William J. Holstein

Another Review in the Financial Times

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June 23, 2011 5:26 pm
Book review: The Next American Economy

By Daniel Ben-Ami

(http://www.ft.com/intl/cms/s/0/e924f9f4-9cb1-11e0-bf57-00144feabdc0.html...

For those of us with some grey hair, it is hard to remember the 1990s technology bubble without suppressing a chuckle. In retrospect some of the wilder claims of that exuberant era were transparently ridiculous – in particular that a new economy had emerged in the US that was so productive that many companies no longer needed to concern themselves with profitability. Nor was it unusual to hear market bulls asserting that equities were bound to rise strongly forever.

With the benefit of hindsight, such contentions seem absurd and indeed, even at the time the more astute commentators argued against them. But amid all the hype about the “new economy” a genuinely important transformation was taking place. The old model of innovation and technological progress was being replaced with a new one based on the way California’s Silicon Valley operated. Unfortunately, however, overblown discussions about the dotcom boom meant that this shift did not get the attention it deserved.

The Next American Economy (Walker & Co, $25) can be seen as an attempt to redress the balance. William J. Holstein, a veteran journalist and author, provides a useful snapshot of this new economic model. He travels around the US surveying several important business clusters before drawing broader policy conclusions about how to rejuvenate US manufacturing. Along the way he is scathing of economists for failing to “understand the ecosystems that create wealth because they rarely allow their tasselled loafers to set foot on the ground outside their ivory towers”.

Undoubtedly the best part of Holstein’s book is his vivid journalistic account of some of the key new clusters of high-technology innovation. Among the places he profiles are Pittsburgh, Pennsylvania (advanced robotics), Orlando, Florida (computer simulation) and San Diego, California (genomics). These are not identical, but they have several elements in common.

Each has an “ideas factory” at its centre that can be a university, corporate laboratory or national weapons laboratory. Typically, scientist-entrepreneurs from one of these places establish start-up businesses to commercialise their ideas. If they are lucky, they will have a plentiful supply of venture capital to help finance their new companies.

Holstein uses the broader term “ecosystem” to describe the interaction between multiple players. Not only are ideas generators and private businesses important, but government agencies in their various forms play a crucial role. State support can include mentoring programmes for entrepreneurs, export promotion and backing for educational institutions. Large companies play an important part too, by investing in smaller businesses, licensing their technology and sitting on their boards.

To people who do not remember life before Apple or Google, this might seem like common sense, but key pillars of this model are relatively new. The centres of innovation in the US used to be sizeable private labs rather than research projects at universities or start-up businesses. Although some innovation still happens at large companies, it is less than in the past.

The US venture capital industry only really began to emerge in the 1960s. It has become a vital source of funding for many new businesses, particularly in high technology, but it was not available to earlier generations.

If sketching the new model of innovation is Holstein’s strength, it is also his weakness. He provides readers with a far more graphic view than they could hope to get on their own. This comes at the expense of perspective on the broader success of the model.

There are undoubtedly many examples of great ideas that have been successfully commercialised and often sold around the world. However, it does not follow that the system works as well as it could or even that it is the best way to promote innovation.

From that perspective, Holstein’s disdain for economists is unfortunate. No doubt it is true that many spend too much time looking at abstract models. Nevertheless, economic tools can play a valuable role in measuring the record of an economy.

It is certainly the case that the period of most rapid economic growth in the US, from the end of the second world war to the early 1970s, coincided with the old economic model. Some economists, such as Tyler Cowen, a professor of economics at George Mason University, have gone even further. In his view, the scale of innovation in the US was much greater in the 1950s and 1960s than it has been since the 1970s.

There is, of course, no going back. There may also be other reasons, besides the model, why growth was faster in the post-war period. Focusing on individual entrepreneurs and their ecosystems, while important, can come at the expense of the bigger picture.

The writer is the author of Ferraris for All (Policy Press, 2010)

(c) 2011 William J. Holstein. All rights reserved.
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