Justin D. Lee 7/25/21 Justin D. Lee 7/25/21

How does the US government support technological innovation?

Strategic Frontier Technology

Technological innovation is a systematic project. Good industrial policies, accumulation of basic research, close cooperation between industry, university and research are indispensable.

Ford Professor of Economics at MIT, Jonathan Gruber, Director of the Health Care Program of the National Bureau of Economic Research, and his partner Simon Johnson in the book "A Brief History of American Innovation", Industrial Policy on American Technological Innovation The changes have been interpreted, from which we can also see the course of the development of scientific and technological innovation in the United States.

To a certain extent, the "A Brief History of American Innovation" co-authored by MIT professors Jonathan Gruber and Simon Johnson is a prosperous alarm in times of peace.

The United States' technological innovation capability, technological strength, and educational strength have been leading the world for many years. In many fields of science and technology, such advantages have also become the killer of the United States in sanctions or restraining some companies in other countries. For the Chinese, the most memorable example is that the US government banned the sale of chips to Huawei. Huawei was hit hard as a result.
Even under such circumstances, "A Brief History of American Innovation" still sounded the alarm about the lack of funding for scientific innovation by the US government. Through this book, we can not only understand classic cases in the history of American innovation, but also learn more about the current problems of American innovation.

A brief history of American innovation

In this book, Jonathan Gruber, a Ford Professor of Economics at the Massachusetts Institute of Technology and Director of the Health Care Program at the National Bureau of Economic Research, combed through the important history of American innovation, expressed concern about the current situation, and raised concerns about the future. Provide concrete and feasible strategic support.

1. The government supports technological innovation, with pearls and jade first

From the perspective of R&D investment, the United States ranks first in the world. The comparative dimension of "A Brief History of American Innovation" is not to compare the United States with other countries in terms of the amount of investment, but to compare the amount of government funding for scientific innovation in the history of the United States and the proportion of GDP.

The Chinese have a familiar saying that science and technology are the primary productive forces, but many people may not really understand the path that science and technology promote economic development and improve national competitiveness. In this regard, this book starts from actual cases in the United States and makes a convincing explanation-in terms of factors that promote economic development, scientific innovation has a spillover effect, promotes further innovation, and creates numerous job opportunities. When a country takes the lead in the most critical industry, it can take the lead in the competition between countries.

In the view of Jonathan Gruber and Simon Johnson, the successful case of the U.S. government funding for scientific innovation is the funding of scientific innovation by the National Defense Research Council led by Vannevar Bush, the former vice president and head of the engineering department of the Massachusetts Institute of Technology. He made outstanding contributions to the victory of World War II and laid the foundation for the economic growth of the United States after World War II.

On June 12, 1940, Vannevar Bush visited the White House. He suggested to President Roosevelt the establishment of a National Defense Research Committee led by scientists and engineers to control the leadership and funding of new weapons research and development. Some industrial companies don't want private top research laboratories. Roosevelt approved this request.

The founding members of Bush’s Defense Research Council included Karl Compton, then Dean of the Massachusetts Institute of Technology, Harvard University President James Conant, and President of the National Academy of Sciences and Director of Bell Labs Frank B. Juvet, California Institute of Technology Richard C. Toroman, Dean of the Graduate School. The research fields of these scientific and technological elites involve atomic theory and some emerging concepts.

At its peak, Bush led 30,000 people, including 6,000 scientists, including about two-thirds of physicists in the United States. What followed was a sharp increase in scientific research funding. In 1938, the US federal government and state governments invested 0.076% of US national income in research funding; by 1944, this figure had risen to 0.5%. Most are spent from the National Defense Research Council.

In 1945, Bush prepared a report "Science: Endless Frontiers" for President Roosevelt. He pointed out that inventions and creations can save lives, improve the quality of life and create jobs; the government should not directly engage in scientific research, and the military's scientific bureaucratic command hinders science. Explore; companies, wealthy individuals, and first-class universities cannot solely undertake and carry out the scientific innovation and research needed by the country.

Bush proposed that the U.S. government continuously provide a large amount of funds to facilitate cooperation between universities and private enterprises to create "post-war innovation machines." In 1944, the "Veterans Rights Act" expanded university enrollment and trained many engineering and technical personnel. After the nascent industry has developed, many unprecedented jobs have been created. In the following 20 years, the salaries of American middle school graduates and college graduates have increased significantly. From 1940 to 1964, the federal government's investment in research and development increased by 20 times. In the heyday of the 1960s, this expenditure accounted for about 2% of GDP, which is roughly equivalent to today's 400 billion U.S. dollars.

On the other hand, during World War II, although the US government allocated a large amount of funds to the National Defense Research Council, the National Defense Research Council was composed and led by scientists and engineers. The bureaucracy of the US government (including the military) has no right to interfere in the work of these scientists and engineers. Decide. This approach has produced good results. The various scientific innovations promoted by the National Defense Research Council have made a significant contribution to the United States in winning the Second World War.

