The Coming Prosperity

Collaborative Advantage

2012-01-30T13:33:00.000-08:00

Here's the video from a panel I moderated at the launch event for Global Entrepreneurship Week 2011. The topic of the panel was "Collaborative Advantage: How Diaspora Entrepreneurs Are Creating Connections for Shared Prosperity." The panelists are:

Semhar Araia, Founder & Executive Director, Diaspora Africa Women’s Network (DAWN) @Semhar
Kalsoom Lakhani, Founder, i2i @kalsoom82
Bill Barhydt President, CEO, m‐Via, Inc. @billbarhydt

You can decide for yourself after viewing how awesome these folks are. (Hint: Very.)

unleashingidea on livestream.com. Broadcast Live Free

"Collaborative Advantage" is also the title of chapter 11 of The Coming Prosperity. Here's an excerpt:

I opened this chapter with a quote from another returned Egyptian émigré, Wael Ghonim, creator of the Facebook page that catalyzed the Egyptian revolution. Following his graduation from the American University of Cairo, Ghonim took a job with Google. He was soon promoted to head of marketing for the Middle East and North Africa, a position based in Dubai. When a young Egyptian Internet activist, Khalid Said, was beaten to death by police, Ghonim was moved to create, under the pseudonym “El Shaheed,” a Facebook page titled “We Are All Khalid Said.” That was the page used to announce the first of a sequence of large-scale protests that, as we all know, resulted in the end of the regime of Hosni Mubarak.

When Ghonim was released from detention and identified for the first time as El Shaheed, he repeatedly insisted that the revolution had been leaderless. “Our revolution is like Wikipedia, okay?” he said to one interviewer. And, of course, he was right. Ghonim was not the author of the change that occurred in Egypt. The protesters themselves, in all the cities in which they took to the streets, also did not alone create the historic transformation that captivated the world for seventeen days in the winter of 2011.

That outsider incursion was complemented by insider acts of courage— from those still-unnamed soldiers and their commanders who, on the ground, advocated for restraint, to Mona El-Shazly, the correspondent forthe independent Egyptian channel, Dream TV, who broadcast an interview with Wael Ghonim that was widely reported to have intensified opposition to the Mubarak regime at a critical point in the protests. A general principle applies. When it comes to making change happen, outsiders are powerless. On the other hand, insiders are trapped. As a consequence, change happens as a consequence of outsider incursion and insider excursion.

When you are aware of, and open to, developing the relationships that define your environment, you are in a position to understand the possibilities of the present. This is a big deal. A brilliant sociologist by the name of Ron Burt has ably and persuasively documented that neither induced homogeneity nor rigid compartmentalization within institutional silos is a particularly good strategy for organizational success. Instead, the organizations that function best are those characterized by “integrated diversity”—clearly distinct areas of knowledge, experience, or understanding that are aware of, and communicate with, one another. Situational awareness and renewed diversity are preconditions for sustained learning and development. As I’ll discuss in the next chapter, the most effective people within organizations harvest value by building bridges between different knowledge silos.

Similarly, resilient and prosperous societies are ones that create ample space for outsider insurgents and insider deviants. This social fringe—the boundary between what is and what cannot be—is the space occupied by entrepreneurs, inventors, and innovators. It is also a space naturally occupied by members of diasporic communities of all varieties.

(... 35% off cover price, pre-order special on Amazon ;)

The Coming Prosperity (cover)

2012-01-07T14:11:00.000-08:00

In case you were wondering...

Fear Itself

2012-01-07T11:15:00.000-08:00

From chapter 13 of The Coming Prosperity (forthcoming from Oxford University Press, March 2012)

Among the items in the back of the hardware store, right next to the lime, is ammonium nitrate. Ammonium nitrate is good as fertilizer; it’s also pretty good for making explosives. In fact, regular old agricultural fertilizer was the operative ingredient for the bomb used in the 4/19 attacks. Doesn't ring a bell? That was the bombing of the Alfred P. Murrah Federal Building on April 19, 1995. It killed 168 people. At the time it was the most severe terrorist attack on US soil.

Of course, the Oklahoma City bombing isn’t forgotten. But it’s not exactly remembered, either. Now, granted, the toll from the attack on the Murrah Building was about 5 percent of the toll from the destruction of
the World Trade Center towers. And the Oklahoma City bombing wasn’t broadcast live on TV, it didn’t involve a pair of national landmarks (I’m including the Pentagon, which as you recall was also attacked on 9/11), and it didn’t result in $30 billion in insured losses.

That said, would we remember the 4/19 attacks in the same way if they had been carried out by a posse of Koran-thumping extremists rather than a couple of homegrown ones? Let’s be honest: despite (or perhaps due to) the fact that domestic groups have perpetrated the overwhelming majority of terrorist attacks in the US, head scarves make more of an impression than baseball caps on the cable news feed. At the end of the day, the story behind the Oklahoma City attacks just didn’t sell—politically or otherwise. Terrorist attacks perpetrated by self-proclaimed ultrapatriots from the Midwest—well, they must be an aberration. The attackers? Dumbed-down Unabombers. No real information there. Just noise.

But how about this, from former Senator Rick Santorum in 2006: “In World War II we fought Nazism and Japanese imperialism. Today, we are fighting against Islamic fascism.” Now that’s more like it. From that eloquent starting point, security screamers can cut and paste the usual language of external menace. Our very way of life is at risk. The line is drawn. The struggle against terrorism is equivalent to World War III. And so forth.

What does any of this have to do with reality? Not much. Comparisons of Islamic fundamentalism to fascism in the 1930s or communism in the 1950s may have sounded good from the podium over the past decade, but they areare almost entirely empty when considered from both economic and historical standpoints. Germany in 1930 was a country with demonstrated capacity as a global economic leader whose steady development had been halted at the start of the twentieth century only when the Treaty of Versailles brought a pointless war to its conclusion through a bankrupting peace. Even Japan, greatly underestimated in the West before it attacked Pearl Harbor, had steadily built its economic foundation and technical capabilities over a period of almost a century by patiently investing and strategically imitating Western techniques. Even in a worst-case scenario (much worse for the countries affected than for us) the countries that might conceivably be susceptible to the sway of Islamic fundamentalist ideologues today do not even have the economic capability of the Soviet Union in the 1950s; they do not compare at all with Germany or Japan of the 1930s.

Of course, innovation and technical change have also created new modes of attack that make small groups potentially threatening today in a way that only an entire nation could have been threatening in the past. But a historical perspective is valuable here, as well. Consider that, worldwide, over sixty million people lost their lives during World War II. Among armed combatants, the United States could count itself lucky in having lost only 290,000 of its sixteen million service members. Such losses are inconceivable today in the context of an attack by a terrorist adversary, touting Islamic fundamentalist ideology or not—even when we consider the truly nightmarish scenario of nuclear attack. Yet even eight decades ago, the democratic institutions, including the decentralized markets, had a remarkable capacity to adapt and respond following World War II. For what reason might we believe that capitalism and democracy are any more fragile today than they were back then? By what measure can any present threat, posed by even the most malicious nonstate adversaries, compare with the combined industrial might demonstrated by the German, Japan, and other Axis powers during World War II, or by the Soviet Bloc during the Cold War? Our respect for the capabilities of foes and our recognition of the reality of potential threats must be matched with an equally realistic appraisal of our society’s resilience and capacity for recovery.

The simple reality is this: terrorists of various types exist, they are dangerous, and they will almost certainly be responsible for further deaths of innocents in the United States and elsewhere in the world in coming decades. But there is basically zero prospect that such attacks will alter the forward trajectory of global history—unless, of course, political leaders dramatically increase their impacts through exaggerated responses.

My predictions for 2012 in zero words

2011-12-31T11:05:00.000-08:00

Happy new year.

The One-Sector Economy

2011-12-11T18:33:00.000-08:00

Here's a talk I gave a couple of months ago on Capitol Hill at an event organized by the Woodrow Wilson Center to discuss the Startup America Act:

Sums up in 10 minutes my motivation for writing The Coming Prosperity.

The Population Boon

2011-10-23T17:32:00.000-07:00

I did a phone interview last week with Josh Landis from CBS News Sunday on the topic of the world at 7 billion. Josh and his "The Fast Draw" partner Mitch Butler drew from the interview in putting together a nice short segment (2:18) that aired today:

More people solve more problems: a core theme of The Coming Prosperity.

I come to bury industrial policy, not to praise it (pt II—Rodrik)

2011-10-14T21:06:00.000-07:00

[continuing from previous post "I come to bury industrial policy, not to praise it (pt I)"]

... Now on to Dani Rodrik's contribution to the 2010 The Economist debate concerning industrial policy. Rodrik's role was to argue against the following motion:

"This house believes that industrial policy always fails."

Rodrik begins his argument by pointing out—correctly—that there is, in a technical sense, no way he can lose. "... always fails"? Give me a break. How could an idea tried repeatedly over the period of decades in much of the world have "always" failed? All that's required to win the debate is to find a single success. I pointed out one in my previous post. So he's won the debate before he even gets started.

But then, unfortunately for his case, Rodrik goes further. He builds his argument bit by bit, reaching a crescendo at the end with a statement that comes perilously close to substituting "always fails" with "always can work":

Fostering structural transformation and innovation is a central public purpose. Governments cannot evade the challenge. The only debatable question about industrial policy is not "whether" but "how."

Now, even though I'm a third of the way through part II of a blog post on "industrial policy," it's not too late to share a bit of elaboration, in Rodrik's own words, about what that term means (at least, to him):

The conventional approach to industrial policy consists of enumerating technological and other externalities and then targeting policy interventions on these market failures. The discussion then revolves around the administrative and fiscal feasibility of these policy interventions, their informational requirements, their political-economy consequences, and so on. We start also from generic market failures, but then we take it as a given that the location and magnitude of these market failures is highly uncertain.

... The task of industrial policy is as much about eliciting information from the private sector on significant externalities and their remedies as it is about implementing appropriate policies. The right model for industrial policy is [one] of strategic collaboration between the private sector and the government with the aim of uncovering where the most significant obstacles to restructuring lie and what type of interventions are most likely to remove them. Correspondingly, the analysis of industrial policy needs to focus not on the policy outcomes—which are inherently unknowable ex ante—but on getting the policy process right. (pp. 2-3)

Rodrik focuses on specific "market failures" that he assert is of particular significance in early- to mid-stages of national economic development: “information externalities entailed in discovering the cost structure of an economy, and coordination externalities in the presence of scale economies.” (p. 5) In other words, a key obstacle to development according to Rodrik is the fact that entrepreneurs systematically have inadequate incentives to search for potentially profitable, but untried, economic activities. The reason is entrepreneurs who successfully engage in such search will soon find their new ventures copies by later entrants, dissipating the quasi-rents that they have earned. As a consequence of this appropriability problem—more or less exactly analogous to that which is generally characteristic of the search for new ideas—the effort devoted to the search for fundamentally new economic activities will be inadequate to get under-developed economies out of a low-diversification, low-income, and low-growth trap.

The way out of that trap—again, according to Rodrik—is industrial policy. What this means is, as Rodik emphasizes repeatedly in the paper just cited and as he has written over and over since, is undertaking a process by which government seeks information from industry, then uses policy mechanisms at its disposal to catalyze entrepreneurial activity in the generation of new, profitable products. Once the new products are part of the economy, and early entrants are suitably rewarded to ensure (second-best) dynamic efficiency, copy-cats will enter and a new, sustainable industrial activity will be added to the country’s portfolio.

Of course, the devil in getting the process right is most assuredly in the details. A brilliantly argued paper written in 1995 describing the successful industrial policies implemented by the Korean government a half-century ago has this to say about the conditions that were required for success in that environment:

… [W]hat was required was a competent, honest and efficient bureaucracy to administer the interventions, and a clear-sighted political leadership that consistently placed high priority on economic performance [along with] an exceptionally high degree of equality in income and wealth—wealth distribution played an important role in shaping the political landscape in both countries. This is probably the single most important reason why extensive government intervention could be carried out effectively, without giving rise to rampant rent seeking.

This paragraph is, in my view, among the most important ones written on the topic of industrial policy—one that rather seriously calls into question generalizability of the Korean experience. Who authored this massive caveat to the industrial policy paeans that followed? Gene Grossman, Victor Norman, and (actually first among them), Dani Rodrik.

I agree with this paper of Rodrik's. He and his co-authors were absolutely correct about the exceptional conditions required to make industrial policy work. Even if the particular characteristics that held for Korea in the 1960s and 1970s also held in Taiwan at the same time, or for Chile in another era, or ... well, it doesn't matter much: one can say with great confidence that they do not hold much of anywhere else—particularly not in the places in which the process of development remains stuck in low gear. Most persistently poor places do not possess a competent, honest and efficient bureaucracy. Most persistently poor places do not possess a clear-sighted political leadership that consistently places high priority on economic performance. Most persistently poor places do not possess an exceptionally high degree of equality in income and wealth. In fact, there are real questions as to where these conditions hold in middle-income and wealthy countries either. As a consequence, there is little reason to believe that a strategy that was effective in Korea in the 1960s is going to work in most other places.

Now, it is worth pointing out along the way that at least three other objections can be made with respect to the framework advanced by Rodrik:

Limits to appropriability aren’t the primary problem faced by entrepreneurs
Cluster-building strategies have been tried and mostly haven't worked
Imitation of successful entrepreneurial strategies is not easy

Elaboration of each of these points would take another three blog posts. However I can offer a sketch of an argument that could be advanced in a more complete critique.

Limits to appropriability aren’t the problem. Limits to appropriability from innovation are not the fundamental impediments to entrepreneurial initiative in the context of technology-based innovation. A parallel argument can be made about the search for new economic activities in an under-developed country.
Cluster-building strategies have been tried and mostly don’t work: Cluster building strategies are mostly closely associated with Harvard's Michael Porter. While Porter's work on clusters has received a great deal of attention, it has the deficiency that, to put it bluntly, it doesn’t seem to work.

Imitation of successful entrepreneurial strategies is not easy. A key premise of the argument in Rodrik is that imitation of successful entrepreneurial strategies is easy. Implicit in this view is the notion that new-to-the-world technological innovations are relatively difficult to copy, but that the sort of relatively simple, new-to-a-particular-region economic activities that would generate new products in a developing country are relatively simple. This is a very questionable claim. What is likely true is that low efficiency, low-effectiveness approaches are easily copied to producing a new product are likely to be easily copies in a developing country—just as they are in a developed country. However, in both settings, there is every reason to believe that the underlying problem solved by an entrepreneur will be a complex one, and consequently that any solution found to the problem will not be easily copied. If this is true, then the implied policy strategy is very different: rather than seek to build product-based clusters, focus on enhancing the management capabilities of firm.

Overall assessment: While Rodrik wins the debate on a technicality, the argument he advances is so overstated that it's an effective draw.

I come to bury industrial policy, not to praise it (pt I—Lerner)

2011-10-14T20:15:00.000-07:00

A recent renewal of public discussion regarding the virtues of industrial policy, juxtaposed against the ongoing Solyndra spectacle, prompted me the other day to revisit an Economist debate from last year between Josh Lerner and Dani Rodrik. The debate was on the following motion:

"This house believes that industrial policy always fails."

Lerner, whose expertise is mostly in rich country (US & Europe) innovation policy, argued for the motion; Rodrik, a development economist, argued against.

This Lerner-Rodrik debate is worth revisiting for two reasons. First, Lerner and Rodrik are exceptional intellects with imposing publication records, debating an important topic. Second—most entertainingly for me as the guy in the bleacher seats—they both manage to be wrong, in spite of having ostensibly staked out opposing positions.

Let's start with Lerner. Here, as when he first wrote on this topic over a decade ago, Lerner focuses on what he characterizes as "the disastrous history of most loan programmes to finance high-growth entrepreneurial businesses." To evidence the disasters, he points to two problems:

bureaucratic incompetence as evidenced by failure of programs to be self-sustaining, because they demand too little of the few "winners" and thus are rapidly depleted as a consequence of the majority's losses, and
"regulatory capture" whereby "programmes geared towards boosting nascent entrepreneurs may instead end up boosting cronies of the nation's rulers or legislators."

Lerner eloquently articulated his perspective with regard to bureaucratic incompetence (part 1 of his argument) in a 2001 paper titled "When Bureaucrats Meet Entrepreneurs: The Design of Effective 'Public Venture Capital' Programs" (p. 81):

The initial reaction of a financial economist to the argument that the government needs to invest in growth firms is likely to be skepticism. A lengthy literature has highlighted the role of financial intermediaries in alleviating moral hazard and information asymmetries. Young high-technology firms are often characterized by considerable uncertainty and informational asymmetries, which permit opportunistic behavior by entrepreneurs. Why one would want to encourage public officials instead of specialized financial intermediaries (venture capital organizations) as a source of capital in this setting is not immediately obvious.

Now no economists is going to dispute either that financial intermediaries play a role in "alleviating moral hazard and information asymmetries," or that "young high-technology firms are often characterized by considerable uncertainty and informational asymmetries." No disagreements there. But there are real problems with the following sentence: "Why one would want to encourage public officials instead of specialized financial intermediaries (venture capital organizations) as a source of capital in this setting is not immediately obvious."

First of all, venture capitalists have long conceded that they're not particularly interested in seed stage, technology-based ventures. (See e.g. this 2001 piece [p. 104] by venture capital legend David Morgenthaler, or just Google the topic to sample the veritable avalanche of substantiation that has been published since.) As the median size of venture capital deals grew beginning in the mid-1990s and pressure on managing partners to provide attractive returns to investors in mammoth funds intensified accordingly, venture capital tended increasingly to flow to projects in later stages of development, to already-proven technologies, or to other investments with potential be rapidly "flipped." But a real science-based company—one of the few that aspires to accomplish the difficult transition from invention to innovation—can take a decade or more to get to the point where it earns revenue, much less a profit. Given such technical and market uncertainties, venture capitalists and even many individual "angel" investors understandably preferred to avoid funding speculation. The very success of the venture capital industry has driven it away from funding technology entrepreneurs in the early stages. High "hurdle rates" for expected returns to venture capital investments translate into high hurdle rates for reading business plans. The gap between the resources required by early stage technology entrepreneurs (typically, in the $100K to $2 million range) are inconsistent with the deal size required by mature venture capital firms to support operations given their current scale of operations.

Here's the more fundamental point: Government investments in potentially high-growth firms is good idea precisely because of the fact that Lerner stresses: the "specialized" skills of financial intermediaries such as venture capitalists are not easily imitated, and thus are in short supply. Why? Again, as Lerner notes, early stage development involves not only high quantifiable risks, but also daunting uncertainties. When the uncertainties are primarily technical (as is the case in science-based innovation), garden variety bankers and fund managers are ill-equipped to quantify them. For new technologies that have the potential to create new product categories, market uncertainties are also high and similarly difficult to quantify. The "due diligence" that investors in venture capital funds require of managing partners and that angel investors require of themselves is intrinsically difficult—and getting more so as both technologies and markets become increasingly complex.

As Lerner himself implies in the above quote, simple labor economics suggests that a public official on a government salary will be less capable of evaluating the market prospects of a new technology than will a highly paid venture capitalist. To suggest otherwise is, rightly, to invite derision. However, the same set of basic principles suggests that venture capitalists are, typically, highly compensated because their skill set is not easily imitated. Barriers to entry and high compensation both imply that the venture capitalist's opportunity cost of time is much higher than that of the public official. For that reason, the efforts of public officials to evaluate the commercial dimensions of technical proposals—for example, the review of applications for competitive government awards such as those given by the U.S. Small Business Innovation Research (SBIR) program—are better understood as complements to, rather than substitutes for, the due diligence performed by venture capitalists.

Differences between venture capital and public modes of support for technology entrepreneurs go beyond both the capabilities of specialized intermediaries as compared with those of public officials and the quantity of funding sought. As work by David Hsu (and others since) has documented, entrepreneurs who seek venture capital investments are typically seeking more than funding. They also seek mentoring, access to contacts, and strategic guidance. In return they relinquish a degree (sometimes large) of control over their organizations. In contrast, a technology entrepreneur seeking a government award can not expect to benefit from mentoring and other such forms of support. At the same time, however s/he can be assured that his/her equity stake will not be diluted. The risk/reward profile of the two forms of financing is thus sufficiently different to call into question the appropriateness of terms such as "public venture capital" frequently used to describe various modes of public financial support to technology entrepreneurs. While the funds supplied may be public, the mode of support bears very little resemblance to venture capital.

To the extent that the sort of there are systematic and persistent impediments to the funding of potentially high-growth, technology based firms, they do so—again!—because the skill set of individuals specialized in evaluating linked technical and commercial opportunities is very difficult to imitate. For this reason, varied contractual arrangements coexist, each offered within one of a diverse set of institutional contexts. Taken together, in a vibrant technology ecosystem, these arrangements provide technology entrepreneurs with a menu of options each with a distinct risk/reward profile. Design and implementation of effective policies to support technology entrepreneurs begins not by looking at one or another category of support in isolation, but rather with an understanding of, and appreciation for, the entirety of this menu of options.

As for the "regulatory capture," the debacle surrounding the Solyndra bankruptcy would seem to provide definitive evidence that programs to support high-growth companies are just as subject to political gaming and cronyism as any other large-scale government energy initiative—be it a policy to support corn-based ethanol or (if you want to see some real money) one to give oil companies breaks on off-shore drilling leases in the name of "energy independence." And, that reality is, the answer is that the Solydra debacle does provide such evidence ... at least, for a program handing out loan guarantees worth half-a-billion dollars to a single company. However, such a program simply cannot be compared with the Small Business Innovation Research Program, which awards competitively administered grants (not loans) that average one thousandth the size of the loan guarantees for Solyndra. The SBIR is relevant because it is the program that Lerner actually studied, originally, in deriving the lines of argument he advanced in The Economist debate.

As it turns out, I'm also quite familiar with this program, having spent three years as part of the research team for a National Academy of Sciences study of its effectiveness. (I was the research lead for the Department of Energy report). In the actual context of the SBIR program, evidence of "regulatory capture" usually focuses on a few "SBIR mills" who receive a disproportionate share of grants without demonstrating real commercial impact--ostensibly proving that they're gaming the system. I studied one such company while I was working on the of the National Academies study--Creare, based in Hanover, New Hampshire.When visited Creare I saw lots of geeks with PhDs, and not too many crony-looking types. I ultimately learned that Creare had incubated more than a dozen spin-off companies, with aggregate sales at that time of over $300 million. None of that impact would have shown up as "commercialization" in the terms employed by Lerner in his original, and still most serious work on this topic.

So the problem with Lerner's argument is that he happens to direct his attention just the one type of "industrial policy" that is actually most likely to work: competitive, professionally evaluated awards extended to early stage companies in countries with highly developed private equity markets. Can such programs be worth while? Yes. If they count as "industrial policy," then the motion fails.

Now as for Rodrik's argument against the motion...

This post draws from Philip Auerswald (2007) "The Simple Economics of Technology Entrepreneurship: Market Failure Reconsidered," in David B. Audretsch, Isabel Grilo and Roy Thurik eds., The Handbook of Entrepreneurship Policy, Northampton, MA: Edward Elgar.

You Get What You Celebrate

2011-10-13T20:04:00.000-07:00

Carl Schramm has a post on Forbes.com titled "Remembering Steve Jobs By Celebrating The Life He Lived":

Here’s what President Obama said in January 2009 to the million people on the National Mall who gathered to celebrate his inauguration: “It has been the risk-takers, the doers, the makers of things—some celebrated, but more often men and women obscure in their labor—who have carried us up the long, rugged path towards prosperity and freedom.” Steve Jobs, whose loss we mourn, was one such risk-taker, doer, and maker of things. His life represents the best of what America has to offer.

Entrepreneurship and innovation are at the heart of our national narrative. We owe it to Steve Jobs—and to the thousands of inventors, innovators, and entrepreneurs whose daily efforts are keeping America not only in the game, but on the frontier of global progress—to put the celebration of entrepreneurship and innovation at center stage in the nation’s capital. Not just on inauguration day, but every day.

