the Future is Better Than You Think (HarperBusiness) is a valuable corrective to that intellectual blind spot. In counterpoint to Alan Greenspan's mid-1990s worries about "irrational exuberance," Mandel makes a case for "exuberant growth," or rapid economic expansion driven largely by technological innovation. He contrasts this with "cautious growth," based on gradual accumulation of physical and human capital. Such cautious growth occurred in the United States in the late 1970s, for example, and it has been the dominant mode of European economies such as those of France and Germany.

Technology drives exuberant growth, in Mandel's telling, through such processes as the "ramp-up," the "spin-off," and the "free lunch." The ramp-up is when an innovation hits the market, is adopted by growing numbers of people, and becomes increasingly cheaper and easier to use. The spin-off is when an innovation yields broader effects in the economy, as when labor productivity rose because of electricity or the Internet, or when new uses for geographic spaces were facilitated by air-conditioning or the automobile. The free lunch is when technology decouples savings from growth; a nation or organization adept at innovation may leap ahead of one that defers current consumption.

Why should we want exuberant growth? Why not the cautious type? Mandel presents a compelling array of reasons. Exuberant growth leads to sharply higher living standards over time. The U.S. economy has grown at an average annual rate of 3.6 percent since World War II; if that had been 2.5 percent, living standards would be some 40 percent lower. Rapid growth is needed to pay for Americans' retirement and medical expenses, to maintain a strong defense, and to help poorer nations raise their living standards. Moreover, exuberant growth makes for a better and more interesting society; it provides people with a sense of opportunity and possibility that extends beyond economics.

Yet exuberant growth, as Mandel notes, encounters resistance from various groups, on both left and right -- environmentalists and religious conservatives disturbed by new technologies; liberals concerned about income inequality; deficit hawks focused on austerity; social critics fearful that society is losing its "authenticity." Meanwhile, the economics profession -- also on both left and right -- shows a wariness of technology. Mandel cites such diverse economists as Milton Friedman and Paul Krugman ignoring or downplaying technology's role in growth. This stance stems in part from innovation's unpredictability and difficulty of being analyzed with traditional economic techniques. Tech enthusiasts such as Stanford's Paul Romer are exceptions within the profession.

Where might the next tech boom come from? Mandel highlights five economic sectors as showing promise; even if a breakthrough is unlikely in any one of them, cumulatively they offer considerable potential. They are: biotechnology, especially if it can produce a drug that attacks multiple diseases; telecom, particularly in wireless applications; energy technologies such as solar, nuclear, and fuel cells; nanotechnology, which could revolutionize manufacturing; and the exploitation of space, for tourism and other purposes.

Mandel highlights the crucial role of finance in technological innovation. The U.S., to a degree unparalleled in other countries, has a financial system geared to foster tech breakthroughs, through mechanisms such as venture capital, junk bonds, and stock options. Moreover, he points out cogently, financial "bubbles" are not well-defined and ought not to be seen as wholly negative; preventing a bust can mean preventing a boom as well, and a gold-rush mentality among investors allows new economic and technological territories to be explored.

To counter the varied adversaries of exuberant growth, Mandel calls for a new political coalition in favor of tech-driven growth. This coalition would include stock-market investors and technology entrepreneurs, but it would also include workers toward the bottom of the pay scale, whose incomes improved significantly during the tech boom of the 1990s. Such a coalition would pay heed to concerns about economic security as well as opportunity.

Thus, Rational Exuberance presents policy stances aimed at bolstering security so as to encourage risk-taking. These include improved corporate transparency and greater portability of health insurance. He argues against the current regulatory push that would make it costlier to issue stock options. In an interesting proposal, Mandel calls for reforming the tax system to allow "income averaging." This would let people whose incomes fluctuate sharply over several years pay taxes based on their average incomes, which would limit the effects of rising temporarily into higher tax brackets.

The pro-growth, pro-technology coalition that Mandel seeks has similarities to the dynamist alliance called for by Virginia Postrel in her book The Future and Its Enemies. It is a coalition that, however loosely organized, is already taking shape. Rational Exuberance is a further step in developing a force to be reckoned with in American politics.


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