Looking back at the history of scientific innovation in the United States during this period, the special backgrounds such as World War II and the Cold War arms race are clearly "indispensable." They have become the best reason for the generous support of investors and the government's massive funding of scientific innovation. But from a methodological point of view, the special precedents during the Second World War may not be comparable.

Facts have also proved that with the reduction of government support, US technological innovation has gradually entered a low ebb.

2. Scientific innovation of U.S. private companies

The innovations of US private companies such as Microsoft, Apple, Amazon, and Google have hardly received any support from the government. They are entirely self-motivating within the companies for the purpose of competition and survival. A large number of privately supported laboratories at Stanford University, Massachusetts Institute of Technology, University of Washington, University of California, and Johns Hopkins University play a very important role in basic research in the United States.

These stories are already familiar to us, but scientific innovation in private companies has not been smooth sailing—at least from the perspective of the United States.

One of the wonderful stories is how the United States missed the liquid crystal display products and handed over to Japan in the 1960s.
In 1968, researchers from RCA held a press conference to showcase the world’s first commercial LCD display—this was the beginning of the liquid crystal display (LCD), and this project was quickly planned. Belongs to the semiconductor team that holds the patent of transistor cathode ray tube (RCT).

Perhaps because of concerns that the development of LCD technology will endanger the very successful and lucrative RCT TV business and the benefits of patent licenses, all research activities on LCD screens were forced to terminate. This decision happened to give the rising Japan an excellent opportunity.

It was in this year that the Japan Broadcasting Association (NHK) went to the American Radio Broadcasting Corporation to shoot the documentary "The Company of the World: Modern Alchemy", one of which showed the LCD screen. After the show was broadcast, this emerging technology attracted the attention of many people, including Tomio Wada, who is in charge of Sharp's computer display business.

He immediately suggested: Use LCD screens to make calculators.

Subsequently, Sharp's management, who had great ambitions to transform into a high-tech industry, went to the American Radio Broadcasting Corporation in person. At that time, the American Radio Broadcasting Corporation was not enthusiastic about this technology, so it sold the patent license to Sharp at a price of 3 million US dollars.

In 1973, Sharp announced that the world's first-generation commercial pocket calculators used LCD screens.

The United States originally had a second chance to overtake.
Sharp's LCD screen uses passive matrix technology. The image is composed of rows and columns of pixels. Complex images require many rows and columns, which results in slower data signals. In addition to the active matrix processing system developed by Westinghouse scientists in the United States, the use of transistors to turn on all pixels at once makes the screen faster, brighter, and clearer.

At that time, Westinghouse did not pay enough attention to this technology. The Brody team responsible for the development of the technology left Westinghouse’s independent portal in anger. In 1984, he began to sell experimental products and laboratory prototype screens. The industry has 80 customers.

If the first time Americans missed a good opportunity, it was because of the short-sightedness of ABC, then this time, American venture capitalists did not show enough courage. They believed that Japanese companies were already in a leading position. it is too late. Finally, Brody's company failed because it was unable to achieve scale.

We all know the following story. Japan has occupied and monopolized the world market. From the mid-1990s to 2010, the scale of the industry has increased tenfold. The current global sales are 114 billion U.S. dollars, but there is no American company. Profit from this industry, and no American workers are employed in this industry.

Ironically, the US state of Wisconsin took the initiative to introduce Foxconn’s LCD factory project several years ago.

3. In the new situation, how does the US government support scientific innovation?

Although the U.S. government's funding for scientific innovation has fallen sharply after the 1970s, there are not a few companies benefiting from the U.S. government's funding, and they have also achieved remarkable results. Genome sequencing is a typical case.

In 1988, the U.S. Congress agreed to fund the National Research Institute of the United States to conduct human genome research. In 1990, the Human Genome Project was launched, which is expected to last for 15 years, with a total budget of US$3 billion. In 1999, the funded Cereira Genomics Company carried out the human genome sequencing work, and its sequencing method was a great success.

There are many government-funded companies like Cereira Genomics, which directly stimulates the development of the entire industry and drives a considerable number of jobs——

In 2004, the total value of the stock market in the genomics category was 28 billion, and 75% were publicly listed companies. Among those private companies that are not listed, 62% are based in the United States;

From 1988 to 2012, direct and indirect economic activity expenditures related to this project amounted to US$965 billion, creating 280,000 jobs and US$19 billion in personal income;

In 2012 alone, the industrial sector supported by genomic research generated US$3.9 billion in federal taxes and US$2.1 billion in state and local taxes, far exceeding the US$3 billion investment in 13 years.

On the other hand, government-funded scientific innovations have higher social returns than private returns because of the spread of technological innovation to other fields. For example, scientific innovation has driven the development of some superstar cities in the United States-the center of biotechnology is located in Cambridge, and Microsoft moved its headquarters to Seattle in 1979. This has had a profound impact on the local area.

Having said so much about the benefits of government funding for innovation, the author also makes suggestions: It is proposed that the US federal government spends 100 billion US dollars to fund scientific innovation every year, which can create 4 million jobs and share the growth opportunities of the entire country.