Here is a proposal: Why not bring the excitement of entrepreneurship and innovation to the National Mall and share it with the more than 30 million people from around the United States, and the world, who visit there every year? We’re not talking about a hands-on science center. We are talking about an Apple-worthy festival of design and ingenuity. A mind-blowing food court of the imagination. A permanent celebration of the living spirit of America’s greatest entrepreneurs and innovators, open and available to all... (more here)

As I recently posted on this opportunity myself, you'll know that I agree with Carl. This isn't just a building. Its an opportunity to make a national statement of historic proportions.

For consumers the rule may be, "you get what you pay for." For nations, it's ultimately "you get what you celebrate."

Who decides? The Secretary of the Smithsonian, who in turn is accountable to the Smithsonian's Board of Regents and the members of the Committee on House Administration. Just FYI. More to follow.

@makersonthemall
@innovateonmall
innovationonthemall.org

Maker Faire is Awesome

2011-09-28T18:31:00.000-07:00

Here are a few videos I took at Marker Faire New York the weekend before last:

The Kauffman Foundation has put together this video with clips from Maker Faire Kansas City (slightly higher production value here):

I could go on at great length about why I think this is important. (Tween kid overhead saying to Dad: "We are soooo coming back here next year!") But Tom Kalil's already done a good job of that. And, anyhow, where would I start?. "Maker Faire is integrative..."? "Maker Faire is open-ended..."? "Maker Faire is essential for..."? Sure. Yadda yadda. But the bottom line? Simple.

Maker Faire is awesome.

Regional Ecologies of Innovation

2011-09-25T11:46:00.000-07:00

I wrote this piece with Lewis Branscomb and Richard Zeckhauser in 2001. As it was part of a grant application, it was never published. The topic of innovation ecosystems keeps coming up (e.g. here), so it seems worth posting. More on related themes here, here, here, here, and here.

The problem of regional imbalances in technology-based innovation is hugely important.[1] Standard approaches to this problem tend to assume that technology-based innovation and resultant economic growth will automatically occur if

· local research institutions are sufficiently strong;

· the regional concentration of high tech firms is sufficiently high;

· the regulatory environment is sufficiently favorable to risk capital,

· political leadership is sufficiently strong.

All of the above "conditions" for regional innovation are necessary, but they are not sufficient. No amount of government support for a nascent venture capital industry will help a region devoid of technology entrepreneurs. A state-funded technology park established near a top research university will house few tenants if the university discourages faculty from seeking to commercialize their innovations. An isolated cluster of heavily subsidized start-up firms constitutes an innovation ecosystem no more than an assemblage of parrots and potted ferns is a rainforest.

Private sector actors in the innovation system, informed policy makers, and academics all know that, to paraphrase [former House speaker] Tip O’Neil about politics with modest hypebole, “all innovation is local.” However, the more specific questions that engage policy makers lie beyond our current state of knowledge:

Where an innovation-based economy does exist, how does government act (or refrain from acting) to support its continued growth? Where one does not exist, what can be done to encourage one to develop?
What are the critical links in the innovation network? What opportunities, if any, exist for partnerships between governmental bodies operating at different scales or in neighboring jurisdictions and various actors in the innovation system? What should be the roles of local, state, and federal governments in supporting innovation?
In an ideal world, what programs should local, state, and federal government fund, how much should the programs receive, and how should their success be measured?

A better understanding of regional innovation, and thus better public policy and program design, depends on being able to answer the follow questions:

What fundamental set of behaviors, contracts and incentives characterizes the “regional ecology of innovation”? By what processes are basic scientific breakthroughs translated into commercializable products and processes? What of incremental improvements to products and processes?
In innovation ecosystems, how do networks of relationships and trust form? What are their limitations of scale and scope (e.g. geographical scope, number of names in the "Rolodex," qualitative variety of contacts)?
How do the local, state, and federal governments engage in the innovation system, positively and negatively? What kinds of policies and programs at each scale of government best support currently thriving innovation ecosystems, and which best nurture the development of new ones?
To what extent is regional specialization—e.g., the development of regional technology “clusters”—truly a requirement for successful competition in global markets for knowledge-based goods and services? Does regional specialization increase the likelihood of capturing economic gains from innovations locally? In an era when technologies, products, and services are increasingly developed upon shared platforms, with networks of research centers, suppliers, and customers linked in complex ways across industry boundaries, are clusters less important? How relevant today are assumed boundaries between ‘traditional’ economic activities (e.g. textiles, fishing, and agriculture) and new, technology-based industry areas considering, for example, advances in robotics and ag-biotech? How do new technologies provide p remote regions overcome traditional limitation in the digital economy, given new technologies?[2]

We use the terms “ecology” and “ecosystem” metaphorically. At the same time, we recognize that the project may benefit from exploring further the insights for human systems of research by leading ecologists and evolutionary biologists (see e.g. Levin 1992). The use of evolutionary and ecological metaphors in economics has a long history in economics, dating back at least to Marshall (1890). Yet natural system differ from human social systems in fundamentals respects.

Technology-based innovation and economic growth

In the 1950s and 1960s many economic models informing public policy assumed that basic science (and spinoffs from military R&D) “automatically” led to productivity and market growth.[3] However most industrial innovation is based on modest extensions of existing technology, so most productivity gains result neither from advances in basic science nor from radical new technologies, but rather from steady improvements to existing innovations. During the 1980s, Japanese success in the high tech industries in which U.S. firms had been dominant were finally understood as a failure of domestic firms to adequately prioritize manufacturing efficiency and consumer satisfaction.[4] In the 1990s the U.S. economy surged. Growth derived fundamentally from a dramatic increase in productivity. While the sources of these productivity gains are debated among economists,[5] most attribute a substantial part of this growth in real terms to the surge in the creation of entrepreneurial, venture capital-backed, technology firms.

At the end of the 1990s, perceptions shifted again toward a view that technology-based radical innovations uniquely replenish the economy’s long-term potential—though their short-term contribution to economic growth is relatively minor. The role of technology entrepreneurship in general, and particularly the institution of venture capital, as engines of U.S. economic expansion became almost an article of faith among politicians, pundits, policy-makers and the public. The stampede of investors into, then out of, the public market for equity in technology-based “new economy” firms and the volume of traffic from Silicon Valley to Wall Street came increasingly to represent not just a single economic sector, but rather the scorecard for the economy as a whole.[6]

The actual relationship between innovation and job growth and venture capital investment is a considerably murkier problem than newspaper accounts or stump speeches would suggest.[7] Innovation today is usually the product of many different types of entities working together. The techno-wizards, perhaps joined by a few others in small start-up efforts, bring their new ideas. Venture capitalists and angels add their money, their contacts, and their vision of the marketplace. Strategic partners offer downstream or upstream customers, rapid access to established marketing networks, and swift scalability in manufacture. Investment bankers proffer the end-of-the-rainbow pots of gold. Beyond this, universities may provide basic technologies for license, governments key incentives for location, lawyers effective structures to allocate shares and align incentives. Specialization across firm types and corporate boundaries characterizes today's successful high tech firm. The success of each of these firm types, the metaphorical equivalent of species in an ecosystem, depends on the presence of others.[8] Understanding the detailed characteristics of the processes supporting innovation at a microeconomic level is critical not only to resolving their impacts at the macroeconomic level, but to designing public policy that allow them to function efficiently and equitably.

Technology entrepreneurs in the innovation system: What do we know?

Schumpeter (1912) foreshadowed current discussions, referring to the role of the entrepreneurs in bringing together resources to create “new combinations” of economic activity—ones that occasionally succeeded in challenging incumbent forms of economic activity.[9] At the start of the 21^st century, what do we know about the process by which technology entrepreneurs in partnership with venture capitalists, corporate technology managers, university technology licensing officers and others in the innovation system conceive and implement “new combinations”? Though our understanding is fragmentary, we can make some observations:

Both technologies and the markets in which they are bought and sold are becoming increasingly complex. Arriving at a detailed understanding of either requires many years of painstaking effort. Yet, having reached the frontier of knowledge regarding a technological area or a market, an innovator cannot rest for long because knowledge depreciates rapidly.[10] Markets exert pressure to standardize and modularize. Complexity on one hand and standardization on the other are thus almost yin and yang forces, the former reinforcing the traditional role of personal contacts, the latter pushing the drive toward impersonal markets.[11]
Nearly all new technological applications arise either from incremental change to, or new combinations of existing technologies. Understanding how to combine existing technologies (e.g., the internal combustion engine and the air-foil) to create a new product (e.g., the airplane) requires having some understanding of how each of the technologies works separately. As technologies become more complex, new combinations require collaboration.[12]
The key obstacle to funding a technological collaboration—bringing into existence a new technological and/or economic combination—is the ability to identify the minute subset of potential combinations for which a viable market exists and which matches the skill set of a group of specialized technologists whose services can be engaged—a task referred to by venture capitalists as “due diligence.”
Technology entrepreneurs are not, as a rule, able to carry out this work on their own. To build one’s knowledge base to the point where one is working at or near the technological frontier and to organize a quality research team is a challenging enough job description. Most technology entrepreneurs cannot additionally maintain a venture capital caliber network of business contacts.
Quality venture capitalists and angel investors must be able to evaluate the quality of new combinations. They must also be able to gain and maintain a good knowledge of the abilities of a large group of potential participants in such projects, particularly those with high levels of technological abilities. Furthermore, venture capital companies continue to add value along the way. They do this in partly by helping companies develop their business plans, products, and marketing strategies. They also do this extensively through their reputations and connections—making introductions, and attesting to quality.[13] The success of the best venture capital firms (those that capture a disproportionate share of the returns in the industry) depends far less on their ability to pick winners than on their ability to create winners. This both adds value to the firms they fund and enables them to attract the most promising firms. Given the particular difficulties of the contracting for technological information,[14] barriers to entry will be high, so individuals and firms that successfully manage such contracting should reap high rewards (a theoretical prediction readily supported by data).
The effort to value technological information—assessing the market possibilities of new, perhaps recombined, technologies—is likely to be severely constrained; few skilled individuals are available to evaluate of new combinations. There will be always be many more potential new combinations of technologies—imaginable, but not tried—than there are companies and their financial supporters to try them out. The gap between potential breakthrough ideas and the number that receive a fair trial may grow in the future, as the execution of new technological combinations increasingly requires the collaboration of different actors with specialized skills.
Modern technologies require the continual exchange of information and products; yet traditional markets can not accommodate such transactions. In response, contracting is now accomplished with alternative arrangements. The firmest ties come through a merger. Incentives get aligned, information exchange is no longer guarded. At the opposite extreme we see alliances, where two or more firms work together for a time, often with capabilities but not dollars changing hands. Alliances may even be institutionalized, as they are with the Internet, where no charge is imposed by any provider to carry the information initiated by others. Diagrams of firms’ relationships with strategic partners often have dozens or even hundreds of lines of connection.

The regional ecology of innovation: Rainforests or amber waves of grain?

Historical evidence amply documents the presence of significant knowledge spillovers and other intra-industry increasing returns to scale within regions—automobiles in Detroit, venture capital in Silicon Valley, biotechnology in the Boston metro region and carpets in North Carolina. Persuasive theoretical arguments, and some empirical evidence, support the claim that sustained regional growth requires not only the presence of specialized industry clusters, but also a certain degree of economic diversity. Barriers to entry in the field of any complementary capability will hurt the entrepreneurial industry as a whole. Not surprisingly, the most innovative regions of the country have seen rapid entry in such fields as venture capital, or technology-oriented law firms. Countries or regions with rigid regulatory structures for investment entities will find themselves disadvantaged way beyond what we would expect from a purely first order analysis.

Nonetheless, generalizing from the experience of particular regions is dangerous. Reason why include the following:

Regions vary not only in their economic structure, but also in their culture and history. Even within regions of the U.S., attitudes towards trust, reputation and risk vary significantly.
Ex post analyses may infer incorrectly infer causation from chance.
For competing regions just as for competing firms, entering a market in which there already exists an established incumbent—e.g. a Silicon Valley—is very different from creating a new market.

[1] The National Venture Capital Association (www.nvca.org) reports that, in 1999 for example, 76 percent of venture capital investments were concentrated in four states. Within Massachusetts, for example, multiple initiatives have failed to generate economic growth based on high technology innovation in various regions outside the Boston metro. Other areas, such as the route 495 corridor, have begun to develop a regional ecology of innovation relatively spontaneously.

[2] A state with a limited technology base might reasonably do as West Virginia and Arizona have done in the fields of biometrics and optics, respectively: seek to nurture and support specific innovation/industry clusters from the ground up. However, in regions with a well developed innovation system such as that in the Boston metro area, there is a far greater reason to believe that a large scale, targeted state program would distort, rather than enhance, private incentives.

[3] Alic et al. (1992).

[4] Dertouzos, Lester and Solow (1989).

[5] Important recent contributions to this literature include Jorgenson and Stiroh (2000) and Nordhaus (2001). Bresnahan and Trajtenberg (1995) directly address measurement issues involved in assessing the contribution to growth of “general purpose technologies.”

[6] Such perceptions are reinforced by the astounding growth and magnitudes of venture capital disbursements—in 2000 alone exceeding $100 billion.

[7] Gompers and Lerner (1999, p. 137) note: “Demonstrating a causal relationship between innovation and job growth on the one hand and the presence of venture capital investment on the other is, however, a challenging empirical problem. To what extent are the mechanisms [of venture capital] uniquely suited to addressing the needs of entrepreneurial, high-technology firms? To what extent is venture capital just one of many financing alternatives for these firms, with its own set of strengths and limitations? This topic will reward creative researchers in the years to come.” A recent paper by Kortum and Lerner (2000) represents are rare, or possibly unique attempt to isolate the contribution of venture capital to innovation in the U.S.

[8] David Teece (1987) introduced the concept of “complementary assets” to describe these external dependencies that govern subsequent economic success of high tech innovations. This has been expanded into the notion of the economic efficiency of social capital, Fountain (1998).

[9] This combinatorial approach to innovation has been taken up recently by Romer (1996), Weitzman (1998; see quote above), and Auerswald, Kauffman, Lobo and Shell (2000). Romer (1996: p. 204) suggests likens combinatorial innovation to the discovery of new recipes:

New growth theorists... start by dividing the world into two fundamentally different types of productive inputs that can be called “ideas” and “things.” Ideas are nonrival goods that could be stored in a bit string. Things are rival goods with mass (or energy). With ideas and things, one can explain how economic growth works. Nonrival ideas can be used to rearrange things, for example, when one follows a recipe and transforms noxious olives into tasty and healthful olive oil. Economic growth arises from the discovery of new recipes and the transformation of things from low to high value configurations.

[10] The increasing complexity of both technological and market environments pressures venture capital firms to try to develop synergies through specialization within their own domain. Where one firm nurtures contacts in Internet advertising, another does so in biotechnology. The specialization goes beyond expertise to the structure of the network of relationships developed by the firm.

[11] Consider, for example, the PC—for some years now a mature technology. The insides of a personal computer suggest a production process easy to decentralize and distribute among a large number of fiercely competing small firms. Modular standards have been clearly established. Prices are falling precipitously. Outsourcing of production is the norm. Yet, at the same time, there are dozens of new technologies appearing on the horizon that are requiring complex contracting, networks and trust. These are the new combinations—amply associated with uncertainties, informational asymmetries and unknowables—that are well suited to the venture and angel mode of support.

[12] See Somay and Teece (2000) and Tassey (2001) for a further discussion of increasing technological complexity and its implications for innovation policy.

[13] Reputations and the link to networks explains why a new MBA hired by a leading VC firm like Kleiner Perkins can generate a million dollars of business, but that same MBA forming a new firm with three peers could not expect to generate a fraction of this business.

[14] See Zeckhauser (1996)

Resilience is Security

2011-09-10T07:58:00.000-07:00

I wrote this in 2007. It's still my view on the eve of the 10th anniversary of the 9/11 attacks:

Illusory threats, if not recognized as such, can provoke reactions far more costly and dangerous than the threats themselves. And when leaders deliberately exaggerate threats to create fear for political purposes, the success of such adversaries is enhanced further.

Such successes are not inevitable. Wise leaders do have the option of responding to vulnerabilities by honestly acknowledging the fact that Americans, like any other people who enjoy an open society, will always be vulnerable to terrorism and to the actions of rogue states. A responsible democratic government should act to minimize these threats, particularly when they involve potentially catastrophic outcomes, but innovation, resilience and adaptability are ultimately the most powerful tools to counter them. When political leaders and private citizens band together to cultivate technology, cut through red tape and build the capacity for response and recovery at home, lasting security may be achieved even under the shadow of persistent threats from abroad.

Full essay is here.

Time to Bring Entrepreneurship and Innovation to the National Mall

2011-09-08T15:22:00.000-07:00

More than a century ago an idealistic scientist gave his fortune to a country he'd never visited to create a research institute in a swamp. The scientist was James Smithson, the country the United States, and the swamp the National Mall. Smithson’s gift provided its author with an enduring legacy extending over nearly two centuries. Generations of trustees have carried out the founder’s vision of advancing "the increase and diffusion of knowledge among men." Now the time has come to update Smithson's vision for the the 21st century and create a space on the National Mall dedicated to entrepreneurship and innovation.

While the mission of the Smithsonian has remained constant, the nature of knowledge has not. At the end of the nineteenth Century the advancement of knowledge generally meant heroic discovery or patient inquiry conducted in isolation; the Smithsonian's infrastructure was accordingly designed to document and display physical artifacts related to that process. Yet in the twenty-first century, as Secretary of the Smithsonian Wayne Clough has noted, "the great issues of the day typically are interdisciplinary." Advances in knowledge increasingly require collaboration and open communication across both disciplinary and geographical boundaries. The complexity and urgency of terrestrial challenges have compelled an increase in the value placed on knowledge developed in the search for practical solutions to global challenges.

Museums today provide a bridge from past discoveries to future opportunities. Among the Smithsonian’s greatest assets is its unique ability to reach, and to touch, millions of people with inspiring and educational experiences. At their best, the Smithsonian’s programs open minds and change lives. In that spirit the Smithsonian can use its great collections and unique location to inspire its visitors to think deeply about the interaction between our planet and the life that populates it, about our major challenges, and about the astounding progress that is attainable through entrepreneurship and innovation.

At different intervals in the history of the United States, the Mall and the Smithsonian have provided us, the people of this country, with a setting for our own redefinition and reinvention. In the midst of the Great Depression, Andrew Mellon funded the creation of a National Gallery of Art, to affirm America's position as a global power. In the midst of the Cold War, the Smithsonian established the Air & Space Museum, to celebrate the trans-atmospheric supremacy that was, for a time, so critical to our national self-conception.

Now the time has come, once again, for the Mall to play a central role in the renewal of our national narrative; the time has come to establish a permanent space to recognize--in words President Obama himself spoke on the Mall in his inaugural address—"the risk-takers, the doers, the makers of things--some celebrated but more often men and women obscure in their labor, who have carried us up the long, rugged path towards prosperity and freedom." No plexiglass this time. Rather Maker Faire. Tech Shop. Fab Lab and D-Lab. Resources for brainstorming about entrepreneurial solutions to global challenges. A "Genius Bar" with the resources to start a company in an hour or less. And maybe a few robotic Pterodactyls swooping down occasionally from the high arches to pick up trash.

Remarkably, there exists an empty building on the Mall that can do this. It is a building with a history perfectly suited to celebrating entrepreneurship and innovation by all Americans and advancing America’s vital role in the 21st century as a source of entrepreneurial solutions to global challenges. Completed in 1881, the Arts & Industries building (situated directly to the East of the Smithsonian Castle) was the first building expressly built as a museum on the Mall. It was designed by renowned architect Adolf Cluss to receive the collections of the 1876 Centennial Exposition. The building was also designed to exhibit the results of research being conducted by Smithsonian scientists working in the Castle next door. But the exhibits were left largely untouched for much of the next century, changing the function of the building from celebrating the new to archiving the old. The original Arts & Industries exhibits were eventually moved, and the building closed to the public in 2004.

The first Secretary of the Smithsonian once said that "The worth and importance of the Institution is not to be estimated by what it accumulates within the walls of its building, but by what it sends forth to the world." The same can be said for the United States. Our worth in the twenty-first century will be determined by the continued efforts of the millions of entrepreneurs and innovators who daily invent a new and more promising reality for their communities, their regions, their country, and the planet we all share.

There is no progress without purpose. Identity is what we are, but initiative is what we become. A nation needs both. Let's renew our national narrative by creating at the Arts & Industries building a National Center for Entrepreneurship and Innovation.

Full concept statement

twitter: @innovateonmall
web: innovationonthemall.org

What if Development Economics Was Actually About Development?

2011-09-08T08:34:00.000-07:00

Pop quiz: Is a "business-friendly" environment the same as an "entrepreneur-friendly" environment?

Answer to that is coming up. But my guess is that 9/10 entrepreneurs get the answer right (10/10?), and 9/10 economists get it wrong.

Now as for the topic of this post, "What if Development Economics Was Actually About Development?" You might rightly ask, "What is development economics about, if not development?" Read recent books co-authored by Dean Karlan and Esther Duflo, or this volume edited by Jessica Cohen and Bill Easterly, and you will find out. "Development economics" is about improving the effectiveness of development projects. It's about enhancing the value we get from the ~$125 billion that flows each year from rich countries to poor countries to improve the lives of poor people. That's "development economics."

Development economics is mostly not about the technological and organizational transformations that are propelling the human community into an unprecedented era of increased prosperity. It is mostly not about structural changes in a $69 trillion global economy. It is mostly not about the global revolution in mobile telephony--the most ubiquitous and powerful technology people have ever created. It is mostly not about the creation and diffusion of vital standards--ISO, container shipping, TCP/IP--that have enabled global economic integration. It is mostly not about the astounding power of migration to improves lives and livelihoods. And it is mostly not about the initiative of entrepreneurs who bring imagination to opportunity to create new forms of business, products, and services that even they did not imagine could exist when they first started out.

Most of all, "development economics" is mostly not about development. That is because projects don't develop. And they don't create development. Here's a definition (thank you Dictionary.com):

noun

the act or process of developing; growth; progress: child development; economic development.

"Process of developing" means that there is change. A transition from one state of being to another. That is what development means. So social scientists who study development should be interested in how societies change.

Development, therefore, is a dynamic phenomenon. But the tools that define "development economics" are, overwhelmingly, static. In order for a project to be evaluated--for example with a "randomized controlled trial" (RCT)--the parameters of the project have to be strictly defined. ("Controlled" says it all). The project is a recipe. The assessment is method for determining if that recipe works in a particular place, and at a particular time.

In my last post I addressed the limitations to RCTs created by the "in a particular place" clause. (Ref. the challenge of "external validity".) But the "at a particular time" clause is even more problematic.

The point is simple: If the phenomenon under consideration is actually important to the process of development, it will, by definition, be changing. Consider just the example of mobile telephony offered above. The numbers, options, and opportunities change on an almost monthly basis. Not just superficially, but fundamentally--at the level of options, learning, and even human preferences. (Ref. "non-stationarity of the underlying process" mentioned in my last post.) But the tools of "development economics" in its current form are inherently, even assertively, static. The viability of the RCT method, in particular, depends on applying precisely the same "treatment" to each target population. If the treatment is not the same, or if important elements are omitted from the "recipe" (they will be), then the assessment is invalid.

Is ingenious program evaluation a total waste of time? Of course not. It is a contribution...to people charged with managing projects anyway. But it is not the study of development.

I almost forgot: Is a "business-friendly" environment the same as an "entrepreneur-friendly" environment? ... Hmm. Well here is a book that is actually about development that provides some answers. More on that in my next post ;)

UPDATE: Citing this paper by Casey, Glennerster, and Miguel as an example, Dean Karlan (@deankarlan) points out to me that RCTs can be used to evaluate "a process of change that includes the decision on what to do, who does it, etc."

