Entrenchment and Inequality

Alexis de Tocqueville, found shipbuilding one of the more revealing of American occupations.  In Europe, shipbuilders used scarce wood (Europe’s forests were already rapidly thinning) to repair defects in existing ships; American simply scrapped old ships and built new, faster models using their unlimited wood supplies.  He was describing America’s “throw away” culture at its birth and noting its role in fostering innovation.  It also was a key in the development of our egalitarianism.  If you didn’t like the way you were treated at work, you could just take advantage of the abundant resources of an as yet unsettled continent to start your own business, or move further west. New ways of doing business were easy to discover. A study I monitored years ago found that expertise in new technology among subordinates forced more democratic management styles among supervisors.  It’s tough to be arbitrary when your employee knows more about stuff than you do. Technology works well as an agent of democracy.

 Rapid incremental innovations leading to quantum leaps are a hallmark of American culture.  We like to think of ourselves as discoverers of basic things, but most American inventions are exploitations of scientific discoveries made elsewhere; Einstein was German, Curie French, Fulton English, Watt Scottish, Bell Canadian, Marconi Italian and genetic engineering an outcome of the English discovery of the structure of DNA. We worry that our scientists are not doing enough basic research, but that has never really been our special talent.  We import that.

Our real talent for innovation owes a lot to low entrenchment, the weight of infrastructure tied to existing technology that must be overcome for a new innovation to be successful. Trains have rail beds, cars highways and gas stations, all-electric homes a national network of power lines. The entrenchment of TV actually helped spread the internet, as cables laid to increase TV coverage became also a vehicle for the internet.   And there are social entrenchments too.  Just think how hard it is to sell mass transit and car pooling to a public hooked on solitary drives to work and the status tied to a sporty sedan.  But just as rapid innovation begets egalitarianism, entrenchment can also slow change and  beget inequality.  The owner of scarce, required resources acquires an edge, and hates to lose it to something new.  The economic capital of the country belongs to owners of the existing technology, who fight losing it to something new.  That’s how the rich stay rich and the poor stay poor.  Samuel Morse got his idea for the telegraph from a semaphore system in Europe and struggled for years to have it patented there; it was too big a change from the status quo for the French.  Meanwhile, it got rapid acceptance in America because it solved a problem and wasn’t replacing anything.

The current recession owes a lot to the struggle between innovation and entrenchment.  I am one of those scruffy, disreputable technologists who place credence in Kondratiev “long wave” economic theory; American mainstream economists look down on it, partly I suspect because it’s of Russian origin, even though Kondratiev was executed by Stalin. They argue that it sees patterns in economic data where none exist; but it’s held in higher regard elsewhere.  I appreciate the skepticism, but find the basic logic of the theory persuasive, without regard to details of the length of cycles, relative strength of credit versus technology cycles, etc.  All those things can vary without destroying the fundamentals.  Kondratiev theory in the form I accept posits that our economy is historically characterized by a succession of driving technologies that at any given time dominate major sectors of the total economy.  Think lumber followed by railroads followed by steel followed by autos followed by oil followed by computers – you get the picture.  Each of these dominant technologies has its own cycle which begins with a highly productive expansion followed by mature exploitation followed by a bubble as efficient limits are hit while capital investment continues to flow into the sector followed by stagnation and recession. I’m greatly oversimplifying and leaving out things, but again, you see that the basic idea is that economic cycles arise out of the dynamics of changing technology. The recession serves to transfer investment interest from stagnant sectors to emerging technologies that will begin the new cycle.

The recession phase is where entrenchment and inequality rear their ugly heads.  The quickest way through such a recession is rapid redeployment of capital to emerging sectors of the economy.  In the present recession, for example, fossil fuels are hitting their efficiency limit as the costs of extraction rise higher and higher, housing is facing a demographic wall as baby boomers retire and finance is facing a crunch as the overuse of broad monies such as derivatives and swaps forms a bubble.  The logical alternatives are investment in renewable energy, exploration of nanotechnologies, particularly in medicine, mass transit systems and investment in renewal of America’s failing infrastructure.  But over-entrenchment of oil and autos, for example, is slowing or preventing the rise of such alternatives.  And the excessive wealth of those invested in the status quo insulates them from immediate consequences.  In a significant way, that is at the heart of the current election debates.  Obama is spokesman for economic change and the transfer of support to emerging technologies; Romney, for continuation of the status quo. The result of the election will shape the economy of America for the next decade.