Based on past innovation cases, the author suggests: First, focus on the integration of research and products. The public sector and private enterprises should establish partnerships to form a good complementarity, generate better returns to compensate for possible losses caused by risky investment, and attract more More investment; the second is to extend public research funds to various places to obtain intensive benefits; the third is to create new innovation centers through competition, and formulate local regulations that are conducive to economic growth, successful infrastructure plans and education base plans, etc.; The fourth is to use an independent committee to ensure that funds are used for the most valuable research projects; the fifth is to benefit more people by sharing innovation dividends.

"A Brief History of American Innovation" does not recapitulate the glory of the past in the field of scientific innovation, but under the new scientific competition landscape, it is vocal about the lack of funding for scientific innovation by the US government, and hopes to form realistic decisions to maintain the leading edge of the United States. . As professional scholars, Jonathan Gruber and Simon Johnson also explained the internal mechanism of scientific innovation to promote economic development, and analyzed the reasons why scientific innovation improves national competitiveness. This allows readers to deeply understand the importance of scientific innovation.

However, do the heads of government and politicians of the United States have such great determination? Can they give up political disputes for the benefit of the whole country? Do U.S. taxpayers agree to pay more taxes for this?

These are obviously more important and difficult issues.

Justin D. Lee 7/25/21 Justin D. Lee 7/25/21

Marketing strategies in family firms

Manuel Alonso Dos Santos, Orlando Llanos Contreras, Raj V. Mahto

ABSTRACT

Branding and reputation plays an important role in determining firm behaviour and outcomes. These well-known marketing concepts have attracted attention of family firm scholars as well. However, despite the significant growth in family firm literature over the last two decades, the application of marketing theories and concepts in family firm context is limited. Thus, there is an urgent need for a better understanding of reputation, branding, communication, and marketing perspectives in family firms. The goal of this special issue is to enhance our understanding of marketing strategies in family firms.

Introduction

Family-owned firms are the most dominant form of business entities in market economies around the world (Poza & Dauguerty, 2013). For example, these firms represent 70% to 90% of all firms in Europe, 70% of all firms in the USA and Australia, and up to 98% of all firms, ac-cording to some estimates, in Latin America. In African and Middle Eastern countries, family firms play an equally important role (Basly, 2017; Llanos-Contreras & Jabri, 2019; Zellweger, 2017). Family firms are central for many countries not only from an economic perspective, but also in terms of their social role in regional development (Bas-co, 2015; Llanos-Contreras & Alonso-Dos-Santos, 2018). Prevalent in family firm literature is the attribution of their uniqueness to family ownership and family influence. Family identity is a resource that influences con-sumer behavior and their response to communicational stimulus (Alonso Dos Santos et al., 2021; Sageder et al., 2015). Thus, the family identity of a firm is a source of differentiation that can be commercially exploited (Bote-ro et al., 2019). While research based on socioemotional wealth acknowledges that these organizations are especial-ly focused on protecting their reputation and family name (Alonso-Dos-Santos & Llanos-Contreras, 2019; Berrone et al., 2010), articles utilizing the resource-based view suggest these organizations retain valuable idiosyncratic resources that impact the lives of their customers and stakeholders (Craig et al., 2008; Gallucci et al., 2015; Zellweger et al., 2010). Furthermore, empirical findings confirm the positive benefits of communicating the family control of the firm to firm stakeholders, such customers, employees, and the local community (Deephouse & Jaskiewicz, 2013).The aforementioned economic and social impor-tance of family firms, when combined with the significant communication and marketing potential of a firm being acknowledged as family owned, creates a rich area for scholarly exploration. Some progress achieved in the area more recently includes: (1) understanding the strategies em-ployed by family firms to communicate their family compo-nent/identity through websites (Botero et al., 2013; Mice-lotta & Raynard, 2011), (2) identifying factors impacting firm image and types of strategic actions enhancing their family brand (Binz et al., 2013; Marques et al., 2014), and (3) assessing consumer response to firm communications emphasizing family nature, such as signals through a firm’s product packaging (Alonso-Dos-Santos et al., 2019; Beck & Prügl, 2018; Lude & Prügl, 2018).

Family firms’ branding and reputation has attracted family firm scholars’ attention in recent years. However, the application of marketing theories to family firms has witnessed a slow progress in academic journals. There is an acute scholarly need for understanding the reputation man-agement of family firms and how to make the most of it from a branding, communication, and marketing perspec-tive. Accordingly, articles in this special issue have been selected because of their contribution in making progress on this theme. This special issue is publishing five articles, which present the work from twelve scholars from five different countries and nine different universities. The articles address issues related to customer-family business relationships, perceptions of family businesses and customer behavior (purchase intention), risk aversion and marketing collab-oration with other businesses, digital marketing strategies for family businesses and reputation and family identity. In terms of methods, most of them are based on quantitative data analysis with one using regression analysis and two others utilizing structural equation analysis. One article is based on a mixed research design and one is a systematic literature review.