Why Randomized Controlled Trials Work in Public Health...and Not Much Else

2011-09-07T09:01:00.000-07:00

If there is a next big thing at the moment in the field of economics, it is the application of techniques from medical research—specifically, “randomized controlled trials,” or RCTs—to assess the effectiveness of development or other government-initiated projects. The general thrust of the work is as simple as it is brilliant: rather than employ complex, and often unreliable, statistical methods to tease out the extent to which a project or policy actually had a beneficial impact on intended beneficiaries, why not follow the tried and true methods employed by pharmaceutical researchers to assess the efficacy of medical treatments? The steps are: 1) randomly divide the experimental population into a treatment group that receives “benefits” from the program, and a control group that doesn’t; 2) assess outcomes for both groups; and 3) determine whether or not a significant difference exists between the two groups.

This approach, championed by MIT economist Esther Duflo (winner of the prestigious Bates Clark Medal, granted to the most promising economist under the age of forty) among others, is a marked improvement on the status quo in development aid, which not infrequently involves assessing program effectiveness by simply checking whether or not the money was spent. Clearly, a world in which aid money is allocated to projects that actually benefit people is preferable to one in which money goes to whoever most effectively maneuvers to get the money to start with and then most reliably manages to spend it. In this way, the use of RCTs in development arguably advances the goal of aid effectiveness.

So, to be clear, RCTs quite credibly represent the “gold standard” in program assessment. If other methods are used, it is usually because RCTs are too expensive or otherwise impractical. Describe your favorite entrepreneurial initiative to an economist and the most probable skeptical response you’ll receive is: “Sounds wonderful, but where’s the evidence of effectiveness? In order to find out whether or not it worked, you really need to do a randomized controlled trial."

So what is the problem with applying RCTs to development? The Achilles heel of RCTs is a little thing known to the statistically inclined as “external validity”—a phrase that translates informally to “Who cares?” (In a future post I'll elaborate on another fundamental flaw of RCTs, which is technically termed the "non-stationarity" of underlying processes.)

The concept of external validity is straightforward. For any assessment, “internal validity” refers to the mechanism of conducting a clinical trial, and the reliability of results on the original setting. A professionally conducted RCT that yields a high level of statistical significance is said to be “internally valid.” However, it is fairly obvious that an intervention rigorously proven to work in one setting may or may not work in another setting. This second criterion—the extent to which results apply outside the original research setting—is known as “external validity.” External validity may be low because the populations in the original and the new research setting are not really comparable—for example, results of a clinical trial conducted on adults may not apply to children. But external validity may also be low because the environment in the new study setting is different in some fundamental way, not accounted for by the researcher, from the original study setting. Econometric studies that seek to draw conclusions about effectiveness from data that span large geographical areas or highly varied populations thus typically have lower levels of internal validity, but higher levels of external validity.

So, once again, the fundamental issue is not the purity of the methodology employed (as exciting as such methodological purity is to the technically inclined) but rather the inherent complexity of the world being studied.

For this precise reason, it turns out that those who most vociferously and naïvely advocate that we apply techniques from public health to economics (a group that does not include Esther Duflo) make a fundamental error. They fail to appreciate the fact that, when it comes to external validity, public health is the exception that proves the rule. Indeed, in aid-led development in general, of the few real historical successes, nearly all are in public health. Outside of public health, few of the large-scale, top-down development programs have in fact succeeded.

Why is this? Multiple conjectures are possible. But one persuasive one is this: when it comes to biophysical function, people are people. For this reason, a carefully developed medical protocol (read “recipes”) proven to be effective for one population is highly likely to work for another population. The smallpox vaccine tested on one population tended to work on other populations; this made it possible to eradicate smallpox. Oral rehydration therapy tested on one group of children tended to work of other groups of children; millions of children have been spared preventable deaths because the technique has been adopted on a global basis. Indeed, medical protocols have such a high level of external validity that, in the United States alone, tens if not hundreds of thousands of lives could be saved every year through a more determined focus on adherence to their particulars.[1]

These huge successes were achieved, and continue to be achievable, though bold action taken by public health officials. They are rightly celebrated and encouraged, but—outside of other public health applications—not easily replicated. Successes in medicine contrast sharply with failures in other domains. Decades of efforts to design and deploy improved cook-stoves—with the linked aims of reducing both deforestation and the illness and death due to indoor air pollution—have so far primarily yielded an accumulation of Western inventions maladapted to needs and realities in various parts of the world, along with locally developed innovations that cannot be expanded to meet the true scale of the challenge.[2] For development programs in general, and RCTs in particular, public health is the exception that proves the rule.

What does work in areas outside of public health? How is it possible to design, test, and implement effective solutions in environments where complexity and volatility are dominant? The general principle applies: Success requires adaptability as well as structure, flexibility as well as structure—a societal capacity to scale successful efforts combined with an ingrained practice of entrepreneurial exploration. As the uniquely insightful Mancur Olson wrote in his classic Power and Prosperity (pp. 188-189):

Because uncertainties are so pervasive and unfathomable, the most dynamic and prosperous societies are those that try many, many things. They are societies with countless thousands of entrepreneurs who have relatively good access to credit and venture capital.

What works in development, according to Olsen, is entrepreneurial exploration. Why? Because we don't know what works.

[1] See Atul Gawande (2009), Checklist Manifesto: How to Get Things Right. New York: Metropolitan Books.

[2] Burkhard Bilger (2009), Hearth Surgery: The Quest for a Stove That Can Save the World. The New Yorker. December 21.

The Myth of the Market

2011-09-06T07:47:00.000-07:00

In the beginning, there was usury.

In the deflationary, no-growth world of the early Middle Ages, lending was frequently predatory. More often than not, the predators were priests. The poor were not the only victims. Nobles also forfeited property—even entire estates—to rapacious moneylenders.

The Church was powerful, but ultimately it could not resist pressure to curb abusive practices within its ranks. In 1049, Pope Leo IX outlawed interest-bearing loans, declaring at the Council of Reims that “No cleric or layman should be a usurer.”

At that point, a surprising thing happened: the trade in interest-bearing loans—officially outlawed by the Church—took off. With the usurious energies of the clergy becalmed, if not entirely dissipated, a new market space opened up in which the medieval “private sector” could provide loans. At the center of this transformation was a financial innovation known as the bill of exchange, predecessor to today’s garden variety bank check. Bills of exchange were important not only because they enabled commerce to occur over long distances, which facilitated trade, but also—and importantly—because they created a loophole in the papal ban on interest-bearing loans. By carefully designing their terms, the earliest merchant bankers could employ bills of exchange as a way to extend short-term loans.

As financial institutions developed around bills of exchange and other innovations, they changed the social function of banking. “What made the new banking different from the old,” says Robert Lopez, a pioneering scholar of early financial institutions, “was its shift from an agrarian to a commercial orientation and from an antagonistic to a collaborative attitude of borrowers and lenders.” Where the old banking was fundamentally extractive, the new banking had the potential to be creative. Alongside lending, a new and deeply disruptive financial form took shape: private investment.

The special edition of Innovations journal being released today at the 2011 Social Capital Markets conference at Fort Mason, in San Francisco, is a report from the evolutionary frontier of capital, and of capitalism. The authors of the essays, case narratives, and analytic papers published in these pages are a veritable Who’s Who in the linked domains of blended value and impact investing.

In this brief essay I will reinforce a simple point also made by Antony Bugg-Levine and Jed Emerson in their contribution to this issue: The nascent world of “impact investing” is not entirely new and unprecedented, nor is it simply an incremental tweak to a now nearly perfected “market system.” Instead, the development of impact investing and of new approaches to assessing value represents the latest stage in the invention, and reinvention, of the concept of economic self-interest and the reality of market-based capitalism over the period of centuries.

In other words, the movement described in the pages that follow is not a fad. It is the next step in a historical progression that dates back to the 11th century. Consequently, there is good reason to think that the transformations suggested by contributors to this special edition are just getting started.

The full text of my into to the special edition of Innovations for SOCAP11 is here.

Money + Meaning = Huh?

2011-09-05T15:53:00.000-07:00

SOCAP11 is getting going today at Fort Mason in San Francisco. I'm not going to be there. So why should I care?

Well, there's one obvious reason that I, personally, should care: Innovations journal (which I co-edit with Iqbal Quadir) has partnered with Kevin Doyle Jones and the Social Capital Markets team to produce a special issue on impact investing that is being released at SOCAP11 this week. The issue was proposed and guest edited by Paul Hudnut (@BOPreneur), Rob Katz (@robertkatz), and Patrick Maloney (@pemaloney). Anyone who's not going to be attending the opening session of SOCAP11 tomorrow can get the special edition as an eBook on Amazon.

In my next post I'll summarize the content; there's also more here at the SOCAP11 site. But I'll tell you this up front: If you don't get "impact investing" now, you will by the time you're done reading through the great contributions to this special edition. Wayne Silby, Elizabeth Littlefield, Jed Emerson, Anthony Bugg-Levine, Mirjam Schöning, Mario Morino, Christine Eibs Singer, and other great contributors to this special edition... these are the pathfinders. Where they have been is where finance is going--if it is going anywhere at all, that is.

So... is the release of this special edition the only reason that I'm excited about what's going to be happening at Fort Mason this week? No. If there wasn't another reason, we at Innovations wouldn't have jumped at the chance to partner with SOCAP on an impact investing special edition in the first place.

Kevin Doyle Jones and the SOCAP11 team are framing this year's meeting with the following Twitter-friendly koan:

$ + <3 = ?

I read this as: Can money (markets) and meaning (purpose) co-exist? Can they be separated?

The facile answer to this question is well known: "Markets are impersonal. They have to do with exchange and they have to do with value. But they have nothing to do with the creation of 'meaning' or the pursuit of 'purpose.'"

The facile answer is--as facile answers tend to be--wrong. The incomparable Matthew Bishop (@mattbish) offered one take on how markets and meaning connect in a piece he wrote for Innovations last year. I made my own first attempt at answering this question in a piece I wrote in 2009 for the Stanford Social Innovation Review.

But the most compelling answer isn't to be found any any single essay, narrative, or line of argument--amazingly, even my own or Matthew's. The best answer is to be found in the mosaic of insights and experiences of the people who have spent their careers exploring the shared space between money (markets) and meaning (purpose). People like Ben & Jerry's co-founder Ben Cohen, who wrote about "The Meaning of Business" in the Spring issue of Innovations. People like Kalsoom Lakhani, Eden Full, Manoj Sinha, and Saba Gul, who will be among the hundreds of entrepreneurs seeking to connect markets and meaning at Fort Mason this year. And it's to be found in the words of the remarkable people who took time away from their daily doing to get their thoughts into words and their words into bits so that you could read them here.

Repurpose

2011-08-27T09:51:00.000-07:00

The wealth that was lost in the crash of 2008 never actually existed. That's why the crash fundamentally doesn't matter.

The U.S. isn't recovering from the bust, it's recovering from the boom. Fear-mongers and ponzi-schemers joined forces to distract a nation for a debilitating decade.

Remember the Black Friday financial panic of 1869? Happened the same year the Transcontinental Railroad was completed. Which do we remember? There's a reason.

There is no Left. There is no Right. There's backward, and there's forward. That's it.

There is not a single institution more than a decade old in the United States of America that is not ready to be repurposed.

Go.

The Real Story

2011-04-21T06:33:00.000-07:00

If you're interested in education, Pakistan, entrepreneurship, or just the experience of being an engaged, compassionate human being, do yourself a favor and listen to Seema Aziz describe how she built one of the most successful textile companies in Pakistan ...

[direct link to MP3]

... at the same time that she built an organization that today educates one out of every 200 of Pakistan's children:

[direct link to MP3]

When you're done, check out Beacon House and The Citizen's Foundation and learn more about their work, and their founders.

This is the real story.

Summary of Every Paul Krugman Column Ever

2011-04-04T07:54:00.001-07:00

1. Republicans are idiots.
2. I told you so.

It's Groundhog Day for Oil Fears

2011-04-03T13:21:00.000-07:00

On Wednesday the New York Times published a lengthy piece by Clifford Krauss on the topic of U.S. energy independence titled "Can We Do Without the Middle East?" Here's how it starts:

Imagine a foreign policy version of the movie “Groundhog Day,” with Bill Murray playing the president of the United States. The alarm clock rings. Political mayhem is again shaking the Middle East, crude oil and gasoline prices are climbing, and an economic recovery is under threat...

In a Twitter post last month I also employed a Groundhog Day reference in the context of oil price volatility, but somewhat differently:

With oil prices heading up again, oil alarmists are digging out all their old, stale, material. Groundhog ... Day.

Here's the message I just sent to Krauss:

I enjoyed your lengthy piece on oil independence on Wednesday. Your answers to the question posed in the title were current and interesting.

I did, however, find the framing of the article truly disconcerting. The various pronouncements you cited regarding the need for "energy independence" prove only that a strong and diverse political constituency exists in the U.S. to support the proposition that reliance on foreign oil is a national security threat that requires urgent action; those pronouncements do not, however, prove that the proposition is true. (You also mention balance of payments. Parallel arguments hold for other imports as well--including other non-renewables whose price trajectories have closely tracked those of oil since the 1980s. So that line of reasoning doesn't lead to proof either.)

The real Groundhog Day here relates to the overwhelming tendency of politicians and journalists alike to take for granted the oil insecurity proposition itself. A rare exception was this recent piece in The Boston Globe. I have written on this topic as well (links below).

The significant recent developments in the Middle East call for a reassessment of old assumptions and a questioning of reasoning-by-force-of-habit. The topic of U.S. energy insecurity related to oil imports is certainly a case in point.

There is one "o" word that should come to mind when thinking of the Middle East in 2011: It's not "oil", it's "opportunity." Time for U.S. journalists, political leaders, and policymakers alike to wake up to that fact.

If you'd like elaboration, listen the talk that Fadi Ghadour gave at the Skoll World Forum two days ago (link here, scroll to "Closing Plenary," starts at 59:00).

-------------------------
Issues in Science and Technology Policy (National Academies of Sciences), Summer 2006
"The Myth of Energy Insecurity"

Boston Globe, January 23, 2007
"Let's call an end to oil alarmism"

The American Interest, May-June 2007
"The Irrelevance of the Middle East"

Development in Three ... Words

2011-02-07T04:00:00.000-08:00

Over the weekend, @bill_easterly very generously posted to this to the @AidWatch blog, with the title "Development in 3 Sentences":

I liked this formulation from the blog The Coming Prosperity, posted today as a link on Twitter:

"If solutions are known, need $$. If solutions are knowable, need evaluations. If solutions are evolving, need entrepreneurs."

In response, @calestous, a colleague of mine at the Kennedy School's Belfer Center (where I'm an external associate), wrote this:

@auerswald @bill_easterly Problems and solutions are always evolving.

Put these two together, and what do you get?

In my view, you get development in three words: Entrepreneurship, technology, and innovation.

I am not claiming this is original. In fact, it is downright old school. In my next three posts I'm going to look into each of these, one at a time, and how they add up to "development." But before I do, let me just note again how strong the consensus among economists is around this general framing. In the last century alone (much written of relevance before that!): Joseph Schumpeter, A.O. Hirschman, F.A. Hayek, Robert Solow, Karl Shell, Jane Jacobs, Mancur Olson, Paul Romer, to name but a few. All have articulated variants of this theme. Even apparent intellectual adversaries @jeffdsachs and Easterly agree on this. The Jeffrey Sachs version:

I believe that the single most important reason why prosperity spread, and why it continues to spread, is the transmission of technologies and the ideas underlying them. (The End of Poverty, p. 41)

And Easterly:

Historically, industrialization arose in initially poor countries which have since become rich, with the common theme of a heavy reliance on both domestic and international market opportunities and decentralized private entrepreneurship.

Good that we can all agree on something.

---------------------------------------
Note: Thanks to @m_clem for previous shout out about the same three sentences (above). They sum up core point of The Coming Prosperity.

The Enemy of My Enemy is ... My Next Enemy

2011-02-03T08:12:00.000-08:00

1941-1945: To oppose the Nazis, the United States allied with the Soviets. (ref. ... the Cold War)

1979-1989: To oppose the Soviets, the United States supported and funded the Mujahideen. (ref. ... emergence of al-Qaeda, 9/11 attacks)

ca. 1986: To oppose the Sandanistas, the United States supported and funded Manuel Noriega. (ref. ... U.S. invasion of Panama.)

1980-1988: To oppose the Islamic Republic of Iran, the United States supported and funded Saddam Hussein. (ref. ... Iraq Wars I and II)

1981-2011: To oppose the Muslim Brotherhood, counter "Islamist" movements elsewhere in the Middle East, and enhance regional stability, the United States supports Hosni Mubarak.(ref. ... #Jan25, #Jan28, #Feb2 ...)

The enemy of our enemies turns out, more often than not, to become our next enemy.

Perhaps the time has come to rethink this strategy.

The Bottleneck is at the Top of the Bottle

2011-02-02T04:55:00.000-08:00

The momentous events of the past week have reminded me repeatedly of an outstanding essay published nine years ago by GrameenPhone founder and Innovations journal co-editor Iqbal Quadir titled "The Bottleneck is at the Top of the Bottle." Iqbal's point in this essay--a key part of our shared motivation for starting Innovations together--is that information and communications technologies (ICTs) don't just benefit societies by lowering transactions costs and making work more efficient. They also disperse power and create the preconditions for political change:

Countries are impoverished in the first place because their governments have historically been unable to adopt beneficial policies. The attitudes of these governments towards ICTs are likely to be consistent with their past record of failing to take advantage of development opportunities. The real question worth discussing is whether ICTs can transform governments so that they are compelled to pay more attention to their citizens’ broader priorities. By influencing governance, these technologies can release resources trapped beneath vested interests. This impact is far greater than the conveniences for which such technologies are ordinarily known.

Along similar lines, I highly recommend this talk that Iqbal gave at the Long Now Foundation a couple of years ago. (Starts at 4:14.)

The Inevitability of Human Freedom

2011-02-01T20:50:00.000-08:00

For the last few days the passion and the dignity that has been demonstrate by the people of Egypt has been an inspiration to people around the world, including here in the United States, and to all those who believe in the inevitability of human freedom.

--Barack Obama (February 1, 2011)

I don't need Obama, I don't need Clinton. I will free Egypt with my Mom and Dad.

--Young child at Tahrir Square (February 1, 2011)

Things were boiling in Tunisia for 15 or 20 years.

--Sami Zaoui, Tunisian Secretary of State for Communications (January 31, 2011)

As last, a statement from the President of the United States that gets to the heart of the matter: The inevitability of human freedom. Simple words that hold so much promise, and so much reproach.

The promise is evident. It is a promise based not on optimism, but on physics. People can not be contained any more than the elements. Heat water in a pot and it will boil. Seal the pot and it will explode. When? Under precisely what circumstances? Impossible to predict. As Gregory Bateson wrote in his classic (and I mean classic) book, Mind and Nature: A Necessary Unity:

Under tension, a chain will break at its weakest link. That much is predictable. What is difficult is to identify the weakest link before it breaks. The generic we can know, but the specific eludes us. Some chains are designed to break at a certain tension and at a certain link. But a good chain is homogeneous, and no prediction is possible. And because we cannot know which link is weakest, we cannot know precisely how much tension will be needed to break the chain.

There is an deep irony contained in this prosaic description: Control creates its own ignorance. The more effectively people are oppressed, the more vulnerable is the oppressor. The precise moment at which human freedom exerts itself is as unpredictable as the ultimate outcome is inevitable.

This brings me to the reproach. A common refrain this week from the "policy community" and "area experts" was that no one could have predicted #Jan25 #Jan28 #Egypt. Indeed, only a year ago, a Council on Foreign Relations "Contingency Planning Memorandum" on the topic of "Political Instability in Egypt" noted that "most analysts believe that the current Egyptian regime will muddle through its myriad challenges and endure indefinitely." This translates as "The sealed pot is not moving;" or, alternately, "the chain is not breaking."

The same CFR memorandum offered a contrasting view, stating that "there are a variety of scenarios emerging from Egypt’s present political, economic, and social environment that could result in acute instability or even decomposition of the regime." This translates as "The pot about to explode;" or alternately, "The chain is about to break."

My friend and colleague @p_mandaville Tweeted something of great importance to folks interested in United States foreign policy two days ago:

Public break w/Mubarak changes rules for entire region. A watershed decision point for U.S. foreign policy. #Egypt #Jan25

He is right. The rules have changed. A fundamental, sweeping rethink is in order.

But what hasn't changed are the laws of physics. Going forward, it won't be enough to say "Who was to know...?" or "How could we have predicted...?" The specific eludes us, but the generic we can know.

The generic lesson is this: Repression makes the repressor vulnerable. It is not only immoral, and inhuman, it is also fundamentally ineffective to chain people. The United States is not made more secure by perpetuating circumstances anywhere in the world which, by their very fundamentals, deprives people of their freedom and us of our security.

It is for this reason that only a strategy based on principle and genuine expression of core values can possibly be effective in the 21st century. It is for this reason that I believe the way forward for the United States is to work with partners around the world to facilitate the search for, and implementation of, entrepreneurial solutions to global challenges.

But whether we choose this course, or not, progress will come, as it has this week in Egypt. After all, human freedom is inevitable.

Time to be What Matters

2011-01-21T08:30:00.000-08:00

Practice is important in every aspect of work, not just the technical. Need to practice finding meaning; if you don't, you won't.

If you're always doing work you believe in, you don't have to worry about ending doing work you don't believe in. Start now.

Primacy of meaning over technical capability as vital for nations as for individuals. Technique has no allegiance. Meaning sticks.

The United States has since its inception been a global leader in openness and experimentation. Leadership in innovation followed.

The Next America will not be built from technique, any more than the last. It will arise from a positive insurgency of value.

Time to be what matters.

www.innovationonthemall.org
@innovateonmall

Chaos in the Streets

2011-01-19T04:41:00.000-08:00

In my last post (motivated by an exchange with @keithkall on the topic of complexity theory), I noted that the observations of actual changemakers held real insights that we students of change do well to heed. Here's an example that wonderfully illustrates the notion of extreme sensitivity to initial conditions in complex systems:

The critical hour of contact between the pushing crowd and the soldiers who bar their way has its critical mininute. That is when the gray barrier has not given way, still holds together shoulder to shoulder, but already wavers, and the officer, gathering his last strength of will, gives the command: "Fire!" The cry of the crowd, the yell of terror and threat, drowns the command, but not wholly. The rifles waver. The crowd pushes. Then the officer points the barrel of his revolver at the most suspicious soldier.

From the decisive minute now stands the decisive second. The death of the boldest soldier, to whom the others have involuntarily looked for guidance, a shot into the crowd by a corporal from the dead man's rifle, and the barrier closes, the guns go off themselves, scattering the crowd into the alleys and backyards. But how many times since 1905 it has happened otherwise! At the critical moment, when the officer is ready to pull the trigger, a shot from the crowd--which has its Kayurovs and Chugurins--forestalls him. This decides not only the fate of the street skirmish, but perhaps the whole day, the whole insurrection.

The author is Leon Trotsky, certainly one of the 20th century's great changemakers (and one who, coincidentally, also bears a striking resemblance to @bill_easterly) writing in his book The History of the Russian Revolution.

Now, what is the point of this reference to chaos in the streets, beyond its connection to deterministic chaos and the dynamics of complex systems? Two points, actually:

1) The actions of changemakers don't always turn out so well in the long run. (USSR? No.) Indeed, as Paul Polak (a.k.a. @outofpoverty, founder of IDE, an organization whose treadle pumps have dramatically increased the productivity and incomes of over 17 million smallholder farmers worldwide) has recently and insightfully written, "institutions" are nothing but "radical ideas cast in concrete." Furthermore, "The failure of development is closely tied to the ossification of big institutional structures." (Read the post. It's great. He's a guy to pay attention to.)

2) Emergence in real (as opposed to theorized) human societies does not arise as a consequence of some pseudo-mystical force called "spontaneous order." It arises out of the choices and decisions made by actual human beings on a daily basis. Many of those decisions are routine; most occur within the context of existing institutions (a.k.a. radical ideas set in concrete). But, every once in a while, an individual or group of people organizes to challenge powerful incumbents. (#sidbouzid) The process may look chaotic from the outside. But it has its own internal logic, planning, agency, decisive minutes, and decisive seconds.

