America’s Hottest Economist

America’s Hottest Economist: Tyler Cowen & The Great Stagnation: Part 3

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The first two parts of this review endorsed the thrust of Tyler Cowen’s book, The Great Stagnation , that the US economy has hit a wall and is facing stagnation if the economy is managed in the same way.

• The first part of the review argued however that the enduring stagnation was not because of the exhaustion of “low-hanging fruit” but rather because the marketplace and the workforce have changed and management hasn’t.

• The second part of the review agreed with Cowen’s thesis as to why the apparent growth in the official GDP overstates our actual economic well-being, but disagreed with Cowen’s thesis that the Internet doesn’t generate sizable revenue streams.

In this third and final part of the revew, I examine Cowen’s proposal to unblock the situation and suggest a reading list for those who would like to understand the economy’s future.

Some favorable trends

Cowen believes that relative slow rates of technological progress will be with us for at least a few more years, possibly much longer. We need to get used to this “new normal”. Nevertheless, Cowen is confident of the eventual future because he believes that more “low-hanging fruit” will appear:

• The first favorable trend is the interest in science and engineering in India and China. So far, he says, those countries have focused their efforts on making cheaper versions of already available goods and services. Over time, we can expect them to assume a greater role as innovators.

In reality, this is already happening, as pointed out in The Power of Pull and Bill Fischer notes in his article: “Made in China: Smarter Companies.”

• The second favorable trend that Cowen sees is that the Internet may do more for revenue generation in the future than it has done today. The Internet makes scientific learning and communication a lot easier, and it increases the productivity of scientists in out-of-the-way places.

As noted in the part 2 of this review, revenue generation by the Internet is already massive. This growth doesn’t have much to do with scientific communication, but rather practical innovation.

• Thirdly, Cowen now sees a critical mass in the American electorate favoring concrete steps to bring greater quality and accountability to K-12 education.

Unfortunately that consensus is still largely based on a “teaching and testing” model, which is suffering from the same declining returns as hierarchical bureaucracy in industry, rather than the needed culture of learning.

Raising the social status of scientists

Cowen’s only concrete recommendation to improve the great stagnation is to “raise the social status of scientists”. He says: “I don’t want a bunch of extra science prizes given out by the White House; what I want is that most people really care about science and view scientific achievement as a pinnacle of our best qualities as leaders of Western civilization.”

Such a raise in status is devoutly to be wished, particularly the rise in the status of scientists relative to overpaid executives in the financial sector. However such a rise in status is unlikely to have any immediate impact on innovation or growth.

Innovation depends not on how many scientific ideas are out there. It depends on how quickly the already abundant ideas are implemented in the marketplace.

Innovation is more than having an idea

For example, in 2004, researchers at Nokia, the world’s leading mobile phone company, presented a prototype of a new kind of mobile phone to the senior management. The phone, which connected to the Internet, had a large bright screen and was operated by fingers on a touch-screen. The researchers believed that the device would be a winner in the fast-growing Smartphone market. Senior management evaluated the proposal and decided that the risks of failure did not warrant the costs: Nokia did not pursue development of the phone.

In 2007, Apple introduced the iPhone with precisely the features that Nokia’s management had opted not to pursue.

By 2010, Nokia’s market share in Smartphones has been devastated. In the United States, its share of the Smartphone market has slipped from 35 percent in March 2002 to 8 percent in April 2010. Since 2007, Nokia shares have lost more than half their value and continue to decline.

Having more or better scientific ideas doesn’t by itself lead to innovations in the marketplace. That requires a radically different kind of management.

A core reading list for top economists

The Bloomberg Businessweek article on Cowen conveys the welcome news that he reads more widely than we might expect from a professor of economics. “He has read for instance what’s listed in Harold Bloom’s The Western Canon, though not every single one of the Icelandic sagas.”

But if Cowen wants to progress from being “America’s hottest economist” to being “America’s most competent economist”, he may need to spend even less time on Icelandic sagas and more time on the core economics curriculum.

Quite apart from my own book, The Leader’s Guide to Radical Management, he might like to spend some time with the following essential reading:

• Gary Hamel’s classic article, Moon Shots For Management, which succinctly explains why management must be reinvented: Harvard Business Review, Feb 2009.
• Roger Martin’s landmark article, The Age of Customer Capitalism, which explains the transition from shareholder capitalism and to customer capitalism: Harvard Business Review, January 2010.
• The Power of Pull: How Small Moves, Smartly Made, Can Set Big Things in Motion (Basic Books, 2010) by John Hagel, John Seely Brown and Lang Davison, which documents the transition from firms pushing products and services at customers, to firms learning how to use the power of pull.

• The New Capitalist Manifesto (2010) by Umair Haque, which describes the shift in goals from outputs to outcomes.

• Leadership In A Wiki World (Dog Ear Publishing, 2010) by Rod Collins which shows why networks are smarter and faster than hierarchies.

• The Responsible Business (Jossey-Bass, 2011) by Carol Sanford which shows how firms are making more money by becoming more responsible.

These books and articles have a common theme: a wholly different world is opening up in front of our eyes, if we have the courage to see it.