Discussion and Contributions

The article by Cuevas-Lizama, Llanos-Contreras and Alonso-Dos Santos entitled, “Reputation and identity in family firms: Current state and gaps for future research” ex-plores the strategic value of reputation and the transmission of a family firm’s family identity. This research uses a sys-tematic literature review approach, studying 56 articles in-dexed in the Web of Science database, to analyze the current state and evolution of the topic, the impact it has had in re-cent years, and to identify relevant research areas with their respective contributions and research gaps to guide future work. The analysis of this work reflected seven research topics related to reputation and family image, finding great-er relevance in works that analyze the sources of advantages of the reputation of family businesses and how the priority to preserve it influences their strategic behaviors such as investments in R&D and their socially responsible activi-ties. Other papers found in this article advance study themes that the transfer of family identity effects both in financial markets, where family firms seek to be transparent in order to take care of their image, and in the consumer market, where they have a better response compared to non-family firms. Finally, this work highlights opportunities for future research by considering other less studied areas that detail how family firms transmit family identity to internal groups, the diffusion strategies they have with external groups, and the effects of reputation on performance.

Botero and Litchfield-Moore make contributions by as-sessing the perception about family firms. Based on signal-ling theory and the theory of reasoned action, the authors predicted that the family identity would be a signal which determines consumers’ perceptions, attitude, and intention to buy in relation to family firms. This research included four studies to respond to the question “What are the as-sociations that customers have with products and services from “family-owned businesses”? Study 1 was based on the analysis of qualitative data from a four-question survey to 87 students from introductory courses. Study 2 considers data collected from a 73 item survey which was responded to by 145 college students. Items in this survey allow the quantitative assessment of perceptions about family firms, attitude toward these organizations and intention to buy and work for these firms. Study 3 included additional respons-es from another 90 college students. Unlike Study 2, here questions on intention to buy and intention to work were asked to different groups to make the survey shorter and easier to answer. Finally, Study 4 was focussed on exploring the generalizability of their previous results and included 65 working professionals (in addition to 54 new students) in the sample. Results are in line with research suggesting that communicating the family identity of a firm would re-sult in a positive response from consumers (Alonso Dos Santos et al., 2021). Botero and Litchfield-Moore confirm that “family-owned businesses” would have an advantage in using their identity as part of their communication and marketing strategies. Results suggest that consumers would have positive perceptions about organizational values and neutral perceptions about products and services offered by family firms. The authors concluded that “As suggested by the Theory of Reasoned Action, these perceptions affected attitudes and intentions towards Family Owned Business.”The work from Gonzalez-Lopez, Buenadicha-Mateos, Barroso and Sanguino deals with the theme of digital mar-keting strategies in family firms. More specifically, the au-thors analyse the online presence and differences between Ibero-American and American family firms in the world. Based on information provided by the Family Business Global Index (FBGI), this article aimed to respond to the following two research questions: (1) Does the quality of a corporate website and the presence in social networks in-fluence the family firm’s turnover? and (2) Are there sig-nificant differences between Ibero-American and American family firms regarding online presence, in terms of quality of corporate websites and presence in social networks? The article analyses content, form, function and presence in so-cial networks. This work is important because the profound influences of social networks and internet in communica-tion and marketing strategies in all the different econom-ic sectors around the world (Alonso Dos Santos, Calabuig Moreno, Crespo et al., 2016; Alonso Dos Santos, Calabuig Moreno, Rejón Guardia, et al., 2016). Internet is not only the one of main and more accessible communication chan-nels for large and small businesses, but also it offers a wide range of options to develop flexible and focused marketing strategies. Among other findings, this article results show that there is a negative relationship between website quality and company turnover and a positive relationship between social networks and company turnover. This is important for family firms because it provides insight into the effec-tiveness of different communication channels and strategies they have access to. Also, the study did not find significant differences among the family firms of the two regions with respect to online presence, which suggests similar availabil-ity of this resource in both regions. Thus, this work con-tributes to the specific topic of our special issue by mak-ing progress in the understanding of marketing strategies in family firms. The article also makes progress in family firm literature, by integrating concept and construct from the marketing research. From a managerial view point their findings are important as they shed light on the importance of enhancing family firms’ online presence, and the power of building strong family firm brands based on this online presence.