Development in human societies is nothing but the process by which novelty is created, reinforced, and then challenged. People with initiative and vision make that process happen. The study of development without reference to, and understanding of, the people who make development happen is ultimately the study of nothing.

Kalling All Development Economists: Cut the Crap

2011-01-17T09:30:00.000-08:00

Keith Kall (@keithkall) gets to the heart of the matter with this comment re. my last post about complexity:

...Very interesting post. I was left with the thought that a lot of this rhetoric and hyperbole could be easily be dashed, if those who write about entrepreneurship would walk out on the limb and engage in an entrepreneurial venture in order to balance some experience with success and failure with their beloved theory; rather than simply nest in the comfort of observation, supposition and mathematical formulas. But then, again, that's not how economists seem to do things....

About a decade ago--having at long-last completed my doctoral dissertation involving an application of complexity theory to the economics of production and innovation--I came to pretty much exactly the same conclusion that Keith does here: since change in human societies is, indeed, increasingly fast-paced and unpredictable, maybe the best way to find out what's going on is to ask those people who spend all day making change happen themselves.

This conclusion motivated me to join forces with GrameemPhone founder Iqbal Quadir to start Innovations journal (@innovationsjrnl) an academic publication whose core mission is to feature the insights of such changemakers, a.k.a. entrepreneurs. As we wrote in the editors' introduction to the inaugural issue:

Existing institutions and incentive structures may or may not be adequate to address [21st century global] challenges. If the past is any guide, continued progress in addressing public challenges will require continued innovations—the efforts of individuals, groups, and communities who creatively employ new organizational forms, and in many cases new technology, to effect discontinuous change. This journal is about such innovations and the changes that they bring about. It is less about what needs to be done, and more about what people are doing...

Academic journals addressing public challenges typically are structured to address the general characteristics of problems rather than particulars of solutions... Important insights with potentially broad application are often lost simply for lack of a common space where they can be found. By focusing on the particulars of practice, Innovations is intended to complement existing journals, providing a common space that cuts across academic disciplines, bridges theory and practice, and links human action with global impact.

In its first five years of publication Innovations has featured the insights of a remarkable group of entrepreneurs, including Mo Ibrahim (CelTel & Mo Ibrahim Foundation), Fazle Abed (BRAC), Nick Hughes & Susie Lonie (M-PESA), Rory Stear & Kristine Pearson (Freeplay Energy), Matt Flannery (1 & 2, Kiva.org), Kathryn Hall-Trujillo (Birthing Project), Catherine F. Lainé (AIDG), Martin Fisher (KickStart), R. D. Thulasiraj (Aravind Eye Hospitals), Karen Tse (International Bridges to Justice), and Ibrahim Abouleish (SEKEM).

Given all this, I appreciate Keith's redirection to what I consider to be the core practical implication that emerges from serious consideration of complexity and development economics (ref. also my previous posts re. Bill Easterly--1, 2, 3, 4, 5, and 6--as well as the inimitable Jeff Sachs): development economists should cut the crap, stop fixating on things that don't matter, and start paying more serious attention to the practical insights of entrepreneurs.

Complexity: It's Not as Simple as Bill Easterly Thinks It Is (It's Simpler)

2011-01-14T20:36:00.000-08:00

Folks over at @aidwatch have been getting into writing about complex systems these days. I'm not sure I know what they're talking about. And I don't think they do either.

Here's Bill Easterly writing today in the Guardian's Poverty Matters blog:

A popular topic in the aid blogosphere this week was not about Haiti or Ivory Coast or south Sudan but about complex systems, i.e. systems that cannot be reduced to a simple mathematical or statistical model, where actions often have unintended effects. [Link included as in the post]

Now, admittedly, this is just one sentence. But still, it would be difficult to come up with a more poorly informed summary of the nature of "complex systems" than the one Easterly offers here.

Why? The reason is that the core insight of the study of complexity--be it deterministic chaos, cellular automata (e.g. John Conway's marvelous "game of life") or agent-based modeling in general, to cite just a few of the many variants that loosely define this domain of study--is this: systems that are not just reduced to, but actually defined by, simple mathematical models, have the potential to generate extremely...well, complex behaviors. The classic example is the logistic map, an extremely simple function whose dynamics are highly complex:

Anyhow, the key point is that such complex systems, while entirely deterministic (that is, lacking any random element) generate behaviors that are indistinguishable from those of stochastic systems (systems driven by a random component). (When mapped in "state space" they also yield beautiful fractals...but that's another story.) Before the study of deterministic chaos (and with it "extreme sensitivity to initial conditions" a.k.a. the "butterfly effect"), determinism and randomness were understood to be opposites. So understanding that there were significants domains in which they were indistinguishable from one another was a pretty big deal.

The caricature of "complexity theory" that Easterly offers is in line with a body of work by Austrian economists that has sought, with greater and lesser desperation, to connect Friedrich Hayek's famous notion of "spontaneous order" in economics systems to that of "emergence" and "self-organization" in complex systems. This was a failed undertaking from the outset, nearly twenty years ago now. It is also one that I have some confidence Hayek himself would have judiciously avoided. The reason is that the problem that concerned Hayek (and von Mises before him) was not the emergence of complexity in the absence of randomness, but rather the impossibility of calculation in the presence of randomness (and its siblings--noise, and informational decay).

An illustration: In the "The Impossibility of Socialist Calculation," Hayek assails the now-forgotten Oskar Lange for making following assertion in an attempt at critiquing von Mises: "The administrators of the socialist economy will have exactly the same knowledge, or lack of knowledge, of the production functions as the capitalist entrepreneurs have." This is what Lange said; Hayek characterizes the claim, with his characteristic light touch, as "a blatant untruth, an assertion so absurd that it is difficult to understand how an intelligent person could ever honestly make it."

Now, let's pause to consider. If the essence of the problem faced by administrators of socialist economies was deterministic chaos as described above (the essence of unpredictability in complex systems) then Lange's statement would not be absurd. It would actually be correct: under circumstances of deterministic chaos there is no way the entrepreneur could have better information than the planner. But that's not Hayek's objection. He does not believe that Lange has failed to grasp the essence of extreme sensitivity to initial conditions. Indeed, his point is not fundamentally about dynamics at all. What Hayek is really talking about is the heterogeneity and localization of information. In other words, Lange is wrong because the entrepreneur has unique and specific information to which the planner does not have access:

The individual entrepreneur will not possess or require knowledge of general production functions, but he will currently learn from experience how at any given time variations in the qualities or the relative quantities of the different factors of production he uses will affect his output. This information relevant for and possessed by each entrepreneur will be very different from that possessed by others. To speak of the aggregate of such information dispersed among hundreds of different individuals as being available to the planning authority is pure fiction.

Given this, what do you think Hayek would say about a model of economic dynamics in which every economic actor not only possessed the same ability to observe local conditions, but followed the exact same deterministic rules? That is the essence of a complex system! But it is the opposite of a model built upon the heterogeneity of economic actors, and the impossibility of reducing their choices to simple models in the aggregate. In other words, a complex system is the opposite of "a system that cannot be reduced to a simple mathematical or statistical model, where actions often have unintended effects" (ref. above).

Now, since ours is a country in which liberty prevails, I suppose it's OK to employ the term "complex systems" to refer to things that are its opposite. Why not? It's all just silly science stuff anyway. So, henceforth, I am sure that Easterly will allow the same license to others who chose to reinvent technical terms--say "effectiveness," "confidence," "evidence"--in ways that similarly suit their fancy. Sound good?

Pakistan: Creating a Place for the Future

2010-12-20T09:22:00.000-08:00

UPDATE (5/9/2011): Entrepreneurship and markets study now available on the Planning Commission's website.

Over the weekend I worked with Lance Kramer (@kramerlance) of Meridian Hill Pictures to put together a video for the Growth Strategy Conference hosted today by the Government of Pakistan's Planning Commission:

The point of the video is to introduce a study that I recently completed with Elmira Bayrasli (@endeavoringe) and Sara Shroff (@samsaradc), at the request of the Planning Commission. However, the core principles reinforce points that Nadeem Ul Haque (@nadeemhaque), Deputy Chairman of the Planning Commission, has been making for some time now, including in this 2007 paper on "Entrepreneurship in Pakistan" and in this Spring 2010 talk at TEDx Lahore :

Here's how our report begins:

For six decades, Pakistan has faced, and overcome, conflict and calamity. Despite many obstacles, the country’s economy has grown steadily. At critical junctures, successive governments have adopted strategies suited to the circumstances of the day, and the nation has developed steadily due to these particular well-conceived initiatives. Yet, as a consequence of the reactive nature of policy formulation and implementation, the institutions of government are conditioned to think in terms of projects rather than strategies to support growth.

Today Pakistan confronts a new round of immediate challenges and urgent demands. Yet, it is precisely at this moment of apparent crisis—in the aftermath of a devastating flood and with security concerns continuing to dominate the national agenda—that the need to change the discourse about the country’s development has become most apparent. Reactive tactics and dependence on external aid are not helping Pakistan to develop or to realize its potential. Sustained and sustainable development cannot come from a collection of projects, no matter how well intended. A New Development Approach is needed: Building markets. Building opportunity. Building cities. Building governance. Including youth.

To realize Pakistan’s 21st-century potential, the nation’s political and business leaders must not only meet the demands of the present, but also—and perhaps more importantly—create a place for the future...

More to follow on this as the Planning Commission's process moves forward.

The Coolest Thing Ever, Pt II: Science, Technology & Revolution (X2)

2010-12-20T08:59:00.000-08:00

... If you haven't checked out the Google Ngram yet, definitely read this New York Times article about it, then try it yourself ... Endless explorations are possible. This one tells a pretty dramatic story of the history of industrialized countries since the Industrial Revolution (focus on the green peaks--eras of revolution that occurred during second half of 18th century and first half of 20th century):

science [yellow], revolution [green], technology [red], submission [blue] -- 1750-2008

Next?

The Coolest Thing Ever, Part I: The Millennial Discontinuity

2010-12-17T09:21:00.000-08:00

Check out what happens at roughly the year 2000 in the charts below, created using Google's just released Ngram tool (for description, see this and this):

Hope[red] = Fear [blue] -- 1800-2008

Science [green], Technology [blue], Innovation [red] -- 1800-2008

China [blue] > India [red] > United States [green] -- 1800-2008

Truth [red] > Beauty [blue] > Hatred [green] -- 1800-2008

HT Tom Murphy (@viewfromthecave) for pointing out on the first chart that the the trend reverses at 2000, after I Tweeted this chart:

Hope[red] = Fear [blue] -- 1800-2000

Initial verdict on Google's Ngram viewer: Coolest thing ever.

Afghanistan, Land of Opportunity (pt II)

2010-11-24T08:43:00.000-08:00

There's a certain mythology built about around conflict, as if the laws of physics or economics somehow don't apply.

Our image Afghanistan is of a soldier standing in front of a mud hut. That's not what's going on...Businesses are functioning, even thriving, in a very difficult environment.

We came across a number of medium-sized businesses that are finding opportunities.

Our perception going in was that physical insecurity would be the number one concern of business... But we found that Afghans were generally more concerned about the uncertainty in the business environment than they were about security.

Business feel very threatened by the Afghan government...One entrepreneur had this to say: "Insecurity is caused by the government and the Taliban. They are the same."

Afghanistan is donor drunk. In Kabul, people were gaming the system...We frequently found international organizations nominally "trying to help" actually distorting the system.

War should not be an excuse to resurrect failed policies, such as that centrally planned growth is necessary in a chaotic environment…

These snipets are from a talk that Jake Cusack and Erik Malmstrom (two a MPP/MBA candidates at the Kennedy School and HBS) gave as CSIS last Thursday, previewing their fabulous report on entrepreneurship and the prospects for real development in Afghanistan. The report is based on interviews that Cusack and Malmstrom conducted over the summer in Kabul, Herat, Balkh, Nagarhar, and Kandahar Provinces. (Thanks to Dane Stangler for bringing me along to this event, and H/T to the Kauffman Foundation for funding the study.) The full audio is here and is a must-listen for anyone interested in entrepreneurship and development. (When you're done, read Carl Shramm's excellent essay in Foreign Affairs that provides the context for this study.)

Back in January I wrote a post titled "Afghanistan, Land of Opportunity." Drawing heavily upon the success of Roshan, the first and still the leading Afghan mobile phone company (more on Roshan here, here, and here), I made the following argument:

Roshan is an example of the sort of "positive insurgency" driven by entrepreneurship, technology, and innovation that is the real driver of development. Want to "help"? Provide local entrepreneurs with skills development, mentoring, and other essential support (yes, funding as necessary).

The report by Cusack and Malmstrom takes this line of argument to another level, documenting that entrepreneurship is, indeed, alive and well in Afghanistan and clearly explaining why support for entrepreneurship must be the cornerstone of any coherent and potentially effective security strategy in that country.

But here's another question: Why did it take two Masters students to get these basic facts straight, and organize them in a manner that they could influence the design and implementation of policy, when the blue-ribbon task force recently assembled by the Council of Foreign Relations failed almost entirely to grasp or articulate them? Why is it that our security thought-leaders have such a difficult time getting past their fixation with the hardware of development to understand the software--entrepreneurship and business innovation in particular?

Granted, the (war) stories we hear about Afghanistan and the (entrepreneurship) stories we don't hear are linked. Entrepreneurs don't get very far under conditions of totalitarian repression, and the founding of Roshan was made possible by the ouster of the Taliban. But, there is a big difference between the systematic repression that existed under the Taliban (which is historically very rare) and the sort of everyday cronyism, neglect, or even anarchy that is far more typical of poor and poorly governed places around the world. Indeed, today's Afghan government ranks among the most corrupt in the world. However, it is precisely the failure of government to provide basic services, combined with a lack of formal regulatory constraints, that can create tremendous opportunities for entrepreneurs.

To claim, as many in development and security circles do, that an honest, stable government is a prerequisite for economic vitality is akin to claiming that a healthy, bountiful garden is a prerequisite for rainfall.

Just ain't so.

Give TODAY to Care Foundation Pakistan

2010-11-16T06:28:00.000-08:00

Mosharraf Zaidi (@mosharrafzaidi) has a great op-ed in The International News (Pakistan) that quite incisively corrects for the overstatements in my previous post:

Zaidi starts with the following observation:

Casual observers could easily conclude that first, under the Musharraf regime, and now under the democratic government of the PPP, Pakistan has been reduced to a rentier or beggar state (or both). The country is incapable of meetings its own needs and constantly needs to seek help with the bills. Of course, this kind of an observation would have to be made by people who are either deliberately ignoring the circumstances that have produced the current situation, or who are plain, outright ignorant. Three very large and very important shocks have rocked the Pakistani economic system in recent years-natural catastrophes, violent conflict, and global price shocks. While most countries can claim to have been victimized by one of these, and perhaps some can claim to have been victimized by two, there is hardly any country on the planet that has had to take on all three kinds of shocks at the same time. Perhaps most crushingly, these challenges have been thrust on Pakistan in a global environment where the narrative of Pakistan is of a country that is fully responsible for every problem that afflicts it (true but only partly), and therefore deserves, deserves to be left to solve those problems itself (not true at all).

He then notes that aid comes in many forms, from many sources:

The most important division we need to understand is the division between humanitarian assistance and development assistance. For most practitioners, this distinction holds limited value in a country like Pakistan, where so much of the recent assistance to Pakistan has been humanitarian, and where a lot of the “development” assistance, has been supplanted, or replaced by humanitarian programmes.

The bottom line:

The most important distinction for a country that is the size of Pakistan, and with the kinds of problems Pakistan faces, is who the aid is being given to. Aid can be provided to governments, or it can be provided to non-state actors-such as contractors, firms, and civil society groups. Government aid itself can be of several kinds, including budget support, and project aid.

Without understanding these distinctions, and knowing who is giving what, and to whom, the national conversation about international aid or foreign assistance is largely a rhetorical jousting session, not serious policy discourse.

All of which is to say that being a critic of official development assistance (as I am!) is not inconsistent with getting online to give today to Care Foundation Pakistan or other effective organization working to assist the millions of victims of Pakistan's recent floods.

Time for Security Experts to Pak It In

2010-11-12T09:36:00.000-08:00

[See follow-up post here.]

I recently found this excellent video clip of the talk that Pakistan’s Foreign Minister Shah Mahmood Qureshi's gave at the Brookings Institution last month:

Oh, wait... Wrong video! Sorry about that. This video here is of President Obama trying to get his G-20 buddies to buy into US monetary policy (..."What the world needs now is...more cheap credit!") Anyhow, read the transcript of the Brookings event and you'll get the idea.

I was reminded of PM Qureshi's talk this morning when I attended the release of Council of Foreign Relations Independent Task Force Report No. 65, "U.S. Strategy for Pakistan and Afghanistan." Scanning the text of the report and then scrutinizing the bios of task force members, I was not surprised to find that physicians and economists were in short supply. (It also appears that exactly one Pakistani & zero Afghans were on the Independent Task Force, but, hell, what do they know?)

Had physicians been present on the CFR task force they would have been able to identify drug-seeking and doctor-shopping behaviors evident in requests for escalated bilateral aid and military assistance commitments.

Had economists been present they would have been able to remind other task force members that no country in the world has ever developed successfully and sustainably as a consequence of military and official development assistance. Countries develop despite aid directed to national governments, not because of it.

Perhaps as a consequence of these absences, or otherwise due to reasoning-by-force-of-habit, the CFR has produced a report that completely misses the opportunity to fundamentally challenge the false premises of Af-Pak (or "Pak-Af") strategy, and, as a consequence, offers an implicit but nonetheless wholehearted endorsement of the ongoing co-dependency between Pakistan and the United States that...well, just might have something to do with that country's relatively disappointing pace of development and current security challenges. What's missing from the report is the one thing the the United States is best at, and the one thing that matters most to development in Pakistan as elsewhere: entrepreneurship and innovation.

Now, I know what you're thinking. Who is this moron? Was he hiding in some cave at George Mason University when 9/11 happened? Is he really suggesting that the Security Threat featured in the CFR report and at the center of the entire Af-Pak discussion is totally the invention of an aid-seeking client state (& the willing consumers of that narrative in the US)? Of course not! Pakistan is indeed a dangerous place. In the past three years as many as 5,000 people have died there in terrorist acts--large and small--including 18 just yesterday in a dramatic attack in Karachi just outside the Marriott where I stayed three weeks ago.

But let's get real here--5,000 fatalities is not even one-fifth the toll of Mexico's ongoing drug war, which is taking place less than an hour by black SUV from Disneyland. Pakistan--a country of 180 million people, covering an area twice the size of California--tends to rank below both Sri Lanka and India when it comes to terrorism incidence. Yet such a ranking--and a decades-long civil war--did not prevent Sri Lanka from making remarkable strides in its development--for example, achieving a plateauing of its population growth rates comparable to that achieved in China, but without a coercive "one-child" policy. And India...

As for the feasibility of entrepreneurial success in a country with a weak or a failed government--well, think about it, does a relative absence of regulatory hurdles and pockets to fill make it easier or harder for an entrepreneur to get started? Conditions for entrepreneurial entry into a market can quite easily be favorable even when conditions for established, large-scale business are not. If you're still not sure, read this story of the founding and dramatic growth of Roshan, the first and still the dominant mobile phone company in Afganistan; or watch this talk on entrepreneur-led development by the current head of Pakistan's planning commission; watch this video of Iqbal Quadir describing the role of entrepreneurship in development (start at 6:20); or browse through the Kauffman Foundation's growing set of resources on "expeditionary economics."

As for Al-Qaeda, what part of global terrorist network hasn't sunk in with the Af-Pak brain trust? Islamic Fundamentalist terrorism is a global phenomenon (Philippines anyone?) It's not going to be solved in the Swat Valley anymore than it is in Times Square. As I wrote three years ago:

In the long term, our counterterrorism policy should be more focused on addressing the profound shortcomings of the U.S. domestic response and recovery capability than on action in the Middle East. The countries most experienced in fighting terrorism (Israel, Spain and the United Kingdom, among others) learned long ago that resilience through well-developed response and recovery capabilities is a critical part of effective deterrence. The actions required to build such resilience are mostly taken at home, not abroad, and they involve deep collaboration between public and private actors. As Hurricane Katrina and its aftermath decisively demonstrated, many such actions have not yet been taken in the United States.

There is one way forward for the sort of Af-Pak policy represented in the CFR report released today, and in other Af-Pak reviews released in recent months. That way is the way to the door--out of Pakistan, and out of Afghanistan. We'll get there by working as equals with Pakistanis and others in the region who share our values and are doing things that make a positive difference (e.g. 1, 2, 3, 4, 5...).

As aid and military contractors gradually and gracefully exit, they will make room for members of the Pakistani diaspora seeking to reconnect with their country; investors from Dubai; deal-makers from Guangzhou; and, who knows, maybe a few regular-old Americans looking to make some money in a place that is poised for take-off.

Questions? Ask your doctor.

How (Yesterday's) Heroes Impede (Today's) Progress

2010-11-04T10:12:00.000-07:00

Paul Polak isn't just one of America's most remarkable "ascending market"* entrepreneurs--having founded and built International Development Enterprises (IDE), the treadle pump design and marketing organization that has brought improved livelihoods to more than 2 million smallholder farmers.

Paul also wins my vote--admittedly somewhat by default--as the country's leading development economist. (Sorry Jeff & Bill, but still more heat than light coming out of the ongoing Great Aid Debate. Not much of practical value emerging elsewhere in the academic literature on development, including RCT wave.) He recently authored a powerfully insightful post titled "The Birth and Death of Big Institutions." Here's how he starts:

The failure of development is closely tied to the ossification of big institutional structures.
The World Bank was born as a vehicle for reconstructing Europe after World War II, a task it carried out with amazing success. But when it morphed into a massive institution to address global poverty, it didn’t do so well. Schumacher launched a revolution in design with his admirable book, Small is Beautiful, but the appropriate technology institutions that emerged from it became ossified, failed to address market forces and died.

I'm about to walk over to the World Bank for the 2nd half of the Tech@State Civil Society 2.0 meeting. So I'll have an opportunity this afternoon to reflect on this specific observation. But the point Paul is making in this blog post is much bigger than the World Bank, and even much bigger than "development" as it is narrowly conceived.

What I understand Paul to be saying is that the core issue facing society is not more or less government control, or whether markets should have greater or lesser scope in the allocation of resources. What really drives societal change is the manner in which both political and economic incumbents establish and maintain advantage. That is the core point of Paul's blog post. It is why entrepreneurship matters.

Read this post twice, then reconsider your takeaways from developments of the last week, the last month, and the last year. Much about the change that surrounds us is not how it seems, or how it is sold.

* Ascending markets are markets for the global majority--elsewhere sometimes referred to as "bottom of the pyramid" which is a term that does make any sense to me so I don't use it.

Why Democrats Lost and Republicans are Losers

2010-11-04T09:21:00.000-07:00

Why Democrats lost:

For Democrats, the core challenge is not absence of principle but rather obsolescence of purpose. For at least three generations the Democratic Party has been, or at least has presented itself as, the party of countervailing power. Notwithstanding attempts at a course-change undertaken first by Bill Clinton and now by Barack Obama, the identity of the Democratic Party is still deeply tied to the tensions and triumphs that for decades characterized politics within the Iron Triangle: Big labor exists in opposition to large corporations, and government must be vigilant if it is to protect citizens and workers from abuses perpetrated by powerful private actors. In fact, big business and big labor are functional allies, and government isn’t protecting us from either one; rather, it is under pressure to prop both up without a justifiable economic rationale. This Democratic vision is to today’s reality what an AT&T rotary dial phone is to Gmail.

Why Republicans are Losers:

Take the Republicans. Faced with a crisis of mammoth proportions, congressional Republicans closed ranks to reject a proposed economic stimulus package on the grounds that the bill contained, in the words of Senate Majority Leader Mitch McConnell, “unnecessary spending that doesn’t create jobs now.” This was a principled stand minus one critical element: principle. The travesty of “don’t-tax-but-spend-anyway” Republicans trying, once again, to portray themselves as advocates of fiscal discipline was actually exceeded in this case by the absurdity of their objecting to the composition of the largest economic stimulus program in history on the grounds that the money would not be spent quickly enough. At a time when we need thoughtful assessments attuned to the longer term, here were the Republicans complaining that policy was not short-term enough! Unable to make a credible case for either total inaction in the face of crisis or yet another round of broad-based tax cuts, congressional Republicans were effectively reduced to playing the role of arch Keynesians.

... from my 2009 essay with Zoltan Acs in The American Interest...

Will anti-immigration idiocy and empty blather about job-creation through budget cuts--the "NO everything" strategy absent any positive program of action--continue to be the order the day from the New Kings of the Hill? Or will Mitch & Co. see the light and decide that they are in Washington to do something other complain about people in Washington.

Will the genius trust that is still in place at the White House break free at last from the Ghost of Dems Past and craft a vision for the future that is really about creating the conditions for the "the risk-takers, the doers, the makers of things" to thrive?

Hold your breath America!
We'll first turn first BLUE
And then turn RED
If we keep it up this way
We'll all be ....

It's the Toilets

2010-08-10T07:27:00.000-07:00

Not finding current data regarding global trade sufficiently depressing, a number of commentators on my weekend post sought discouragement closer to home. One impassioned observer noted that unemployment in the U.S. is now 20%; another got a bit closer to the truth by noting that the most recent broad-based unemployment number (U-6) is 16.5%. All of which seems like U.S. unemployment is getting in the vicinity of The Great Depression peak of 25%.

Well, it's not. The reason is that the 25% number is most closely comparable to today's U-3 unemployment number, which is 10%. If you apply U-6 methods to historical data, you will get an unemployment figure for the peak of The Great Depression much higher than 25%. (One attempt from the blogosphere here.) The conclusion being that...

But the picture for the present--as opposed to 1930s--is even better than would be suggested by looking at the above chart. Recapping earlier blog posts of mine, I added in a comment to my own post:

In the 1930s 1/3 of Americans didn't have a toilet, unemployment peaked at 25% (not 10%, where we are today), and the average life expectancy was about the same as it is in Ghana today. The current recession is not comparable to The Great Depression. Period.

One well-informed reader (thank you dwg) offered this response:

And your statement as regards toilets... I'm not quite sure how to address it. An apples-to-apples comparison is evaluating the drop in real standard of living; no one is saying we've moved back to the income levels of the Great Depression; your argument there would appear either a gross misunderstanding of the terms of the debate or a straw man. Even those of the Great Depression era were better off than a peasant in the Middle Ages by many terms of reference. The issue here is: how many people are suffering a diminishing of their quality of life, proportional to their baseline expectation prior to the downturn?

So to be very clear, the toilet comment isn't a straw man, it's actually a core point here. And that point is that absolute levels do matter.

Look at it this way: Is (evil, Greenwich-CT-dwelling, CDO-trading) hedge fund manager whose income drops from $2 mil/year to $200K really in the same position as the owner of a shuttered auto dealership who was making $200K/year and now is bringing home $20K? I'm sure you'd agree--No. Well, you know what fraction of the world's population makes over $20K/year? In terms of individual-wage earners, about 2%. That's us. We are to the rest of the world what hedge-fund-guy is to us.

These absolutes may not have mattered much in the 20th century but in the 21th century, they do. All those poor schmucks out there in the "developing world" who are still pissing into open sewers are--surprise!--the people who are going to be driving global growth for the next 50 years. That because growth happens where there are unrealized gains to productivity. And those people--people who matter a lot both to America's future and to its recent past (ref. Greenspan's "conundrum")--aren't taking toilets for granted.

So the really big thing Krugman's missing isn't the trend in the global trade data after all. It's the toilets.

Krugman vs. Reality (Reality Wins)

2010-08-08T09:09:00.000-07:00

Here's what Paul Krugman had to say about the Great Recession a year ago: “When it comes to international trade, actually it’s not the Great Depression, it’s worse." Yes, he said that.

Krugman's attempt on that occasion, in his column, and elsewhere to draw comparisons between the magnitude of the Great Depression and the recent recession and were absurd for myriad reasons then as they are now, as I noted at the time here, also more recently here and here.

Now the speculation is over and the extent of Krugman's misread is evident. As The Economist reports this week, global trade and global manufacturing are surging back:

At first, the recession did hit trade hard. Global GDP fell by 0.6% in 2009 while the volume of world exports dropped by 12.2%. But whereas the Depression saw trade decline for at least four years, this time the rebound has been quick, and sharp. By May this year, emerging-economy members of the G20 were importing and exporting around 10% more than their pre-crisis peaks (see chart). Rich-world trade has recovered from the trough too, though it has not yet made up all the ground lost since the credit crunch began.

As it turns out, there is nothing Depressing about current prospects in the global economy...unless, of course, you happen to be Paul Krugman.

At least he's still got his Nobel Prize to keep him company while the rest of us enjoy the good (if not unexpected) news.

ADDENDUM: An response to all the ~~praise for~~ ~~agreeement with~~ comments on this posts.

First, Hooray for Paul Krugman. He is an elegant theoretician of international trade. Hooray again for Paul Krugman.

Now that were done with the hero worship, two additional points:

Yes, the quote in the first line above came from remarks Krugman delivered a year ago. My question is this: How many times does Krugman have to compare the current recession to The Great Depression before he becomes accountable for having made that claim? It is clear why Krugman wants to advance this argument ("What Paul? The stimulus package might not have been big enough? You don't say..."). But at some point, if the sky doesn't fall, it is fair to say--sky's not falling, Paul.
Along the same lines, but from an analytic vantage point: My 5-year old daughter can look at a chart and say "that line is pointing downwards." My 12-year old daughter can look a chart with two lines and say "Line A is more steeply sloped than Line B." Neither of them has a Nobel Prize (yet). So to say, as David more or less does (below), "He made that statement a year ago. How was he to know that the trend would reverse itself...completely. Invalidating his comparison...entirely." Indeed, how was he to know? Well that is exactly why he is paid the big bucks. That is why he has the big reputation. Because we expect that he can do more than just compare the slopes of two lines.

In scholarship, it's not what you know, it's how you know. Krugman is in a category with other macroeconomists whose projection of certainty goes far beyond the knowledge base on which such certainty can possibly be based. When events point out alleged experts' (potential, conditional even!) deficiencies in fundamental insight, it is worth noting. That is the point of this post.

(And by the way: I am not fundamentally opposed to analytically-based extrapolation based on trends. You just have be straight about what you really know with confidence, and be prepared to accept responsibility for your claims when any speculations made turn out to be wrong.)

New Growth Theory: Not New, and Not Useful

2010-08-07T14:55:00.000-07:00

In a recent article in The Atlantic featuring Stanford University professor Paul Romer, Sebastian Mallaby opens with the following story familiar to all economists:

Starting in the late 1980s, [Paul Romer] produced a series of papers that changed the way his profession thinks about economic growth; his most celebrated contribution, published in 1990, “was one of the best papers in economics in 25 or 30 years,” in the estimation of Charles I. Jones, a colleague of Romer’s at Stanford. Before the Romer revolution, theorists had explained an economy’s growing output by looking at the obvious inputs—the number of hours worked, the skills of the workforce, the quantity of machinery and other physical capital.

But Romer stressed a fourth driver of growth, which he termed simply “ideas,” a category that encompassed everything from the formula for a new drug to the most efficient sequence for stitching 19 pieces of material into a sneaker. In statistical tests, the traditional inputs appeared to account for only half the differences in countries’ output per person, suggesting that ideas might account for the remaining half—and that leaving them out of a growth theory was like leaving the prince out of Hamlet. And whereas the old models had predicted that growth would slow as population expansion put stress on resources, and as new investment in skills and capital yielded diminishing returns, Romer’s New Growth Theory opened the window onto a sunnier worldview: a larger number of affluent people means more ideas, so prosperity and population expansion might cause growth to speed up.

Now, just for the record, this is nonsense. Every year I have to guide one or more doctoral students through the process of unlearning this little bit of mythology--and with it the notion that New Growth Theory constitutes some sort of great breakthrough in the history of ideas (or even just economics for that matter) which we should all applaud.

I'll explain as quickly as possible because the origin of ideas in economics is a topic of almost no interest to anyone, including me. But some clarification, for the record, is in order:

1) The first clarification is that Romer's contribution to the theory of economic growth was very specific and technical: He found out how to make the mathematics of an "endogenous growth model" work. He can rightly be credited with reviving a moribund field (economic growth theory), but it is an exaggeration to claim that he created the field, and simply incorrect to assert (as Mallaby does) that "before the Romer revolution, theorists had explained an economy’s growing output by looking at the obvious inputs—the number of hours worked, the skills of the workforce, the quantity of machinery and other physical capital."

To the contrary, the ideas and a fair share of the modeling behind the model Romer developed (initially for his dissertation and then in a handful of papers on which his fame primarily rests) had been worked out more than twenty years earlier by a group of economists notably including Karl Shell, Hirofumi Uzawa, and the great Kenneth Arrow. Read the work of Schookler, Nelson, Phelps, or many others from 1950 and 1960s (see e.g this classic volume) and earlier still the work of Joseph Schumpeter, and it is evident that, long before Paul Romer was born, scores of economists had written brilliantly on the topic of how ideas create growth and development. (This history is well understood by individuals who are close to the events in question--including Romer himself, obviously--and has been ably chronicled by David Warsh of the Boston Globe here and here [e.g. pp. 155-156]).

2) The second clarification is that, of the two ideas most closely identified with "New Growth Theory," one is wrong and the other is so obvious as to be of no practical use to policy-makers or businessmen.

Let's start with the idea that's wrong, namely, that because ideas are "non-rival" and "non-excludable," economically relevant innovations (Romer actually uses the term "recipes,' as I have in work with Karl Shell and Stuart Kauffman) are characteristically subject to "knowledge spillovers." In plain English "non-rival" means that one person's use of an idea does not keep another person from using the idea; "non-excludable" means that it is impossible to keep a person from using an idea once it is "out in the open;" and "knowledge spillovers" refers to the costless transmission of ideas that are non-rival and non-excludable.

This all sounds well and good, and versions of these few lines have led a generation of economists to buy into the notion that "knowledge spillovers" are somehow the fuel that drives development and growth. But the whole construction only makes sense in the lecture room. In fact, the ideas that actually propel growth and development are overwhelming uncodified, context-dependent, and transferable only at significant cost (econ-speak: tacit knowledge dominates, information asymmetries are the norm, and transactions costs are significant, see here and here). While "knowledge spillovers" of the type celebrated by Romer certainly exist, they are of marginal relevance in the practical work of economic growth and development. (Don't start talking to me about webpages and pirated music videos here--those are a different story altogether from production recipes.) For more, see my prior post on this topic, and also this absolutely brilliant (short and readable!) book by Robert Solow--or for that matter, Schumpeter's Theory of Economic Development.

Now as to the idea at the core of New Growth Theory that is so obvious as to be useless, it is the one featured by Mallaby: "Romer stressed a fourth driver of growth, which he termed simply 'ideas,' a category that encompassed everything from the formula for a new drug to the most efficient sequence for stitching 19 pieces of material into a sneaker."

Let's be real here: Was Paul Romer really the first person to figure out that new ideas don't just fall out of the sky, but actually require effort and investment to develop? Of course not! My guess is that you would have had a very hard time finding a single individual involved in corporate research and development or technology entrepreneurship in 1986--when Romer published his first "seminal" paper-- that believed that the ideas that drove the growth and development of societies just sort of happened on their own. Indeed, consider this observation by Ralph Flanders, co-founder of America's first venture capital firm, written fully 40 years before Romer published his work:

The continued maintenance of prosperity and the continued increase in the general standard of living depend in a large measure in finding financial support for that comparatively small percentage of new ideas and developments which give promise of expanded production and employment and an increased standard of living for the American people. We cannot float along indefinitely on the enterprise and vision of preceding generations. To be confident that we are in an expanding, instead of a static or frozen economy, we must have a reasonably high birth rate of new undertakings.

Is our bar for scholarship so low that ideas obvious to everyone but scholars can constitute great advances in knowledge? I really hope not.

All of this matters because the slavish and uncritical repetition of the New Growth fable (ref. Mallaby article above) has led even the most thoughtful economists to believe that this fable somehow corresponds to reality and the ideas of New Growth Theory are of practical relevance. A recent post by Bill Easterly serves as an illustration:

Response to RT @auerswald People r (Not) Statistical Noise http://bit.ly/bAwtpQ:

on objection that small bursts of creativity can have very large effects. Um, yes, it’s called non rivalry of ideas (and music scores). Many people can simultaneously use the same idea/score. And everyone wants to use the best ones. So the scale effects can be Gigantic. I guess I had noticed I’m not the only one who likes Mozart.

Easterly misses what macroeconomists customarily miss: that the process by which "small bursts of creativity" have large effects has a name, and it is not "non-rivalry". It is entrepreneurship.

Entrepreneurship involves the search for ideas that are in fact, rivalrous and excludable (at least temporarily) out of which ventures with proprietary value can be created. The impediments to entrepreneurship that matter most are not lack of appropriability of returns (as New Growth Theorists almost invariably preach) but rather the everyday battles involved in communicating ideas, building trust, and making deals (more here and here.)

Of course, the most remarkable achievement on Paul Romer's vita is that he is economist who has also managed to become a successful entrepreneur himself--having founded and sold the online economics teaching company, Aplia, which I have used in my own courses. So Romer certainly knows all this, and can't be held responsible for the creation of fables in which he is a featured player.

But to everyone else: enough with the New Growth Theory already. It wasn't new even 30 years ago, and it's not useful now.

ADDENDUM: Lest my macroeconomist friend--oops, that should "friends"--think me too ungenerous, here are five papers and one book written about economic growth in the past three decades that I do think contain real insights of conceivable value to business strategist or policy-makers:

Robert Lucas, "Making a Miracle" because of its integration of insights regarding firm learning curves and its clear articulation of the fact that sustained growth requires the constant innovation of new goods and services
James Schmitz, "Imitation, entrepreneurship, and long-run growth," great paper addressing limits to appropriability of knowledge in entpreneurship and implications for growth theory
Robert Solow, Learning from Learning by Doing, absolutely brilliant summary of the drivers of growth and how they have been represented by economists (including insightful critiques of the "New Growth" literature)
Claudio Michelacci, "Low Returns in R&D Due to the Lack of Entrepreneurial Skills," a rare paper in the growth literature to explicity address the role of entrepreneurs in converting basic science inventions into market-ready innovations (see this for description of the practical realities)
& best of all, Martin Weitzman, "Hybridzing Growth Theory" and "Recombinant Growth," for linking combinatoric possibilities (ref. Schumpeter's characterization of entrepreneurship) to growth, and connections to earlier, highly prescient work by Weitzman on the Soviet Economy.

These are but a few among many others, of course.

Non-rival ideas: Great for growth theory, but not for growth practice

2010-08-06T14:27:00.000-07:00

This long post is drawn in part from prior work of mine on entrepreneurship and economic growth including "The Simple Economics of Technology Entrepreneurship: Market Failure Revisited."I was prompted to write it by this article in The Atlantic, which put me over the limit of exasperation with uncritical views of the actual contribution to the study of development made by "new growth theory."

If nature has made any one thing less susceptible than all others of exclusive property, it is the action of the thinking power called an idea… He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me. That ideas should freely spread from one to another over the globe, for the moral and mutual instruction of man, and improvement of his condition, seems to have been peculiarly and benevolently designed by nature…

—Thomas Jefferson, Letter to Isaac McPherson, August 13, 1813

As anyone who has been within a mile of a macroeconomics course in the past two decades is well aware, the big idea in growth theory in the past 20 years is something called endogenous growth. This is the insight that economic growth to technological and organizational innovation doesn't come out of nowhere. It actually requires work and investment.

Yes, that's the big insight.

Anyhow, the device that allows societies to escape the inevitable boundedness of any given project or set of projects and grow far into the future is something call "increasing returns to scale." This property allows some outputs of human intiative--notably, new ideas--to add more to economic outcomes than it takes to produce them. Ideas are particularly interesting because they are, in technical parlance, "non-rival": one person's use of an idea does not diminish its usefulness to someone else. As Thomas Jefferson noted two centuries ago (see above): "He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me." Credit for this insight usually goes to Stanford economist Romer, on the based of set of more-or-less papers based on his dissertation that he published between 1986 and 1994.

This concept of non-rival ideas is intuitively obvious and seemingly interesting--even if it wasn't really Romer's. (Ref. the work of Karl Shell.) Only one problem: In it's usual application to growth, it's mostly wrong.

Here's why: While codified knowledge (books, published patents) may be non-rivalrous, in most cases it is either excludable (patents, documents protected by trade secret) or not directly applicable to production (basic research papers). The exceptional cases of published, unprotected "designs" are for obvious reasons, not likely to offer significant opportunities for entrepreneurs--unless combined with other information in novel and not easily imitable ways. (The phenomenon of "orphan drugs" is illustrative.)

Furthermore, patent protection is available to innovators in all industries, yet significant inter-industry differences exist in the extent to which patents allow persistence of profits. The differentiation is due to ease of imitability, which in turn relates to technological complexity. As MIT economist Rebecca Henderson and colleagues noted in a paper a decade ago:

[R]apid imitation of new drugs is difficult in pharmaceuticals for a number of reasons. One of these is that pharmaceuticals has historically been one of the few industries where patents provide solid protection against imitation. Because small variants in a molecule's structure can drastically alter its pharmacological properties, potential imitators often find it hard to work around the patent. Although other firms might undertake research in the same therapeutic class as an innovator, the probability of their finding another compound with the same therapeutic properties that did not infringe on the original patent could be quite small."

With regard to codified knowledge that is partially excludable, a critical issue is the extent to which partial imitation, or copying, preserves the quality of the original. In many, perhaps the majority, of economically important contexts, it will not.

In recent years economists, sociologists, geographers, and historians have addressed the transmission of knowledge, particularly increasing returns due to knowledge spillovers, in a large and varied literature. The empirical work on knowledge spillovers and parallel historical work have documented what the theorical work largely missed: the decline, during the twentieth century, of small scale craft-based production, and the corresponding rise of science based innovation and complex system development projects.

Consider Alfred Marshall's formulation of knowledge would be "in the air," frequently cited as the original articulation of the concept of knowledge spillovers. For craft-based production---glass making in Bohemia (Czech Republic), Champagne in Rheims (France), windmill production in Herning (Denmark)---there are solid reasons to believe that knowledge is "in the air." Masters share tacit knowledge with apprentices, whose core capability lies in replicating centuries-old techniques. New approaches are viewed with suspicion, and are accepted in to common practice only after considerable scrutiny. Science-based innovation and system development are another matter.

That Marshall's observations predated Romer's by nearly a century is of significance. The introduction of new products today (as opposed to a century ago) typically involves overcoming both technical and market risks. When products are based on truly novel technology, or create new markets, their introduction often requires new organizational forms. The knowledge that drives long term growth in a modern economy is thus detailed, highly technical, and context specific. It is an asset of the firm, whose development may be a consequence of explicit investments, "passive learning," or both. Ideas that are easy to copy will do not represent opportunities for entrepreneurs.

Yet to the extent that the knowledge developed by an incumbent firm is the solution to a complex problem, even slightly imperfect copying will likely lead to substantially degradation of performance. Active investment may be required to develop the "absorptive capacity" needed to make use of the information.

Whether knowledge about modern science based innovations is "in the air" or not is---literally and figuratively--immaterial. Only specialists will understand what it means.

A Response to "Why Sharing the Wealth Isn't Enough"

2010-08-06T08:32:00.000-07:00

In his column today prompted by the Billionaire's Giving Pledge, Steven Pearlstein of the Washington Post kindly referred at length to an essay that Zoltan Acs and I published in The American Interest last Spring. Here's what Pearlstein had to say:

In an article last year in The American Interest, Philip Auerswald and Zoltan Acs of George Mason University suggested that the defining characteristic of American capitalism is not only an entrepreneurial culture that generates great wealth but also a philanthropic infrastructure that recycles that wealth in ways that create more opportunity, more growth and more wealth. This virtuous cycle, they concluded, is the "inner dynamic of American capitalism and the source of its prosperity." They contrast that to socialist countries, where philanthropy is weak and government takes on the recycling role, or less-developed countries, where oligarchs' fortunes are not recycled at all.

That's a pretty good summary. But Pearlstein isn't buying our case that philanthropic giving is a cornerstone of American capitalism:

Auerswald and Acs are known as institutionalists because of their focus on institutional arrangements and behavioral norms in explaining why economies work. Not surprisingly, their views have been embraced by business types and free-market conservatives who shamelessly use them to justify small government, low taxes and minimal regulation.

... Yes, philanthropy has been important, but so have unions, which ensured a fair distribution of corporate profits. So have antitrust laws that prevented successful companies from snuffing out entrepreneurial competition. So have norms of corporate behavior that made it socially unacceptable for top corporate executives to pay themselves 350 times what their workers made. And so have tax-supported schools, playgrounds and hospitals that were good enough to be used by rich and poor alike.

He goes on to point out that income inequality is increasing, the middle class is disappearing, and " it will take much more to revive the virtuous cycle by which wealth begets opportunity which in turn begets more wealth."

Considered in an historical context, I really don't disagree with much of what Pearlstein has to say. Indeed, I agree that "Sharing the Wealth Isn't Enough." Dewey the development of American public education? All for it. Unions, "the people who brought you the weekend"? Kudos.

But systems of public education are not distinctly American. Neither is organized labor. (Furthermore the same unions that once brought us the 40-hour work week have more recently shared culpability in bringing millions of U.S. manufacturing workers the less-desirable zero-hour workweek.)

What is distinctly American is a system of institutions--didn't really think of myself as an institutionalist, but I guess I am one--that allocates resources to successful entrepreneurial initiative, allows for the accumulation of wealth, and then--importantly--encourages the transfer of wealth back into the economy not only through consumption and investment (that was trickle down), but also through philanthropic giving. This is the process that brought us the National Gallery of Art, Harvard, Stanford, and now an expanding world of philanthrocapitalism that is funding some of the world's most promising entrepreneurial solutions to global challenges. But, of course, such a system does not arise out of nowhere. Political leadership and policy define the context and can be important drivers in advancing entrepreneurship and innovation. As Pearlstein himself has recently noted, even regulation and standard-setting--often incorrectly cast as an enemy of entrepreneurial initiative--can serve to drive innovation.

That's one thing. Another is that Pearlstein's lament about the hollowing-out of the American middle class--while accurate as stated--misses a bigger trend moving in the opposite direction. The fact is that, on a global scale and using measures that mean more than income, inequality has been shrinking dramatically. Skeptical? check out this 2007 talk by Hans Rosling (yes, I know I'm big into Hans Rosling right now):

The entirety of the experience of the United States over the last decade has been a sideshow to this larger global change, driven by increasing wealth in previously poor places (ref. e.g. Greenspan's "connundrum" and role of China's savings in our real-estate bubble).

Bottom line: Do I think that the U.S. at the moment could benefit from looking a tad bit more like Canada or (God forbid!) France? Along some dimensions, such as health care and standards for energy efficiency, I would say yes. But over the next quarter-century most of the world will benefit hugely from looking a lot more like the United States in at least this respect: building institutions to support entrepreneurs and celebrating philanthropists the put their wealth in the service of society.

People Are Not (Statistical) Noise

2010-08-06T06:58:00.000-07:00

Bill Easterly had an interesting post yesterday about individual creativity and economic growth. It concludes

I learned from Herr Mozart that musical creativity, like economic growth, proceeds in fits and starts, and we should not be so obsessed with short term fluctuations.

Also I would not dare apply the words “random” or “lucky” to The Marriage of Figaro. Bursts of creativity, like bursts of rapid growth due to, say, entrepreneurial breakthroughs, may be temporary but they are not “random” in any mechanical sense. They reflect the best of humanity’s purposeful activity, and they stay with us forever even if the original creative moment is fleeting.

Bill's post is written at the level of analogy, which is fine. But there is in fact a real-world connection between individual creativity and change at the scale of particular communities or even entire societies. The nature of that connection is not only an interesting puzzle to ponder, but in my view the fundamental question in the study of economic development.