The article entitled, “Personalized Service and Brand Equity in Family Business: A Dyadic Investigation of How Family Business Owners’ Time Servicing Customers Im-pacts Work Overload: Spillover Effects in Delivering a Per-sonalized Service and in Building Brand Equity” by Velas-co, Lanchimba, Llanos-Contreras and Alonso-Dos Santos focused on the understanding of demand and resources on the firms’ brand equity. More specifically, this research fo-cused on answering the question of (1) how family busi-ness owners’ time in serving customers, work overload, and Collaborative Organizational Citizenship Behaviours inter-act and influence the delivery of personalized services in Small and Medium size Family Enterprises, and, (2) how these relationships ultimately influence these firms’ brand equity. In this way, the article made progress on the under-standing of how family business owners’ time in servicing customers triggered a chain of effects (positive and nega-tive) which finally impacted on small and medium family enterprises’ brand equity. The authors’ study is highly im-portant and relevant because brand equity is closely related to corporate reputation and accordingly, it would not only be a good way to assess reputation in family firms, but also to understand factors that enhance or harm it. This is par-ticularly important in family firms as the firm reputation is closely tied to the family reputation and it is one of the most salient socioemotional wealth priorities (Deephouse & Jaskiewicz, 2013; Llanos-Contreras & Alonso-Dos-Santos, 2018). The findings in this article are relevant and make an important contribution to theory and practice. From a theo-retical viewpoint, the study sheds a light on the connection between brand equity and firm reputation. It is important as it suggested that brand equity would be a good proxy to assess reputation in family firms. Theoretical contributions are made also to marketing and reputation theory in family firms by integrating the analysis of resources and process to reputation theory. In this way this article goes beyond the analysis of the sole effect of communicating the fam-ily identity and integrates the study of the process which is central in the marketing strategy. From a practical view-point, family-business managers can learn by identifying strategic resources and processes that influence their firms’ brand equity and ultimately the family and firm reputations. Controlling these resources and process would be central for managers in order to preserve their firm and family rep-utation.

Ibáñez’s paper, “Inter-firm marketing collaboration in family businesses: The role of risk aversion”, explores how risk aversion in family firms influences their non-fi-nancial strategic decisions to collaborate in marketing. This research addresses two issues barely explored in the fami-ly firm literature: (1) the influence of risk aversion on the decision to collaborate to develop marketing capabilities and (2) the choice of a partner known or unrelated to the family firm for this cooperation. The author proposes that both decisions are made simultaneously. She uses a bivar-iate probit method to evaluate the decision to enter into a collaborative relationship and the choice of a partner in a single econometric model. Results suggest that family firms that are more conservative in terms of risk-taking are less willing to engage in collaborative relationships for market-ing activities. However, these firms are willing to take a risk by collaborating with a partner they do not know (rather than a known partner). This apparent dichotomy is consis-tent with previous research showing that family firms are both risk-taking and risk-averse in order to preserve socio-emotional wealth (Gómez-Mejía et al., 2007). In this case, socioemotional preservation would not only be related to risk-taking decisions, but also to their priority of preserv-ing good standing with people they have close relationships with by avoiding engaging in partnership with them. This article contributes to family business research by extending the study of risk aversion beyond the financial and econom-ic decisions of family firms. Concluding ThoughtsIn summary, this issue of Journal of Small Business Strategy is a special issue on “Marketing strategies in fam-ily firms”. The five works in this special issue significantly enhance our understanding of family firm reputation from a strategic marketing viewpoint. The studies in the special issue contribute to reputation theory in family firms, as well as to knowledge in marketing and communicational strate-gies for these specific types of organizations. The articles in this issue allow the readers to know the state of the art from a theoretical viewpoint, but also to analyse empirical find-ings in relation to the effect of communicating the family firm identity, the influence of family identity in the world wide web, the importance of small and medium family firms’ resources and demand in building brand equity, and the importance of risk-taking aversion toward collaboration on developing marketing capabilities. From a managerial perspective, this special issue provides important insight for family firm owners and managers in relation to the im-pact of leveraging their family identity in their marketing strategies. Also, practitioners can learn about mechanisms, processes and resources which would drive the successful implementation of such strategies in these firms.

Justin D. Lee 7/25/21 Justin D. Lee 7/25/21

What Makes Capitalism Tick?

By Arnold Kling

Understanding the market process as a systematic, error-corrective sequence of profit-inspired entrepreneurial discoveries, continually reshuffled and redirected as a result of the ceaseless impact of exogenous changes, should drastically alter our appreciation of key features of capitalism.

—Israel M. Kirzner, Competition, Economic Planning, and the Knowledge Problem

This volume of the collected works of Israel M. Kirzner, edited with a modestly brief introduction by Peter J. Boettke and Frederic Sautet, addresses deep and important questions that most economists would rather skip. These pertain to what distinguishes market activity from central planning, the economic role of entrepreneurs, and what is meant by competition.

I found the conceptual issues that Kirzner raises to be intellectually challenging, and so I imagine that many readers will as well. If you pick up the book, I recommend starting near the back with the essay “How Markets Work: Disequilibrium, Entrepreneurship, and Discovery,” in order to get a general overview before you tackle the essays from the beginning.

Here, I will focus primarily on the question of what distinguishes a market economy from a centrally planned economy. While my discussion is informed by Kirzner’s writing, I do not claim to completely understand or share his views.

In a market economy, decisions about what to produce and how to produce are made by individual entrepreneurs. In order for entrepreneurs to do this in a way that promotes more efficient economic outcomes:

1. They must be guided by a profit incentive.
2. They must compete in a never-ending process in which they correct mistakes and seize opportunities for improvement.
Many economists believe that the main weakness of socialism is the absence of a profit incentive. But Kirzner writes,

Our further exploration of the interface between the economics of socialist calculation and the economics of the process of entrepreneurial competition will permit us to argue, I believe, that there are analytical grounds for maintaining that the Misesian “problem of knowledge” is indeed anterior to [the] problem of motivation. (page 151)

The problem of knowledge is to discover what consumers want and how to efficiently provide for those wants. Entrepreneurial competition is a process for making such discoveries. In the absence of such competition, the central planner must rely on guesswork.

In a socialist economy, the planner lacks a means for obtaining information on what individuals want. Kirzner point out that, conversely, a market economy has no concept of what “society” wants.

A market economy is by definition made up of a multitude of independently-made individual decisions. In such a context to talk of decisions made “by society” is, at best, to engage in metaphor. “Society” does not, as a simple matter of fact, choose; it does not plan; it does not engage in the “allocation of resources”; it does not have ends; it does not have means; to talk of society facing “its” allocative, economizing problem is, strictly speaking, to talk nonsense. (pages 153-154)

Those of us who wish to defend both methodological individualism and markets are faced with a paradox. When we say that the economy works well, we are claiming to speak for the entire society. But as individualists, we would say that there is no such moral entity as “society.”

My way of dealing with the paradox is to say that I have my intuition about what constitutes a “good economic outcome for society,” and you have yours. If our intuitions have little or nothing in common, then we have no basis for further discussion. But if our intuitions are similar, then we can have a productive dialogue about what sort of institutional arrangements are likely to produce desirable outcomes relative to our respective intuitions.

“For background on these topics, see Socialism,, by Robert Heilbroner; Austrian School of Economics,, by Peter J. Boettke; and the biography of Leon Walras in the Concise Encyclopedia of Economics.
For more writings by Israel Kirzner, The Economic Point of View and Edwin G. Dolan (ed), The Foundations of Modern Austrian Economics.”

During the “socialist calculation debate,” economists who advocated socialism conceded that the price mechanism performs an essential information-processing function. They suggested, however, that a government bureau (today we would say a powerful computer) could store a list of all of the economy’s inputs and outputs. Call this the WAC, for Walrasian-Auctioneer Computer. The WAC would then propose a set of prices for inputs and outputs. Consumers would decide on their demands, and firms would decide on outputs. The WAC would look at the results to see what shortages or surpluses emerged. For inputs or outputs that are in surplus, the WAC would adjust prices downward. For inputs and outputs that are in shortage, the WAC would adjust prices upward. Then it would allow consumers and firms to respond to this new set of prices, and look at those results. This process would continue until all surpluses and shortages were eliminated.

In fact, the process just described is problematic, because the economic activity that takes place at “false prices” in one iteration might alter the desired activity at a subsequent iteration. It by no means guarantees smooth convergence to the point where all markets are in balance.

An alternative is to have the WAC announce a set of prices but not allow trading to take place. Instead, the WAC asks everyone to report what they wish to trade at those prices. Based on these wishes, the WAC looks at the resulting surpluses and shortages as hypothetical. It proposes a new set of prices to eliminate these hypothetical shortages, and everyone reports what they wish to trade at these new prices. Assuming that this iterative process converges to a balanced solution, the WAC finally allows trading to take place at the market-clearing set of prices.

Some remarks about this hypothetical WAC mechanism:

1. Most mainstream economists, whether they favor socialism or not, do not worry about whether or not the WAC mechanism exists or is feasible. The standard approach is to construct economic models that assume that the economy works “as if” it used the WAC mechanism. In particular, it can be taken for granted that the economy will adjust to equilibrium states. Therefore, the task of the economist is to analyze the properties of equilibrium states and to compare one such state with another.

2. In contrast, Kirzner and other Austrian economists insist on the importance of the fact that the WAC mechanism does not exist in the real world. In the real world, central planners make their dictates using guesswork, not by using databases and trial-and-error prices. Kirzner points out that in a real-world market economy, entrepreneurs take on the task of adjusting prices and identifying opportunities to alter the mix of what is produced and how it is produced. A computer does not identify shortages, surpluses, and opportunities. Individual entrepreneurs find them.

What Kirzner calls “entrepreneurial alertness” is what grinds down inefficiencies and drives the economy in the direction of equilibrium, or market balance. Of course, the economy never actually reaches such a state, because new opportunities to improve efficiency always arise as events take place and new discoveries emerge.

3. Even if the WAC mechanism were technically feasible, I believe that it still would not be sufficient to facilitate a socialist economy. We would still be missing the element of “entrepreneurial alertness.” It is one thing to believe that a factory manager could decide how many compact cars and how many mid-size cars to produce, based on prices proposed by the WAC. But who has responsibility for coming up with the idea of a ride-sharing service? Or a self-driving car? That is neither the job of the WAC nor the car manufacturer. In addition to the WAC, would-be market socialists need a cadre of designated innovators, whose job it is to generate new products and processes.