There are at least two ways of posing the question. The first is: Are people just noise? Creativity fluctuates at level of individual, but simple laws of statistical aggregation might seem to imply that societal outcomes should be smooth. They are not. So why does the law of large numbers not apply in cases of discontinuous societal change prompted by individual action? How is it that small-scale fluctuations in talent and creativity, both among people and within a single life, end up having large-scale impacts?

There a lots of answers in theory to this version of the question--herding & other types of increasing returns, chaotic dynamics, self-organization. There is also a rich tradition of addressing something like the same question in philosophy and literature (best in my view: second epilogue to War and Peace and Nietzsche's "Philosophy of History"). I also started in this direction using a culinary, rather than musical metaphor, a while back. These ideas could the be subject of multiple future posts, essays, or books...or, maybe, none at all. Because I don't think that this version of the question is the most interesting.

The interesting version of the question is a much more practical one, namely: Are entrepreneurs just noise? Easterly's earlier post re. system change suggest that they just might be. His link bait for that post: "The most important thing I can ever say: development is NOT about solutions, it IS about problem-solving systems."

An excellent recent post by @penelopeinparis gives solution-finders a bit more credit:

I don’t know for sure, but I suspect that when a bunch of crazy French doctors decided to create Doctors without Borders during the Biafra war, everyone around them must have thought they were absolutely off their rockers.

What about Henri Dunant, the idealistic businessman whose disgust with the horrors of Napoleonic wars lead to the creation of the Red Cross? (Did you catch that? Henry Dunant was a businessman with no experience in anything remotely connected to humanitarian aid)

There are several types of aid entrepreneurs; a fact that sometimes seems to get lost on critics and supporters of NGO entrepreneurs alike. Not everyone is an Henri Dunant, Bernard Kouchner or Greg Mortenson,...

The real question, for me, is how do we support the kind of innovation that does create positive change, all the while weeding out all the useless and potentially harmful amateurish initiatives?

I fully concur that this is the real question. Indeed, the direction @penelopeinparis appears to be going is, well, music to my ears.

UPDATE: @bill_easterly offers this pithy rejoinder via Twitter: "My response on giant potential scale: hello nonrival ideas"

People + Employment = Prosperity

2010-07-16T04:35:00.000-07:00

Hans Rosling makes the population connection...

Alice Amsden makes the employment connection

Falling population growth rates---a plus for development---tend to respond more to changes in paid employment than to changes in poverty alleviation.

Conclusion:

People + Employment = Prosperity

The Truth About "Free Markets" and "Market Failure"

2010-05-29T10:26:00.000-07:00

Slide 12

[I]t is possible to conceive of better worlds that the one in which we live. But the problem is to devise practical arrangements which correct defects in one part of the system without causing more serious harm in other parts.

—Ronald Coase, "The Problem of Social Cost"

These days everyone has an opinion as to what's wrong with "free markets" and what government should go about it.

On one end of the spectrum are those who remain persuaded that government intervention in the economy inevitably distorts private incentives, and thus that "free markets" function best when they are left alone. In other words, "If it ain't broke, don't fix it."

On the other end are these who believe that government must act assertively to curb market excesses and rein in corporate power. In other words, "It is broke. Fix it now."

A technocratic middle reconciles these two extreme viewpoints by invoking the concept of "market failure." The logic is presumably simple: a role for government exists if, and only if, a market failure exists. The burden to policy lies in establishing the nature of the market failure, and then specifying the mechanisms by which it can be corrected.

Unfortunately, none of these three rules of thumb is of much use as a guide to policy making in a world where markets are as temperamental as a tent-full of toddlers and market failures are as abundant as a bankrupt banker's bonus bag.

This is a problem. To illustrate with an analogy, let's say that the issue under consideration were treating cancer, instead of fixing markets. Suppose scientists understood what cancer is, and how to treat it. What if, instead of working with a definition based on science, every doctor decided to make up her own definition of cancer. For one doctor, it would be any illness that makes people suddenly lose weight. For another, it would be any illness resulting in death. Using the first definition, healthy people would be treated with chemotherapy. Using the second, treatment would only be offered to patients when already dead. Not good.

Similarly economists know what market failure means. However, at least some legislators in charge of its treatment exhibit a persistent disregard for the term's correct definition. As a consequence, where some may see potential government programs everywhere they turn, others only see them when conducting economic post-mortems--of which we have witnessed more than the usual number in the two years.

In its usage by economists, market failure is a concept that is defined in terms of "perfect competition." Contrary to caricature, perfection in this context here means a state of the world that is fundamentally unattainable, not one that is ultimately desirable. The conditions defining perfect competition are numerous: everyone is small relative to the market (no monopoly); all information is public (no secrets); there is no uncertainty or inter-dependency (no surprises); and transactions costs costs are zero (no lawyers). In another words, a fantasy land.

The entire point of creating such an idealized, fundamentally unrealistic model of markets was to provide a stable point of reference for the study of the real world, in all of its astounding diversity and complexity. Indeed, after the early 1970s, economists more or less stopped studying perfect competition. There was nothing left to study. Attention turned almost entirely to another topic: market failure. And what is market failure? Quite simply every situation that isn't perfect competition.

The first takeaway, then, is that the "market failure" test for government intervention is a misleading one. Market failures so permeate economic reality that "correcting" every one of them to arrive at a frictionless, riskless, perfectly efficient alternate reality is a dangerous fantasy.

The second takeway is those who seek naively to equate "free markets" with economic efficiency are engaged in horse-and-buggy reasoning that has no place in any serious, 21st century discussion of economic challenges and their solution. From the standpoint of economic theory backed up by decades of empirical analysis, there is absolutely no reason to presume that "free markets"--markets in which, for example, business opportunities exist and companies pursue them--are "efficient." This is because, under conditions of rigorously defined "perfect competition," business opportunities simply do not exist; there are no proverbial $20 bills lying on the sidewalk. Consequently, even in the total absence of any government intervention, substantial inefficiencies in market outcomes are to be expected whenever participants in markets don't share the same information, the practices of firms differ, and the environment is characterized by significant uncertainties.

To paraphrase the Nobel laureate Ronald Coase, well-designed policy must begin with a situation approximating that which actually exists. The situation that exists in any real-world market is one rife with "market failures." From such a starting point, a change in the market environment created by government may move the market either towards, or away from, efficiency (to say nothing of equity!). It certainly is possible to conceive of worlds in which market failures were less dominant. But the problem is to devise practical arrangements which correct defects in one part of the system without causing more serious harm in other parts.

Unsure? Ask your doctor.

(More to follow on the closely related topic of why "business-friendly" and "entrepreneur-friendly" environments are not the same.)

The Smartest People in the Room

2010-05-07T17:24:00.000-07:00

I'm a person of simple pleasures. For instance, I count any day a success when I have the opportunity to use the word "eviscerate." Take Thursday. That was the day when I wrote this blog post about Presidential Study Directive 7 (PSD-7). In additional to employing the word "eviscerate," the post expresses considerable enthusiasm for the direction of the global development rethink currently going on at the White House.

Yesterday NYU development luminary Bill Easterly had the kindness to not only take notice of the post but also to point out to me that I managed to misrepresent a blog post by Aid Watch staffer Laura Freschi as one by the Maestro himself. (Arrghh. Guilty! Though, in my defense, how was I to know that anyone under the age of 50 could so persuasively convey the jaded air of a veteran development insider? Easterly trains his people well!)

It turns out that Easterly is considerably less sanguine than I am about the potentially transformative potential of PSD-7:

Professor Auerswald (sorry for my teasing you in this post), you do seem to have a theory of social change in which promises about government intentions to someday change priorities are a major force. My experience of many years of observing such statements is that they are more like New Year’s resolutions that are repeated every year.

My rebuttal to this? My counter-attack? None whatsoever. Easterly is right. My last post is probably mostly wishful thinking. What is the likelihood that awareness of the exigencies and opportunities of the moment will be enough displace entrenched bureaucracies and transform decades-old habits of thinking? What is the likelihood that an esoteric administrative exercise like PSD-7 will turn out to have made a difference in the lives of actual human beings? Even people like me who were actually born in Washington DC (yes, some of us exist) recognize the obstacles that stand in the way of such outcomes.

As Easterly is, I believe, aware from any one of my six previous posts calling into question the coherence--indeed the very existence--of his own theory of social change (1, 2, 3, 4, 5, and 6), I do not in fact hold the view that the United States government (USG) is likely to be a "major force" in global development. If anything, I would say that the causality is reversed: the point of my post, and a core point of this blog, is that global development will almost certainly be the major force affecting the United States in the next quarter century, whether the USG plans effectively for this eventuality or not.

So what was it about Freschi's post that motivated me to drop deadlines on that particular day and go on the offensive? It's pretty simple: I find it more than a bit depressing when The Smartest People in the Room refuse to leave the room in which they are the Smartest People. For instance, from Easterly:

I vaguely remember that I was invited to a meeting with a US government big shot on development whose name I’ve forgotten, to take place in Washington. I failed to do my patriotic duty, using the lame excuse that the meeting was two days before Christmas, and I unreasonably treat the days around Christmas as belonging to Family Zone.

After a lifetime working on development, might not Easterly have made it a priority to influence the most sweeping review of priorities in global development undertaken by his country's government in a decade, if not longer? After all, the government of the United States may not be much to Bill Easterly, but it's got more resources at its disposal than he does. No way to find an alternate time? Schedule a call? Write an email? Post a direct Tweet? Undertake a pinkie lift?

No. None of the above. Just not worth the time.

(Note: Bureaucrat appears to have been working two days before Christmas. Not everyone has the benefit, as Easterly and I do, of living by the academic calendar.)

In any process that involves difficult decisions with uncertain outcomes, those seeking solutions should welcome, even celebrate, the views of astute critics (in this case, Easterly). But when critics hold themselves apart from engagement in anything that might resemble positive action, one is sorely tempted to make sausage of their studied detachment.

Step 1: Eviscerate...

What it Means to "Elevate Development"

2010-05-06T07:30:00.000-07:00

The White House process aimed at redefining U.S. development policy for the 21st century (known internally as Presidential Study Directive 7, or PSD-7) is coming to a close. Earlier this year some colleagues and I had the opportunity to offer input to Gayle Smith in the National Security Council, who was tasked with leading PSD-7, which we did.

On Monday Foreign Policy blogger Josh Rogin leaked a copy of the document that is coming out of PSD-7. Item one on the proposed new agenda for global development policy, as advanced in this draft, is this:

Moving forward, the United States will foster the next generation of emerging markets by enhancing our focus on broad based-growth and democratic governance.

To begin with, consider here what is not listed first on the nation's development agenda: "Poverty alleviation." "Nation-building." "Global threats." "Counter-terrorism." And other code words allegedly relating to "development" that are based alternately about fear & condescension.

Notice further that in this sentence "broad-based growth" is listed before "democratic governance." What does that mean? It means that the people who wrote this draft get it: expanded economic opportunity precedes democratic change. Both together lead to increased prosperity. That is development. (Elaboration here.)

Now as a counter-point, Bill Easterly [actually, Aid Watch staffer Laura Freschi, see below] offered his comments today. He focused on administrative structure:

The most significant change in the draft is the creation of interagency committee reporting to the President to run US development policy.

He wants to know what it means to “elevate development” as a “key pillar of US foreign policy.”

Here's my attempt at an answer to that question. "Development" today refers to the process by which the majority of the world's population is joining the global economy. It is a process whose momentum is going to overtake and obliterate puny debates about "aid" (pro and con) and eviscerate stale discussions about donor coordination and accountability.

"Elevating development" means taking (at least some!) decision-making away from those alleged development experts who pay no attention to entrepreneurship and global business (the actual drivers of development) and instead continue to devote their energies to making failed approaches less failed. (Yes, I am talking about pretty much every "development economist," Easterly included.)

It means that people who have not been accountable or serious about advancing actual development may potentially lose their authority, and then their jobs, because this is too big an opportunity for this country to be entrusted to people not determined to make the most of it. It is not only too big for one agency. It is also much too big for the entirety of the U.S. federal government--which, incidentally, will have succeeded if manages to remain relevant to global development in the next quarter century, much less dominant.

That is what this process is about. That is what the draft PSD-7 memo from the White House is about.

Now if you don't care about the role of the U.S. government in the world today, don't read this memo. If you do, its message is worth considering carefully. There is not an organization in this country that would not benefit from its own PSD-7 process, and that wouldn't also be moving forward if it similarly found a way to "elevate development" in its strategic planning.

Correction: ... Ummm ... well... as it turns out Bill Easterly didn't quite exactly write the post that I attribute to him in this blog post. As kindly pointed out to me by Bill, the post was actually written by Aid Watch staffer Laura Freschi. Apologies to Bill... and to Laura!

Why Entrepreneurs?

2010-04-21T16:07:00.000-07:00

Among all the riddles of economic life, none perhaps is greater than the existence of a market for new cookbooks.

Consider TED prize winner and celebrity chef Jamie Oliver. Last night Skoll Centre Director Pamela Hartigan, her husband Martin Hartigan, and I shared a meal at Jamie Oliver's Italian restaurant in Oxford. (In case you're wondering, it's called "Jamie's Italian.") Martin and I both ordered "fish in a bag" which the menu describes as follows:

The freshest sea bass fillet from Brixham market, Cornish mussels and clams steamed in their own juices with smashed fennel, heritage potatoes, capers, arrabiatta sauce and zesty Amalfi lemon.

To accompany my fish in a bag, I had a glass of Merlot. The meal was delicious and the three of us had a great time.

But here's the point: For how long have human beings been drinking fermented grape juice? For how long have we been steaming fish and mussels--potentially in combination with available fresh vegetables? Answer: A very long time.

Now granted, there is some skill involved in organizing raw materials (sea bass, fennel, lemon, etc.) into a meal--which is to say, cooking. Very good cooks may be able to profit from their skill by, for example, charging for the meals that they prepare. (Ergo, restaurants.) Alternately, they may painstakingly document their techniques so that others can duplicate their skill. (Ergo, recipes.) Yet, even when a recipe is well spelled out, dimensions of discretion that inevitably fall to the cook can lead to very different outcomes. As Joseph Schumpeter observed a century ago in The Theory of Economic Development:

The necessity of making decisions occurs in any work. No cobbler’s apprentice can repair a shoe without making some resolutions and without deciding independently some question, however small.

All is well so far. Where we run into a problem is with Jamie Oliver, as well as with Nigella Lawson, Thomas Keller, and all other celebrity chefs. Indeed, the very existence of cookbooks is a bit vexing. How can it possibly be that, after the trillions of meals that human beings have prepared and consumed over millennia out of essentially the same fundamental set of ingredients, individual people to not only come up with new recipes, but in fact to become famous doing so? A new recipe here and there, sure. But an entire cookbook full of culinary novelty? Such a thing would seem to be a statistical impossibility.

The answer is, of course, that cookbooks aren't impossible. Indeed they are not only possible, they are ubiquitous. That is because there is no limit to humanity's appetite for novelty, just as there is no limit to human creativity. In fact, if Chicago's Moto Restaurant and Disruptive Food are any indication, we're just getting started...and that's just with the recipes.

In economic life, managers are cooks. Some are better, some are worse. Good ones can make money from their skill. Bad ones botch even the easiest recipes. Variance among managers makes it difficult to sort out, when assessing a project (as when eating a meal) whether any shortcomings experienced are due chef's lack of skill, or to the recipe employed. As Bill Easterly tweeted a while back

Nothing works everywhere, depends on how implemented RT @Transitionland: Microfinance meltdown in Bosnia - http://trunc.it/4lya2

Even in medicine, with its highly routinized protocols, over 1 million deaths per year occur as a consequence of medical error. (That number is for the United States alone. Ref. Atul Gawande's Checklist Manifesto. In 1994, that 1 million included my father, who died due to complications in the course of a "routine" surgical procedure.) When surgery fails, is the fault with the surgeon, or the technique? This is a difficult enough question to answer in a medical context, but it is even more difficult when applied to a development project.

That said, the remarkable persistence of markets for cookbooks suggests that nourishment depends on much more than ensuring that existing recipes are properly prepared--as important as that can be. It also, and perhaps more fundamentally, depends on the creation of new recipes.

Or, to get past the metaphor: sustained prosperity depends on more than capable managers. It depends on more than blueprints, manuals, and franchises. It depends on more than projects with goals, targets, and timetables.

Instead, sustained prosperity depends on novelty. It depends on invention in the face of change. It depends on creativity with limited resources.

More fundamentally--most fundamentally--sustained and sustainable prosperity depends on entrepreneurs.

Dr. Know

2010-03-13T08:13:00.000-08:00

Recipient countries should be invited to prepare plans and budgets.

—Jeffrey Sachs, "Homegrown Aid"
New York Times April 8, 2009

Critics of big-money solutions to complex problems like to make a pariah out of Jeff Sachs. He is an easy target, in part because (unlike Bill Easterly) he generally stays up in the stratosphere, out of reach of his critics.

That would have been me until an afternoon a couple of years ago, when I happened to be out for a walk in San Francisco's Mission District with Kiva founder Matt Flannery. Reflexively, I started Sachs-bashing. I'd barely gotten started when Matt glanced my way and said, "yeah, I've noticed people like to put Jeff Sachs down a lot." Surprised and somewhat deflated by my evident lack of originality, I cut my diatribe short and quickly sought another topic of conversation.

For some time since then, I decided to hold my judgments in check. We do have a convention in academia to avoid ad homimen arguments. Focus on the message, not the messenger.

I was prepared to stick with that line of reasoning, until a few months ago, when I finally took the time to read Sachs' most celebrated popular work, The End of Poverty.

Reading this perplexing epistle to the powerful (core analytic insight: poor countries are like sick patients that require differential diagnosis and treatment??) prompted me to wonder if we, as academics, have not been too easy on Jeffrey Sachs, rather than too hard. What is the nature of the expertise for which he is everywhere lauded? For what actual contributions to understanding or human betterment is he responsible?

To seek answers to these questions is, for me, to take a bumpy ride trip along memory lane, revisiting distinct moments in my career as an economist. I suspect many of my generation have similar recollections . . .

First, I am in graduate school. The Berlin Wall has just fallen. There is this guy from Harvard advocating for something that goes by the name "shock therapy" for countries making the transition away from Communism. Apparently it has been just the trick in Bolivia.

I think to myself, "Who is this guy? What is going to happen to all that state-owned stuff when it's just flipped into the market?" Best case scenario is that it will create a lot of rich criminals who will eventually try to create a proper country ... sort of on the Joe Kennedy Sr. model.

Assessment of contribution: Kept hyperinflation at bay. Otherwise, in Russia, crashed industrial production, plunged life expectancy, and seeded the rise of an autocratic kleptocracy. Not a big win.

Flash forward. I'm a post-doctoral fellow at Harvard's Kennedy School of Government. There is that same guy! Except now he's presenting papers (this one for example) that purport to explain why poor countries are poor. It turns out, they're in the wrong place! If poor countries could be in the places where rich countries are, they'd be rich too. Or something like that.

I think to myself, "Who is this guy? ... Next he'll be telling us that he can figure out someone's IQ looking at the shape of their skull."

Assessment of contribution: In a Department of Geography, might count for credit toward Master's degree . . . if submitted on-time, without too many typos.

Fast forward a few years. I am still at Harvard, now as a lecturer in economics. Sachs has decamped to be the head of the Earth Institute at Columbia University. Only now he has morphed again.. this time into passionate advocate for the poor.

I think to myself, "Who is this guy? If he was being straight with people, his response to anyone who approached him to talk about lifting people out of poverty would be, 'I'm sorry, you've got the wrong guy. I'm a macroeconomist. Therefore, by definition, I can't tell you anything of practical use regarding the day-to-day process of economic development. You need to talk to my former Harvard colleague Amartya Sen, the Nobel Laureate and one of the great social scientists 0f the 20th Century. He will be able to help you. (Zvi Griliches has recently passed away, so I'm afraid you won't be able to talk with him.)'"

Assessment of contribution:

Potemkin villages
< Millennium Villages
< real development

But hearing Sachs speak here in DC a few weeks ago, I finally figured out how this all ties together. Sachs isn't isn't just fond of medical metaphors. He is Dr. Know. Though he has often been wrong, he seems never to be uncertain. He is the guy who believes that "we" have the solution. All "we" need is the money to put the solution into practice. Whether in Russia in 1992, or in Kenya in 2010, the obstacle isn't ignorance or uncertainty, it's willpower. When the determination to drive change is present, change happens.

Checkbooks out, please.

In the end, Matt Flannery turns out to be right. Personalized polemics are pointless. What is at stake in the assessment of the contributions and legacy of Jeffrey Sachs isn't who he is or what he knows, but how he knows.

This meta-discipline—one that encompasses not only what we know, but how we know it—is called epistemology. And, when it comes to development, epistemology is at least as important as economics. Notably, it is on the basis not only of economics, but of epistemology, that the role of entrepreneurs in development can best be appreciated.

If solutions are known, need $$. If solutions are knowable, need evaluations. If solutions are evolving, need entrepreneurs.

My Buddy Pine (a.k.a. "Syndrome") Moment

2010-03-11T13:48:00.000-08:00

This is the sixth and last of my series of posts re. aid effectiveness guru Bill Easterly. Others are 1, 2, 3, 4, and 5.

If you have children, then you know Buddy Pine (a.k.a. "Syndrome") :He's the kid in The Incredibles who idolizes Mr. Incredible, only to turn vindictive (see expression above) after his hero rejects him as a would-be sidekick (IncrediBoy). Adopting the name Syndrome, he dedicates himself to besting his former idol.

In the confessional spirit that seems to be the flavor of the week on the development blogosphere, this post is about my Buddy Pine moment with the Mr. Incredible of the aid-criticism world, Bill Easterly.

The year was 2006 (or was it 2005?) and Easterly was visiting George Mason for a semester. Toward the end of his visit, I managed to catch a talk of his at the Mason Econ. Department. The talk was full of good stuff on dealing with endogeneity in cross-country growth regressions, the role of institutions in determining development trajectories, and other macro-development topics. After the talk I approached Easterly to pose the question that had been waiting anxiously all afternoon to ask: Would he, by any chance, be willing to author a lead essay on the topic of social entrepreneurs as "searchers" for the journal I had just co-founded with Iqbal Quadir?

Easterly was very gracious, but his reply took me aback nonetheless. Social entrepreneurship might be heartwarming, I recall him saying, but it has nothing to do with development.

Nothing to do with development? What?

Now, given that I can't remember where my car is parked half the time, I could have this wrong. Maybe that wasn't what he said, or what he intended to say. But the remark as I heard it really stuck with me. How could Bill Easterly—of all people!—take the position that entrepreneurship in any form has nothing to do with development? What about the staff of 100,000 that daily carries out the work of BRAC in Bangladesh, founded by Fazle Abed three decades ago? Not the outcome of social entrepreneurship? Not development? What was I missing?

That was the Buddy Pine moment.

From then on, I looked at Easterly's writing with, let's say, a bit more of a critical eye than I had previously. I searched copies of his books for mentions of the words "entrepreneur" and "entrepreneurship." (Elusive Quest for Growth: 6; White Man's Burden: 12 . Compare with Sachs, The End of Poverty: 4; Schramm, Litan & Baumol, Good Capitalism, Bad Capitalism, and the Economics of Growth and Prosperity: 225).

What I have realized over time is that, while Easterly has made a huge contributions in pulling back the curtain on assorted Wizards of ODA that inhabit Emerald ($) Cities on the banks of the East River, the Hudson, and the Potomac, and while he talks a good game about "searchers" and "seekers," he's really not all that interested in entrepreneurs and entrepreneurship. Apparently once a macro-economist, always a macro-economist.

Now, you might say, so what? As Easterly himself pointed out to me earlier this week, it's not very entrepreneurial to try to force everyone to talk only about entrepreneurship.

Of course, he's right... Well, almost... No, actually, he's wrong.

Why? Because, among the prominent development economists and former World Bank staffers that circulate in the same environments as Easterly, the number who really focus on entrepreneur-led development is exactly zero. Which is to say, nobody. Not Rodrik, not Kremer, not Duflo, not Pritchett, not Birdsall. And, no, not Easterly. Keep working down the list. As good as they are along other dimensions, none of them focuses on entrepreneurs and entrepreneurship.