4. I think this still leaves open the question of how to motivate firm managers and others in a socialist economy. You can tell a manager to adjust production to maximize a profit that is purely an accounting device, with no effect on remuneration. But what incentive will that provide to managers? And will designated innovators take the right risks if they are playing the game for tokens that are not real money?

5. While all of these arguments point to the difficulty of central planning, this leads to the question: how do firms manage to operate? Within a firm, activities are not guided by a price system and entrepreneurial alertness. Instead, like a central planner, the boss sets internal prices, notably the compensation rules for its workers. Like a central planner, the boss chooses projects based on informed hunches rather than leaving the selection to a market mechanism.

““Can advocates for socialism point to Wal-Mart or Apple Computer as proof that central planning can work?””

Skeptics of socialism like to point to North Korea or the former Soviet Union as proof that central planning fails. But can advocates for socialism point to Wal-Mart or Apple Computer as proof that central planning can work?

I would say that the difference between Wal-Mart or Apple on the one hand and North Korea or the former Soviet Union on the other is that when central planning breaks down at one of these entities, the ineffective firm will be weeded out and replaced much more quickly than the ineffective socialist government.

If we think of the firm as a locus of central planning, then a market economy consists of these planned enterprises, jostling with one another. We might use a metaphor of ships that are centrally managed, some large and some small, all trying to stay afloat in a sea of competition. Corrosion and natural disasters frequently sink some of the ships, but other ships arrive, and people’s lives generally get better because these ships are new and improved. A centrally planned economy is a like a single structure sitting on dry land. It is less likely to experience rapid improvement, and when it corrodes or is hit by a natural disaster, its population suffers for a long time.

Justin D. Lee 7/25/21 Justin D. Lee 7/25/21

Drop Your Intellectual Defenses

By Arnold Kling

When your views are challenged by a discordant observation or a person with a different opinion, should you treat this as an opportunity to reconsider or as a threat to fight off? Julia Galef argues for the former.

Galef favors what she terms the scout mindset, which means adjusting your outlook to take new information into account. She contrasts this with what she calls the soldier mindset, which means ignoring or dismissing new information in order to keep your current outlook intact.

According to Galef, the intellectual scout uses reasoning to try to map reality. The scout welcomes contrary information as helping to correct this map. The soldier uses reasoning to defend one’s map of reality. The solider fights contrary information as if to stave off defeat.

Scout mindset has a number of advantages. One makes better predictions and decisions by seeking the truth. One is actually more persuasive to others, because people value honest assessment rather than overconfidence.

This raises the question of why the soldier mindset evolved in the first place. Galef lists several psychological factors that make it appealing.

First, challenges to our worldview make us uncomfortable. Dismissing such challenges relieves the discomfort, at least for a while.

We are inclined to tune our beliefs in order to protect our self-esteem. For example, if we have trouble learning a foreign language, it is easier to insist that knowing foreign languages is unimportant than to undertake the effort needed to attain that skill.

When we make a decision, considering alternatives may create anguish. Closing our minds to those alternatives may allow us to feel better about our choice, at least for a while.

Being firm in our beliefs can help us to get others to comply with our wishes. But note that this creates the risk that when others defer to our soldier mindset, they do so reluctantly, lacking our same conviction. Galef cites a study in which

… law students who are randomly assigned to one side of a moot court case become confident, after reading the case materials, that their side is morally and legally in the right. But that confidence doesn’t help them persuade the judge… [they] are significantly less likely to win the case—perhaps because they fail to consider and prepare for rebuttals to their arguments. (p. 27)

Galef points out that one’s beliefs can serve as a sort of fashion statement.

Psychologists call it impression management, and evolutionary psychologists call it signaling: When considering a claim, we implicitly ask ourselves, “What kind of person would believe a claim like this, and is that how I want other people to see me?” (p. 23)

A related motive for holding some beliefs is to fit in better with one’s social group. This can be a particularly powerful motive when a group is strict about excommunicating heretics.

“The more that we are convinced of our own objectivity, the less likely that we are operating in scout mindset.”

One of Galef’s interesting themes is that we self-deceive about our mindset. The more that we are convinced of our own objectivity, the less likely that we are operating in scout mindset. In fact, one key to remaining in scout mindset is the willingness and ability to recognize one’s own inclination to fall back on soldier mindset. As she puts it,

But the biggest sign of scout mindset may be this: Can you point to occasions in which you were in soldier mindset? (p. 57)

In particular, having high intelligence and a good education is no assurance that one has scout mindset. On the contrary, it makes one better able to operate using soldier mindset and to hang on to incorrect views.

Galef believes that one acquires scout mindset by cultivating certain habits. These include making a point of telling other people when they have helped you to change your mind, genuinely welcoming feedback, and subjecting your own beliefs to rigorous examination.