I'm sure you'll agree with me that nobody is a long way from everybody. Therefore... wrong. Q.E.D.

For the A-Team in the academic study of development to be systematically ignoring the core driver of the process of development is an alarming mis-allocation of a scare resource: talent. Instead, academic development professionals (Easterly among them) fixate upon the effectiveness of Official Development Assistance (ODA)—these days, about $100 billion. A lot of money? Well, it's less than one fifth of one percent of global GDP. It's also less than half of the $200+ billion in remittances that flow annually from people in wealthy countries directly to their relatives in poorer countries. And it is less than 1/5 of the $500+ billion that exits poor countries every year and heads to rich countries in illicit transfers of various types.

In sum, Official Development Assistance in its entirety is about as relevant to the process of global development as the programs of the U.S. Department of Commerce are to the advancement U.S. economy. Part of the story, to be sure, but a small part.

But enough about the world. Let's get back to me. I admit that Easterly's introspective ploy did cause me to abandon my plan to lure him back to Northern Virginia and subsequently to read aloud from The Theory of Economic Development (in the original German) until he reversed his prior error and consented to write not one, but a sequence of essays for Innovations about entrepreneur-led development. But, otherwise, the Oprah Show at Aid Watch this week was on the wrong topic. Tweetiquette? Blog decorum? ...

When Mr. Incredible is reduced to politely discussing a topic that doesn't really matter much to start with... well, then this Buddy Pine doesn't even want to be IncrediBoy anymore.

Next posts...

Why entrepreneur-led development is development (picking up from Iqbal and from Paul Kagame)
Why "top-down" vs. "bottom-up" dichotomy is not the fundamental one. Basic tension is exploration (flexibility) vs. routine (order). Sound like "searchers" vs. "planners"? It's not...
"RCT, non merci"... Why ascending markets (a.k.a. "developing countries) need more growth capital for successful entrepreneurs and skilled mentors, not more randomized controlled trials of development projects

... and more relating to the coming prosperity.

Inviting Jeff Sachs and Bill Easterly to Agree

2010-02-26T07:31:00.001-08:00

I just sent this email to Jeffrey Sachs. He was at my alma mater on Wednesday speaking with students and faculty at the school about global development, Millennium Villages, the Earth Institute, and related topics. I had the chance to chat with him briefly at the end of his visit and to share with him the recently published special edition of Innovations on invention-led development.

The point of the message is to encourage Jeffrey Sachs and Bill Easterly to put aside their disputes on the lesser topic of aid effectiveness, and co-author an essay on a more important subject about which they appear to be in agreement: namely, what actually works in global development.

Dear Professor Sachs:
...

I have been greatly heartened to hear directly from you, and from Professor Easterly (cc'ed), your shared view that entrepreneurship and innovation are at the core of the process of economic development. The two of you may also a share the view (one that I hold most emphatically) that a development strategy focused on entrepreneurship and innovation is not equivalent to one that relies on markets as they currently exist. Rather it is one that considers interventions to markets strategically, with an appreciation for the reality that solutions in a rapidly changing world are not known, but are rather are evolving, and thus that success at scale begins with broad-based local experimentation combined with the resources, commitment, and alignment of incentives that jointly ensure support for approaches that work.

I believe that the discourse on global development would be greatly advanced if you and Professor Easterly were to participate together in an event, and jointly author an essay, focused not on the subsidiary subject of aid effectiveness, but rather on the core issue of what actually drives global development--a topic on which it appears your are largely in agreement. The event would be all the more interesting if you could be joined by actual entrepreneurs who have, in their own work, advanced global development--people like Iqbal Quadir and Mo Ibrahim. Should you be willing to participate in such an event, I am sure that you would find any number of willing hosts. For my own part, I can say that Innovations journal would be more than pleased to publish the jointly authored essay that the two of you seem well placed to author on this topic.

Best regards,

Philip Auerswald

Obama's Road Not (Yet) Taken

2010-02-09T09:53:00.000-08:00

In reaffirming the greatness of our nation, we understand that greatness is never a given. It must be earned. Our journey has never been one of shortcuts or settling for less. It has not been the path for the fainthearted, for those that prefer leisure over work, or seek only the pleasures of riches and fame. Rather, it has been the risk-takers, the doers, the makers of things—some celebrated, but more often men and women obscure in their labor—who have carried us up the long rugged path towards prosperity and freedom.

—Barack Obama, President of the United States
Inaugural Address, January 21, 2009

One evening in the Fall of 2008—when Lehman Brothers had just failed and the entire financial system seemed to be on the edge—a former student of mine approached me as I was leaving the School of Public Policy building after teaching my microeconomics course.

The student had a question: What should the government be doing to help small business cope with the financial meltdown?

It turned out that, in this case, the matter was not just of academic interest. The student was a staffer on an key Congressional Committee, and had been tasked to tackle this specific question. In fact, the rest of the staff and committee members were so preoccupied with the rather significant job of making sure that the entire financial system didn't fall of a cliff that she—so far as I could tell from that discussion and subsequent exchanges—was the only person responsible for this task. And she had been given four days to come up with an answer.

The importance of her assignment was evident to both of us. After, as we were both aware, all net new jobs for two decades had come from small business. If small business didn't create new jobs to get the country out of the coming recession, there wasn't going to be any getting out of the coming recession.

That legislative session came to a close without large-scale targeted action to support entrepreneurs. We then had the inauguration of a new president. We had TARP. We had MASSIVE STIMULUS. (Both needed. Some elements of the stimulus—notably, smart grid investments--highly worthwhile.) But a concerted strategy for small business and entrepreneurs? Still nowhere in sight.

In the Spring of 2009 my George Mason colleague Zoltan Acs and I published an essay in The American Interest that took note of the need for government at all levels to make support of entrepreneurs an fundamental policy priority:

Economic growth, or its absence, is merely an indicator on the dashboard of our ongoing national journey. The engine that propels American capitalism forward is entrepreneurship; the fuel is opportunity; the work of foundations recycles the energy of society, making progress and widespread prosperity sustainable. Yet, just as a Tesla Roadster is no Model-T, 21st-century entrepreneurship derives from a formula far more complex than the “1 percent inspiration and 99 percent perspiration” once cited by Thomas Edison. Far-sighted government policies are an essential element within this formula. Political leadership must do more than celebrate the “risk-takers, the doers, the makers of things” who create opportunity and extend the reach of prosperity. It must act in partnership with private foundations to ensure the existence of an environment conducive to their efforts.

Again, months passed. The President's agenda continued to be dominated by exigencies of the moment (Afghanistan) and justifiable legislative priorities (in particular, health insurance reform). But "risk-takers, the doers, the makers of things" that the President celebrated at his inauguration remained sidebars on the President's policy agenda.

And then, in the past three weeks, a change: The Obama Admistration started not only talking about small business and entrepreneurs, but actually proposing specific initiatives to help them continue their role as featured participants in the creation of American prosperity.

This is good news. It could get even better. For example, the Obama admistration could embrace wholesale the outstanding set of recommendations the Kauffman Foundation has advanced recently to drive innovation and advance prosperity through entrepreneurship.

Why do all this? Because what the past America and the next America have in common is entrepreneurship, innovation, and a nation's defining determination to find the practical solutions needed to maintain momentum "up the long rugged path towards prosperity and freedom."

Would Americans everywhere embrace such a story?

Here's hoping the Obama administration helps us find out.

When the Blue Screen of Death Really Means Death

2010-02-05T07:26:00.000-08:00

The Blue Screen of Death. Even Mac users know what this means. It means that you have a problem. The problem may be small, or it may be big. You may have lost some time, or you may have lost a piece of your soul.

Why the seeming inevitability of the Blue Screen? Because computer code is complex. New programs interact with old programs, and with the operating system, in ways that are all-but- impossible to anticipate. The only way to find out for sure what will work and what won't is to try things out. (Ergo the concept of the Beta version.) When you try things out, sometimes they don't work right. When that happens... BSoD.

Now here's how another computer user experienced the Blue Screen of Death (from today's NYT):

It was a Saturday afternoon, April 19, 2008, and [Guadalupe] Alberto, a 77-year-old former autoworker, was driving her 2005 Toyota Camry. Within blocks of her home, witnesses told police, the car accelerated out of control, jumped a curb and flew through the air before crashing into a tree.
Mrs. Alberto was killed instantly, leaving her family stunned at how such an accident could happen to someone who was in good health, never had a speeding ticket and so hated driving fast that she avoided taking the freeway.
Her car was not among the millions of Camry models and other Toyotas recently recalled for sticky accelerator pedals. And it also did not have floor mats at the time, which were part of a separate recall.
Instead, the crash is now being looked at as a possible example of problems with the electronic system that controls the throttle and engine speed in Toyotas.

Mrs. Alberto was not aware she was using a computer when she left her home. But she was. Any automobile built in the last decade has computing power comparable to... a personal computer. In today's world, computing power is ubiquitous. The water from your faucet? The power in your home? These and more infrastructure services are brought to you by "supervisory control and data acquisition" systems--referred to by professionals as "SCADA" systems--the category of software that runs the background programs for everyday life in industrialized countries. (If you're interested in that sort of stuff, you might want to check out this... and if you're really a glutton for punishment, this.)

Recognizing that society's operating system = computers + the built environment + people, the BSoD itself becomes a ubiquitous metaphor. The Challenger and Columbia crashes. The Northeast power blackout. Katrina. All BSoD phenomena in one way or another.

Now let's get back to the Blue Screen we started with--the one on your computer. How do you deal with it? We all know that the only way to deal with the BSoD is to expect it to happen, to prepare accordingly, and to get good at recovering rapidly. In other words, you need to be resilient. After all, what good is weeks, months, or years of efficient, productive work if it all gets lost in one Blue Screen. Ask Akio Toyoda.

The 20th century was all about growth. Not the 21st. For communities, businesses, and nations, resilience is the quality that matters most.

Speaking of Scarcity...

2010-02-05T07:25:00.001-08:00

Bill Easterly has a blog post today titled "Who gets the Last Seat on the Plane? Why Aid Hates Economics." He's right again. But his argument could be extended. For example, there is another scarce resource not mentioned in this post whose allocation matters for development: The talent of development economists, like Easterly.

Take, for example the Aid Watch blog itself, whose motto is "Just asking that aid benefit the poor."

Now (bear with me for a moment here!) let's say you're back in the historical paradise of planning, namely the Soviet Union. Everyday, you have to eat the same old cr&p food...

photo credit

You're sick of it, but you can't find a way out.

Then one day, a leader arrives, with a banner that reads "Just asking that the food not suck!" You cheer! You hoist your comrade on your shoulders! At last, you are fighting back against the system. The battle for better cafeteria food is on!!

But what is the opportunity that is missed here? What is the thing you really need, that you're not going to get from the "Just asking that aid benefit the"--I mean, the "Just asking that the food not suck" campaign?

What you're not getting, and what you really need, is some new restaurants!! Yes, that would be just the thing. Some options. You would like another place to go to eat.

There is a general rule here: What really drives change isn't protest, but genuine competition driven by consumer choice. (Back to dining for a moment: Think about food in airports twenty-five years ago, if you were alive then. All Sodexo monopoly. Uniformly terrible and expensive. Now, with entry and competition for licenses, the food in the airport is at least as good as what you get outside the airport.)

Entry (or threat of entry) doesn't have to be by entrepreneurs in order for it to induce beneficial change. In the U.S., the most significant new entrant in the aid business in the last decade has been the Department of Defense. At his big event at Brookings last month, Easterly ridiculed the assertion by Secretary of State Clinton that the DoD's mission could be aligned with development, saying:

Her big think point was that we can merge defense, diplomacy, and development. And that’s probably one of the worst ideas I’ve heard in my career as a development economist.

Well, what does he think is more likely to stir USAID from its longstanding torpor: (a) the Aid Watch blog, or (b) the threat of being rendered obsolete by the Pentagon? I'd put my money on (b).

So instead of "just asking that aid benefit the poor," how about just asking for some new restaurants?

Randomized Out-of-Control Trials

2010-02-02T20:02:00.000-08:00

Listening to the audio for the recent "What Works in Development" meeting at Brookings, I couldn't help but notice the moderator's (no need to name names here) telling insistence on using the term "randomized clinical trial" in place of the generally preferred "randomized controlled trials." Either way, the message is the same: "Put on your lab coat, Sonny. . . It's time to do some people experiments!"

Now I'm going to let the experts--and they were in abundance at Brookings last month--address the finer points of external validity (for the uninitiated, this reflects the researchers ability to answer the question "Well, so what?") and other challenges to the claim of RCTs to being the big thing in development.

What interests me is what RCTs might do to entrepreneurship. And it's not a pretty picture.

To set the stage, consider this observation on the process of development from very-smart-guy Mancur Olson:

Because uncertainties are so pervasive and unfathomable, the most dynamic and prosperous societies are those that try many, many things. They are societies with countless thousands of entrepreneurs who have relatively good access to credit and venture capital.

Power and Prosperity, pp. 188-189

What works in development, according to Olsen, is experimentation. Why? Because we don't know what works. Such a view, earlier articulated by Hayek and other, finds a contemporary expression in Bill Easterly's now-familiar (to folks that follow this sort of stuff) distinction between "searchers" vs. "planners" in development. For those of you inclined to economic theory (anyone? ... hello?) here's my version.

Now Bill Easterly is also known as an advocate for accountability in aid. He has concerns about the potential overuse of RCTs. However neither he nor the colleagues represented in his recent book with Jessica Cohen, (mis)titled "What Works in Development," have much of a notion of what else might really work better.

All good so far.

But here's a problem.

No entrepreneur ever used randomized controlled trials to create a business. None. Ever.

OK, I don't know that for sure. But please find me one... and you know I'm not talking about a biotech startup that pulls off a clinical trial to test for safety and efficacy. I'm talking about using a randomized trial to build the business itself... the entrepreneurship part of entrepreneurship.

Development driven by entrepreneurship (also known as "development") is comprised of randomized out-of-control trials. That would be--yes!--the opposite of randomized controlled trials.

Why does this matter? Stop and think. In what U.S. industry do clinical trials dominate? That would be pharmaceuticals. And in what industry are markups higher, and barriers to entry greater, than they are in the pharmaceuticals industry? The answer to that question is, of course, no other industry. When it comes to persistent oligopoly, pharma beats them all.

A very big part of the reason for this is that large-scale clinical trials are expensive. But you can't sell a drug without them. (For mostly good reasons, I might add, in the case of medicines.) So even successful biotech companies have had great difficulty breaking into the business of conducting their own clinical trials; instead they often partner with "Big Pharma" on the last mile of drug development.

Now I'm not saying we should abolish the Food and Drug Administration--though, like the U.S. Patent and Trademark Office, it is in serious need of some tender loving care . . . alternately administered with a potential kick in the groin or two.

No, I'm just asking this question: Is the increasingly widespread use of RCTs a move in the direction of an FDA for development--if not in a hardwired, institutional sense (unlikely, unless you think that the World Bank is in danger of becoming relevant again) then instead in the sense of customs, standards, and expectations.

I can see it now... A well-meaning RCT acolyte popping up on NPR to talk about the Aravind Eye Hospital and saying

Well, yes, it is true that they have cured two million people of blindness in thirty years. But we don't have any real evidence of their effectiveness. How many of the people treated at Aravind would have ceased to be blind without the surgery they received? Was the Aravind approach really better than alternatives? And did it really have an impact on economic growth in the regions in question? The only thing I can say without proper evaluation is that this is a nice retirement project. But I can't tell you that it is effective development.

Am I making this up?

Will not "higher standards of evidence" not only distort resource allocation (if outcomes are improperly defined) but also create barriers to entry? Won't this favor incumbents, 0r outside consultants flown in to do the work? Might not all of these "secondary" effects more than outweigh any benefit gained from "better" standards of evaluation?

Furthermore, might we not do better by studying the work of those exceptional entrepreneurs--like Aravind's founder, Dr. Govindappa Venkataswamy--who do a particularly remarkable job in creating social value, and putting our resources into supporting the nascent efforts of others like them, using an approach to evaluation that is actually appropriate to entrepreneurship?

Instead of putting our faith in randomized controlled trials whose beneficial impacts are uncertain, shouldn't we bet on the process of randomized out-of-control trials (a.k.a. entrepreneurship and innovation) that has been the very definition of development and growth pretty much everywhere in the world for five centuries?

Randomized clinical... that is, controlled trials work fine in public health, but for development, they could well be the cure to aid ineffectiveness that turns out to be worse than the disease.

IMAHAINGTTIA!

2010-02-02T19:06:00.000-08:00

@montero funny how entrepreneurs define by creating and academics define by quoting and correcting each other.

me: guilty as charged

Having for five years taken great joy in editing a journal featuring narratives by entrepreneurs addressing global challenges, I can relate to what Montero's saying here. Academic one-upmanhip isn't even interesting to academics. How can it possibly be interesting to anyone else?

But, in the immortal words of Peter Finch, IMAHAINGTTIA!

Take the alleged "debate" over what works in development, featuring the inimitable (please don't try) Jeffrey Sachs and his Big Apple neighbor, William Easterly. Why would the two of them be adversaries on the topic of what works in development? After all, they both know what works and what's more, they agree!

But not only don't they listen to each other, they don't even listen to themselves. (For you folks watching at home: Yes, that is pathetic.)

Here's the Jeffrey Sachs version:

I believe that the single most important reason why prosperity spread, and why it continues to spread, is the transmission of technologies and the ideas underlying them. (The End of Poverty, p. 41)

Here's Easterly:

Historically, industrialization arose in initially poor countries which have since become rich, with the common theme of a heavy reliance on both domestic and international market opportunities and decentralized private entrepreneurship.

Now only two things need to happen to connect the dots between these two statements.

One is to pull Sachs out of whatever Secretariat meeting he happens to be in at the moment to remind him that human beings are responsible for the "transmission of technologies" and furthermore that the most adept among us at this task actually have a name: technology entrepreneurs. These people do not wear lab coats (for the most part), they do not work at the United Nations, and they do not know Bono.

The other thing that needs to happen here is to drag Bill Easterly away from friendly chats with fellow economists for long enough to give the topic of aid effectiveness a rest (perhaps permanently) and start spending some time and attention studying what matters most in development.

And, again, what was that?

Entrepreneurs. Technology. Innovation. These have been the drivers of increased prosperity for the past 500 years. They continue to be the drivers of increased prosperity today.

Jeff and Bill: If you don't agree with this statement, why do you yourselves--like pretty much all other growth and development economists--use variants of it in your own writings?

And if you do agree with this statement, then why don't either of you pay any serious, scholarly attention to entrepreneurs, technology, and innovation?

What is the matter with you people!

IMAHAINGTTIA!

The Trouble With Bill (He's So Close to Great)

2010-01-28T12:11:00.000-08:00

First, a question: What would happen if an exceptionally public-spirited chiropractor was to blow the whistle on exaggerated claims made by other chiropractors? We'd all say "great!" And what if he was to persuade similarly high-minded colleagues to collaborate on a book about making chiropractors, as a profession, more accountable? Again, we'd say "great!"

But what if that same well-meaning chiropractor was to endow said book on chiropractor-accountability with the title What Works In Health-care? We'd all say... well, it wouldn't be nice. "Who's making exaggerated claims now! Isn't there more to health-care than the work of chiropractors? And I thought you just told us that most of your fellows are frauds anyway? What exactly is going on here??"

The problem would be worse if policy-makers, political leaders, and power brokers actually believed that the book and its cover were one and the same. Nutrition? Don't bother me. Exercise? Who cares. Preventative medicine and therapeutics? No my concern. All I care about is straightening your spine.

Now go back and substitute "development economist" for chiropractor, "aid-effectiveness" for chiropractor-effectiveness... and, for "nutrition" and "exercise" the words "entrepreneurship" and "technological innovation." There you have my dismay (OK, fine, over-reaction) to the book by Jessica Cohen and Bill Easterly titled What Works in Development.

Now let me explain why I'm going to spend the next 4-5 posts persisting in the seemingly irrational undertaking of picking a fight with Bill Easterly: It is because Easterly is the most compelling voice among development economists today. Others are brilliant (Michael Kremer, Esther Duflo among them) and worthy of genuine admiration as scholars. Some are doing great practical work, alongside their academic work.

However, Easterly is alone in having solid academic background, a large platform from which to speak, and something like the right message to deliver.

That last phrase holds the key to my frustration... "something like the right message." Yes, Easterly is near the top of the list among economists addressing the vitally important issue of strategies to make the most of the coming prosperity (see post #1 of this blog). If he can't get it right, what hope is there for the rest of us?

In any event--whether or not it turns out that there's anything to my particular angle here--my guess is that boxing with the blind men Uptown who still don't see the limits of big money approaches to development has got to get a bit tedious. So if my observations serve only as a brief, peripheral break from the "aid good"/"aid bad" show, so much the better.

Aid Effectivess DOES NOT= Development

2010-01-26T18:16:00.001-08:00

When I first heard about the new book by Jessica Cohen and Bill Easterly on What Works in Development, I was downright excited.

Then I looked at the papers posted online , the combined texts of which look like this

... and listened to the podcast of the book release event at Brookings on January 21, the transcript of which looks like this

I finally got a hold of a copy of the book itself. If you are interested in techniques for assessing the impact of aid (and, parenthetically, why cross-country macroeconomics is difficult to the point of being, well... pointless) I urge you to order up a copy right now. An impressive list of the usual suspects in development economics shares insights as to what we Think we really Know about aid from Randomized trials.

But "what works in development"? I think not.

What is my view of what works in development? Here's one picture (the text of chapter 3 from The Coming Prosperity):

http://wordle.net

Many other plausible pictures are possible... None resembles an economist's navel.

More to follow on this general topic... including why framing the search for solutions in global development as Easterly vs. Sachs is a bit like framing the search for solutions to the obesity epidemic as Coke vs. Pepsi.

Without Google, Will Baidu Become China's Minitel?

2010-01-14T07:30:00.000-08:00

I clearly remember visiting my cousins in France in the mid-1980s, the heyday of a device launched in 1982 by Poste, Téléphone et Télécommunication (the French national telephone company) called the “Minitel.” The Minitel was a marvel. It consisted of a small keyboard and monitor with myriad uses: you could buy things, book seats on the train, check the market, find a phone number, and even chat with friends. It being France, pretty much everyone in the country eventually had one. It was a pre-Internet Internet—connected by phone lines, through a centralized system.

Now if there was any way to save this Gallic innovation from its inevitable demise once the Internet rolled into town, I am sure that the good folks at the PTT (now France Telecom) would have teamed up with this or that minister to find one. Indeed, they tried. But a national network, operated through a centralized carrier, could not compete, in any way, shape, or form, with the global, almost organic, architecture of the Internet. The Minitel limped along, but today is nothing more than a glorified phonebook.

Such battles happen all the time—and, almost invariably, open networks beat closed networks, and larger networks beat smaller ones, in that order.

All of which leads me to wonder if Baidu, the Chinese search company which currently has 66% of China's search market, won't be up next up for monopolistic, closed-network obsolescence if Google (which has the remaining 33% of the search market) ends up pulling out. Search is a tough business to break into--though, admittedly, most folks thought it was locked up in the US before Google got going in the late 1990s... and they were wrong. But, for a variety reasons, a search monopolist in China may be tough to displace in the market, with complacency being the predicted outcome. As one Chinese Internet market analyst quoted in today's New York Times put it, "Without competition, Baidu has no motivation to innovate."

Nick Kristof had this to say in his column today: "In a conflict between the Communist Party and Google, the party will win in the short run. But in the long run, I’d put my money on Google."

He's right. In the controlled chaos that is economic development, the chaos has a tendency to pull back every once in a while before it once again overwhelms the control. Sooner or later, that's what's going to happen here.

Picking Up the Twitter Throwdown

2010-01-12T06:34:00.001-08:00

It has taken me three months, but I'm finally answering this call issued by Rob Katz:

@robertkatz: Twitter throwdown btween @auerswald & @bill_easterly was awesome. hope Phil + Bill will take up on blogs. 7:24 PM Oct 29th, 2009

Here's the Twitter exchange Rob was referring to.

Easterly: On Gates. When aid optimism vs pessimism becomes political not evidence based - am I guilty also? http://bit.ly/PvPTq (prev T'd)

Me: @bill_easterly Your "searchers" (who are they again?) may gauge effectiveness w/ randomized control trials. But no entrepreneur ever did.

Me: Been to a lot of events. Tonight's presentation by Bill & Melinda Gates was exceptionally powerful. @gatesfoundation http://bit.ly/mhZ2R

Easterly: I couldn't see the Gates webcast last nite b/c of technical problems. Anyone who saw it have any comments or reports?

Me: @bill_easterly I was there also (ergo previous Tweets.). Gates Foundation is not the U.N. That's a good thing. Gates is an entrepreneur.

Me: @bill_easterly Bill Gates is an entrepreneur first, philanthropist second. @gatesfoundation

Me: @bill_easterly The totality of your narrative ultimately does not make sense because you do not understand entrepreneurship.

Easterly: Why do entrepreneurs like bad data? RT @auerswald: your narrative does not make sense because you do not understand entrepreneurship.

Me: @bill_easterly Science doesn't prove, only disproves. Data & analysis not "good" or "bad," but rather better or worse depending on context.

Me: @bill_easterly RCTs are $$ & inherently limited in generalizabilily & by non-stationarity of distribs. Good in public health. Not much else.

Easterly: My blog is also cautious and critical of RCTs RT @auerswald RCTs are $$ & inherently limited in generalizabilily

Me: @bill_easterly Entrepreneurship is inherently forward-looking. Retrospective confidence you call good data is, prospectively, just a guess.

Me: @bill_easterly You advocate a data aesthetic relevant only to public health & critique of aid relevant to everything but public health.

Easterly: Don't you need to know if it's working? RT @auerswald Entrepreneurship is forward-looking. Retrospective you call good data is a guess.

Me: In business, you know it's working when people buy what you're selling. RT @bill_easterly: Don't you need to know if it's working?

Easterly: We dont have that in aid, need to know outcomes RT @auerswald: In business, you know it's working when people buy what you're selling.

Me: Didn't you get the memo? Aid doesn't work. RT @bill_easterly: We don't have that in aid, need to know outcomes. http://bit.ly/1YKZnn

Easterly: Let's continue our dialogue on blog or email RT @auerswald

Me: @bill_easterly has worn me out. Unintended consequence from going to Living Proof event last night. @gatesfoundation http://bit.ly/mhZ2R

No, "DOD" Does Not Stand for "Department of Development"

2010-01-11T14:19:00.001-08:00

Also relating to my post on Saturday on the topic of U.S. global development policy, here's a reality check on the role of the DOD in development that I got in an email from Gordon Adams who for five years was Associate Director for National Security and International Affairs at the Office of Management and Budget (the senior White House budget official for national security):

1.Such efforts are not central to the DOD/military mission, but by-products of the military role in Iraq and Afghanistan (and a few other countries where counter-terrorist operations are under way). We have government agencies for which development is the mission, notably USAID.

2. The focus of DOD's effort is not development, but meeting near-term mission needs for commanders. The net result is investments that are not oriented toward long-term development, but acquiring "hearts and minds," as part of the military mission. Projects end up not deriving from a country-based view of development needs, and are, as the Special Inspector General for Iraq Reconstruction has noted, often not sustainable in the long run.

3. Empowering DOD for this mission has the consequence of further weakening State and USAID; Congress concludes they are not capable of their mission, with the result that a growing civil-military imbalance gets even worse.

4. In the end, making DOD responsible for development is counter to US national interests, because it puts a uniformed face on US forward engagement, which is not universally appreciated. In turn, this makes further US steps more difficult as other countries and peoples come to see the US forward engagement as military, and driven by US security interests, not development.

And this from a colleague in the Armed Forces, who concurs that DOD is not a development agency, but adds

I still think there is more of a role for the DoD than simply developing technologies. The military also has core competencies in logistics, command and control, monitoring and evaluation, ops research, training, program management, etc, which USAID or other agencies could leverage as part of their development efforts. If nothing else, the military could help USAID and DoS developing these capabilities within their own organizations, or assist when they share a common footprint in various countries.

BTW: Gordon Adams is now a Professor at American University's School of International Service. He and Cindy Williams have just come out with a great book titled Buying National Security: How America Plans and Pays for Its Global Role and Safety at Home.

Anonymous DOD guy is ... anonymous DOD guy.

What Rajiv Shah is up Against (One View from the Inside)

2010-01-11T14:19:00.000-08:00

From what I hear, Rajiv Shah is an amazing individual who has what it takes to transform General Moto... I mean, USAID. Still, he has his work cut out for him. That, at least, is the conclusion I draw from this message I received yesterday from a colleague with current, and I expect accurate knowledge, of the situation at USAID, sent in response to my last blog post:

USAID has two main problems as I see it: insularity and ideological group think. These both sort of reinforce each other and bear on several of the practical problems of the agency such as the fact that much of the funding of the agency gets tied to "green development"--as if anyone actually really knows what that means, let alone how to achieve it--and environmental impact statements on development projects. What this really means is that we are going to be pushed out of development by the Chinese who clearly care more about the environment than do we (sarcasm intended).

DoD does not have its hands tied to the same extent as USAID does with all its externally imposed or, frankly, internally imposed, constraints: an accounting system reminiscent of the Army in 1940; a structure in the foreign service that cares more about how long you've been with the agency and who you've pissed off lately than the quality of your work, the projects you've completed, or what expertise you bring to the agency; and worse yet, a promotion system more concerned with time in grade than anything else.

Then of course, they pay talented people like [noun indicating insufficiency], and brown-nosing blow-hards like kings.

There are of course the normal obstacles, like the government's inability to fire incompetent people and a completely dysfunctional human resources division ... but hey, this is what everyone else seems to have to deal with.

The issue of insularity is a problem for the agency because it is completely hostage to the political left, which means it has zero supporters from anywhere else in the political spectrum. That puts the agency's survival in question and undercuts its ability to represent the US population at large--which, after all, is a primary role of a diplomat. The agency's precarious political position also affects it's ability to solve problems, as people on the inside approach things from the perspective of how best to hang on to USAID money rather than how best to accomplish the agency's mission and .... I am afraid, I don't think a new administrator is really going to change any of that.

On a related note, they could also use a real dose of facts about under which administrations and Congresses they have fared better or worse. There is a tendency to obsess about Republicans being their enemies, despite the fact that this technically isn't technically true, since most of the agency's downsizing happened under Clinton (not either Bush or Reagan), and their budget growth in recent years came almost entirely under a Republican president and Congress. This is completely lost on them.

My own view on this last set of points: One of the great things about the end of the Cold War is that it caused an implosion of ideology. If you wonder what this means, go to China (still think it's a "Communist" country? you are seriously missing the point), Vietnam, or India for that matter. Unfortunately, the political leadership in the United States is having a hard time catching up with this global reality. (Business leadership is doing better.)

The concern raised by my colleague here is just a case in point. The global transformation currently under way--what I term the coming prosperity--is far beyond anything that might be pegged as a "liberal" or "conservative" issue. If any of our nation's representatives overseas don't get that, they sure should.

Hillary Clinton on Global Development: The GREAT, the TERRIBLE, and the unspoken

2010-01-09T10:56:00.000-08:00

On Wednesday (a decade ago in Twitter time) Secretary Clinton gave two speeches at the Center for Global Development. You may have mistakenly heard that it was one speech, but it was, in fact, at least two.

Here's the GREAT speech the Secretary gave on technology, entrepreneurship, and innovation as drivers of development (the Secretary's actual words, in their logical order as determined by me):

Development is a strategic, economic, and moral imperative -- as central to advancing American interests and solving global problems as diplomacy or defense.

New technologies are allowing billions of people to leapfrog into the 21st century after missing out on 20th-century breakthroughs. Farmers armed with cell phones can learn the latest local market prices and know in advance when a drought or flood is on its way. Mobile banking allows people in remote corners of the world to use their phones to access savings accounts or send remittances home to their families.

There is no limit to the potential for technology to shrink obstacles to progress. And the United States has a proud tradition of producing game-changers in the struggles of the poor. The Green Revolution was driven by American agricultural scientists. American medical scientists have pioneered immunization techniques. American engineers have designed laptop computers that run on solar energy so new technologies don't bypass people living without power.

Because development is indispensible, it demands a new approach. We hope to put ourselves out of the aid business. Rather than helping fewer people one project at a time, we can help countries activate broad, sustainable change.

Private businesses are able to reach large numbers of people in a way that's economically sustainable, because they bring to bear the power of markets. We're exploring venture funds, credit guarantees, and other tools to encourage private companies to develop and market products and services that improve the lives of the poor. We are seeking more innovative ways to use our considerable buying power -- for example, through advance market commitments -- to help create markets for those products, so entrepreneurs can be sure that breakthroughs made on behalf of the poor successfully reach them.

Here's the TERRIBLE speech she gave pandering to folks worried about losing their jobs at USAID (the Secretary's actual words, in their logical order as determined by me):

We also need to ask hard questions about who should be doing the work of development. It's time to rebuild USAID into the world's premier development agency.

The experience and technical knowledge that our development experts bring to their work are irreplaceable. Whether trained in agriculture, public health, education, or economics, our experts are the face, brains, heart, and soul of U.S. development worldwide.

Development projects can be stalled or stymied by too little support from leaders. Our diplomats can help make the difference. They have the access and leverage to convince government ministers to give these development programs their support.

Some of the most transformative figures in the history of development represent the convergence between development and diplomacy. Today, we have many such "development diplomats" working at USAID. They embody the integration between development and diplomacy that, when allowed to exist, can amplify both of these disciplines.

Finally, here's the speech she might have given instead of the terrible one.

I'm here to talk about global development policy. If anyone happens to hear a loud chomping sound outside the door while I'm talking, that's the Department of Defense eating our lunch.

Now the mere fact that the Department of Defense has moved into the development business shouldn't worry you. They're doing it because they have no choice. (As you probably noticed, our political leaders got in the habit for a while of telling them to invade countries without any clear plan of what to do in the event that they "won." So they're trying to fix that.)

What should worry you is that a bunch of farmboys from Missouri are, in more than a few cases, doing a better job figuring out what works than this room of so-called experts. That may be because they have common sense. Or it may be because they don't have cozy relationships to outside contractors whose ability to continue to pay their mortgage depends on their skill in pushing the same Kool-aid (pun intended, of course) that has been toxic to developing countries for fifty years.

What does all of this mean for you here at USAID (because even though I'm at the Center for Global Development, you all know who I'm really talking to)? It means after 30 years of diminishing relevance, you all are now in serious danger of losing not only your jobs, but your Agency.

So this is what I'm going to do. I'm going to set you up with a really smart guy from the Gates Foundation. He's going to be in charge. And I'm going to say a lot of nice things about you for a while. I'm even going to try to get you some more money. And I'm going to ask you all to read and ponder one single four-page essay by President Paul Kagame of Rwanda.

And it that doesn't get you to figure out what actually works in about 24 months, then you're all fired.

Have a nice day.

Partying Like It's 1869

2010-01-05T07:12:00.000-08:00

Remember the Black Friday financial panic of 1869? No, of course you don't. Neither did I. Well, that was when a group of financial speculators with insider access took reckless risks based on the premise that the government would be there to back them up. People lost lots of money when the asset bubble they had artificially created popped.

You get the idea. And, yes, there have been lots of financial panics over time that are in some way or another similar to the one we recently experienced. But I bring this one up in particular because of another event that occurred in 1869: the completion in the U.S. of the First Transcontinental Railroad. I bet you do remember that. Why? Because, in the long run, the Transcontinental Railroad mattered, and the financial panic of 1869 didn't.

Another Transcontinental Railway is being completed today. It is wireless and global. Instead of connecting one half of a country to another, it is connecting one half of the world's population to another. Is this global revolution in mobile communications a bigger deal than the financial crisis of 2008-09? I dunno. Was Cornelius Vanderbilt a bigger deal than James Fisk?

While we're pondering these finer points of U.S. history, we can take a minute to say hello to the world's have-nots. We can now, you know. They have cellphones.

Schumpeter's Century

2010-01-05T06:28:00.000-08:00

This essay of mine from The American Interest (November-December 2007) provides some of the conceptual background for The Coming Prosperity, as well as the title for my innovation policy blog, with Brian Higginbotham. Here's how it starts:

The history of the 20th Century is invariably told as a political and military narrative: the battle of world’s democracies first, with the Soviets, to defeat fascism and second, against the Soviets, to defeat communism. Far less well appreciated, but arguably more relevant to the present, is the economic subtext of the same history: the rise and (partial) fall of large-scale, centralized production.

... The real power of Schumpeterian analysis for today’s readers, and the focus of this essay, comes in its application to the period from Schumpeter’s death in 1950 to the present. What really caused the collapse of the Soviet Empire? Not Ronald Reagan. How does the threat of Islamic Fundamentalism today compare with the threat of Fascism in the 1930s or Communism in the 1950s? From the standpoint of economic fundamentals, it doesn’t. What is the key to China’s sustained economic growth? Not cheap labor...

The Great Depression That Wasn't (part 1)

2010-01-04T07:43:00.000-08:00

If you've read one essay by Fareed Zakaria, you've read them all? Maybe. But luckily for Zakaria, his one essay is pretty darn good. In the latest version he neatly summarizes what anyone who has stopped reading columns by Paul Krugman long enough to look out the window already knows:

Despite the turmoil of the past year, it's important to remember that more people have been lifted out of poverty in the past two decades than in the preceding ten.

The current global economic systems is inherently more resilient than we think.

The diffusion of knowledge may be the most actually be the most important reason for the stability of the current [global economic] system.

If you're under the impression that these claims ignore the documented, devastating impact of the global financial crisis on the global majority earning less than $3/day, read this exchange between Bill Easterly and the World Bank's Martin Ravallion.

Assessing the impact on the global financial crisis on people in the poorest places is not an easy matter--one complicated by many factors including the fact that the bubble in commodity prices burst (+ for the poor) at the same time as the global economy tanked (- for the poor). Certainly, the downturn has been bad for everyone. But did the negative impacts of the global financial crisis overwhelm all other gains (e.g. the global revolution in mobile communications) even when one only considers the past two years? Not obviously the case.

The Great Depression That Wasn't (part 2)

2010-01-04T07:42:00.000-08:00

In his essay in this week's issue of Newsweek, Fareed Zakaria starts by bringing us back to last Winter, when doom-saying was de rigeur:

Pundits whose bearishness had been vindicated predicted we were doomed to a long, painful bust, with cascading failures in sector after sector, country after country. In a widely cited essay that appeared in The Atlantic this May, Simon Johnson, former chief economist of the International Monetary Fund, wrote: "The conventional wisdom among the elite is still that the current slump 'cannot be as bad as the Great Depression.' This view is wrong. What we face now could, in fact, be worse than the Great Depression."

Another Great Depression??... Lest you think any critique I might put forth now is purely the product of 20/20 hindsight, here's what I had to say about comparisons to the Great Depression back when Johnson was finishing up his essay for The Atlantic:

... there is another issue that can be resolved much more easily. That is the extent to which the nation's current economic predicament compares to the Great Depression.
Here's the answer: There is no comparison between the Great Depression and today's economic crisis.

Put differently: There is NO COMPARISON between the Great Depression and today's economic crisis. To compare the two is actually to insult the memories of our parents, grandparents, or great-grandparents, as the case may be, who endured that era of hardship and struggle.

... "Poor" in the world today doesn't mean that your 401K just lost 60% of its value. "Poor" means that your children have a far better chance of dying of diarrhea than they do of going to college. Whatever difficulties most Americans may be facing at the moment, they in no way compare with the hardships faced either by our forebearers during the Great Depression, or by the majority of people elsewhere in the world today whose daily wages amount to less than the price of a latte.

At home, the putting greens may be closed and our golf clubs may have been repossessed, but we still have a pot to piss in. Let's be thankful and start to build the Next America, rather than wasting our time lamenting the demise of the last.

OK, so Johnson was talking about global economic turmoil, and my comments are focused on the United States. But the point is the same. The "Great Depression" that matters is the one that has been surrounding the Global Economic Center for the past century--that this to say, the economic periphery inhabited by the majority of the world's population. As Zakaria's essay does a good job of summarizing, what the economic crisis of the past year and a half actually did was to sink the peaks (rich countries) and raise the valleys (formerly poor countries) somewhat in our still very uneven global economic landscape.

So, if the global financial crisis served to advance global equity, then no worries? Not quite. But don't be surprised if people in the world's poorest places have as much sympathy for our "suffering" since the Fall of '08 as we do about certain former purveyors of Collateralized Debt Obligation now forced to downsize in Greenwich, CT...

Afghanistan, Land of Opportunity

2010-01-02T17:19:00.000-08:00

A few years ago I heard Francis Bator give a talk to a small group at the Kennedy School about Lyndon Johnson's foreign policy. Having for three years been Johnson's deputy national security advisor, Bator was in a good position to reminisce on this subject. He observed, without much elaboration, that Johnson had actually been very adept in dealing with the Russians--as a Senate veteran, he could relate to Kremlin schemers. However, the Viet Cong were another story. They were, according to Bator, deemed by LBJ and those closest to him to be playing an altogether different game than we were--"inscrutable," irrational, and the like. Calamitous decisions ensued.

As I listened to Bator's recollections, it struck me that the "war on terror" just gearing up at the time was likely to lead to a similar trap: by systematically underestimating our adversary's strategic capabilities, we would end up under-utilizing our own.

Fast forward to the outstanding the set of essays in the New York Times Magazine last August about the global imperative to improve the lives of women, including a powerfully written article on a girls' school in Afghanistan. While the Afghanistan article focused, with forgivable journalistic predictability, on the dreadful battery-acid attack that victimized 11 girls at the school, it also contained the following interesting bit of data: "In 2001, only a million Afghan children were enrolled in school, all of them boys. The education of girls was banned. Today, approximately 7 million Afghan children attend school, of which 2.6 million, or roughly a third, are girls." While the article points out that attacks also occurred at other schools, the numbers are still striking: 2.6 million is a lot more than 11. So perhaps a claim for improvement can be made here.

Another example from a different domain: In a recent issue of Innovations journal we published an essay by Karim Khoja, founder of Roshan, the Afghan cellphone company. Created with support from the Aga Khan Fund for Economic Development, Roshan went from serving 80,000 customers in 2003 to serving 6.6 million at the start of 2009. It continues to grow rapidly--now with a rapidly expanding mobile banking service. I heard Khoja speak last year. He tells a remarkable story--but, of course, it is one that doesn't get much press.

Roshan is an example of the sort of "positive insurgency" driven by entrepreneurship, technology, and innovation that is the real driver of development. Want to "help"? Provide local entrepreneurs with skills development, mentoring, and other essential support (yes, funding as necessary).

Under Obama as under his predecessors, the corridors of power are full of people who continue either to believe that the world can be comprehended in terms of geopolitics (a concept that in my view lost whatever meaning it once had with the fall of the Berlin Wall); that aid to governments is somehow equivalent, or even superior to, investments that go to directly to entrepreneurs (ref. the outstanding essay by my friend Iqbal Quadir); and that some sort of straight line can be drawn between actions of the U.S. military and the emergence of a democracy, in Afghanistan or anywhere else.

Better to have a few more people, who like Khoja, are looking at Afghanistan and other inevitably ascendant societies as lands of opportunity.

Nobody Owes Rwandans Anything...

2010-01-02T17:01:00.000-08:00

Sound harsh? Before you judge, consider the source: Rwandan President Paul Kagame. Here's more of what President Kagame has to say:

It is very simple: nobody owes Rwandans anything. Why should anyone in Rwanda sit back and feel comfortable that taxpayers in other countries are contributing money for our own well-being or development? Why should we not be doing what we are able to do and raise ourselves up to higher standards and achieve more and better and get out of this poverty that we find ourselves in. Change has to start in the mind. And that is what we have been working on over time. Once the mind gets correct, the rest becomes simple.

This is the reason that we are focusing on creating an entrepreneurial mindset in every Rwandan. This mindset begins with a sense that one’s life, choices, and actions matter to the whole country. It begins with a clear understanding that business as usual is not acceptable. Every day, every Rwandan from all walks of life has a unique opportunity to change our country for the better.

The full essay is well worth a read. It'll be the lead in the special edition of Innovations journal that my editorial team and I have put together for the Ashoka-Lemelson Celebration of Fellows coming up in Hyderabad next month. (Thanks to Michael Fairbanks for that.)

The Coming Prosperity

2010-01-01T20:12:00.000-08:00

In our lifetimes the majority of the world's population will join the global economy. This is not just a good thing. It is the biggest and best development in human history.

But progress toward global prosperity is not inevitable. The very magnitude of the changes already in process and those to come creates significant obstacles to their realization. The choices that each of us make will determine the extent and reach of the coming prosperity, and our part in it.

This blog, and a book I am writing by the same title, is about the coming prosperity and the opportunities it creates for each of us to make the most of humanity's moment.

The Coming Prosperity

Collaborative Advantage

The Coming Prosperity (cover)

Fear Itself

My predictions for 2012 in zero words

The One-Sector Economy

The Population Boon

I come to bury industrial policy, not to praise it (pt II—Rodrik)

I come to bury industrial policy, not to praise it (pt I—Lerner)

You Get What You Celebrate

Maker Faire is Awesome

Regional Ecologies of Innovation

Resilience is Security

Time to Bring Entrepreneurship and Innovation to the National Mall

What if Development Economics Was Actually About Development?

de·vel·op·ment

Why Randomized Controlled Trials Work in Public Health...and Not Much Else

The Myth of the Market

Money + Meaning = Huh?

Repurpose

The Real Story

Summary of Every Paul Krugman Column Ever

It's Groundhog Day for Oil Fears

Development in Three ... Words

The Enemy of My Enemy is ... My Next Enemy

The Bottleneck is at the Top of the Bottle

The Inevitability of Human Freedom

Time to be What Matters

Chaos in the Streets

Kalling All Development Economists: Cut the Crap

Complexity: It's Not as Simple as Bill Easterly Thinks It Is (It's Simpler)

Pakistan: Creating a Place for the Future

The Coolest Thing Ever, Pt II: Science, Technology & Revolution (X2)

The Coolest Thing Ever, Part I: The Millennial Discontinuity

Afghanistan, Land of Opportunity (pt II)

Give TODAY to Care Foundation Pakistan

Time for Security Experts to Pak It In

How (Yesterday's) Heroes Impede (Today's) Progress

Why Democrats Lost and Republicans are Losers

It's the Toilets

Krugman vs. Reality (Reality Wins)

New Growth Theory: Not New, and Not Useful

Non-rival ideas: Great for growth theory, but not for growth practice

A Response to "Why Sharing the Wealth Isn't Enough"

People Are Not (Statistical) Noise

People + Employment = Prosperity

The Truth About "Free Markets" and "Market Failure"

The Smartest People in the Room

What it Means to "Elevate Development"

Why Entrepreneurs?

Dr. Know

My Buddy Pine (a.k.a. "Syndrome") Moment

Inviting Jeff Sachs and Bill Easterly to Agree

Obama's Road Not (Yet) Taken

When the Blue Screen of Death Really Means Death

Speaking of Scarcity...

Randomized Out-of-Control Trials

IMAHAINGTTIA!

The Trouble With Bill (He's So Close to Great)

Aid Effectivess DOES NOT= Development

Without Google, Will Baidu Become China's Minitel?

Picking Up the Twitter Throwdown

No, "DOD" Does Not Stand for "Department of Development"

What Rajiv Shah is up Against (One View from the Inside)

Hillary Clinton on Global Development: The GREAT, the TERRIBLE, and the unspoken

Partying Like It's 1869

Schumpeter's Century

The Great Depression That Wasn't (part 1)

The Great Depression That Wasn't (part 2)

Afghanistan, Land of Opportunity

Nobody Owes Rwandans Anything...

The Coming Prosperity