Galef advocates using thought experiments as a way of escaping from soldier mindset. For example, in deciding whether to continue or quit a project, she proposes an “outsider test,” in which you imagine what another person would do if they were suddenly dropped into your situation. This thought experiment could relieve you of the baggage of your previous actions that got you into the predicament. The outsider test may also make it easier to avoid throwing good money after bad or wasting time continuing to pursue a graduate degree that no longer seems as worthwhile as when you started.

Another interesting thought experiment is to ask whether your opinion would change if an influential person were to change their mind. For example, suppose that during a meeting the boss advocates a particular project. Before you decide whether or not you agree, imagine what your thinking would be if the boss were to oppose the project.

For acquainting yourself with diverse viewpoints, it pays to choose carefully who you pick to represent that viewpoint. If you only pay attention to the worst people on the other side, then this will serve to close your mind rather than open it.

To give yourself the best chance of learning from disagreement, you should be listening to people who make it easier to be open to their arguments, not harder. People you like or respect, even if you don’t agree with them. People with whom you have some common ground—intellectual premises, or a core value that you share—even though you disagree with them on other issues. People whom you consider reasonable, who acknowledge nuance and areas of uncertainty, and who argue in good faith. (p.171)

Galef suggests that one good habit is to cultivate friends who model the scout mindset.

One of the biggest things you can do to change your thinking is to change the people you surround yourself with. We humans are social creatures, and our identities are shaped by our social circles, almost without our noticing. (p. 219)

For more on these topics, see the EconTalk episode Julia Galef on the Scout Mindset and “Tribal Psychology and Political Behavior,” by Arnold Kling, Library of Economics and Liberty, August 6, 2018. See also the EconTalk episode L.A. Paul on Vampires, Life Choices, and Transformation.

When we raise the level of analysis from the individual to the group, this leads me to think of another reason that the soldier mindset survives. At an individual level, self-skepticism may be a useful characteristic. But at a group level, rewarding loyalty and stifling dissent may have survival value, at least up to a point. A society where “anything goes” could lose out to a society that demands sacrifice and a strong community-oriented ethic from its members.

From an individual perspective, treating challenges to one’s beliefs as an opportunity rather than a threat might be a good strategy. But from a group perspective, it may pay off to be less truth-seeking and more conformity-demanding. I suspect that this tension between what is best for the individual and what promotes group survival may be at the heart of why soldier’s mindset is difficult to leave behind.

Justin D. Lee 7/25/21 Justin D. Lee 7/25/21

Anti-monopoly regulation falls a heavy hammerThe long-maligned exclusive copyright of online music ceases

Meng Yanbei

On July 24, 2021, the State Administration of Market Supervision and Administration issued an administrative penalty decision against Tencent Holdings Co., Ltd. (hereinafter referred to as Tencent)’s acquisition of equity in China Music Group for illegally implementing operator concentration, and ordered Tencent and its affiliates to lift exclusive copyrights and stop high Payment methods for copyright fees such as prepayments, etc., will restore the state of market competition. The case directly hits the "competitive pain points" of the online music broadcasting platform market in China, focusing on breaking exclusive copyrights and stopping high-prepayment copyright fees, ending the most-favored-nation treatment clause, reshaping the relevant market competition pattern, and continuing to play a role in my country's online music industry. Healthy development will have far-reaching impact. It not only demonstrates the attitude and determination of China's anti-monopoly law enforcement agencies to resolutely maintain fair competition in the platform economy, but also has a very important symbolic significance for the development of China's anti-monopoly law enforcement.

1. Release of regulatory dividends, and take necessary measures to restore competition to the concentration of business operators after illegal implementation for the first time

This case is the first case in which necessary measures have been taken to restore the market competition order after the implementation of the Anti-Monopoly Law. The anti-monopoly review of the concentration of business operators is an important institutional arrangement to avoid competition damage and prevent market monopoly from the source. Operators are obliged to report to the anti-monopoly law enforcement agency in a timely manner for the concentration that meets the reporting standards. If they fail to declare the illegal implementation of the concentration in accordance with the law, they shall bear corresponding legal liabilities. Article 48 of my country’s “Anti-Monopoly Law” clearly stipulates that “Where operators implement concentration in violation of the provisions of this law, the Anti-Monopoly Law Enforcement Agency of the State Council shall order them to stop the concentration, dispose of shares or assets within a time limit, transfer business within a time limit, and take other necessary measures. To restore to the state before the concentration, a fine of less than 500,000 yuan can be imposed."

Since the end of 2020, the State Administration of Market Supervision has imposed penalties on a number of platform companies’ illegal implementation of operator concentration, warning companies engaged in operator concentration to strengthen anti-monopoly compliance management, declare operator concentration in accordance with the law, and maintain a good market competition pattern. . It can be seen from the “Administrative Punishment Decision” in this case that after the concentration occurred, the market share of relevant entities increased after the concentration, copyright resources were further integrated, major competitors in the relevant market decreased, market concentration increased, and market entry barriers for online music broadcasting platforms Improved, consumer welfare may be harmed. The General Administration of Market Supervision fully assessed the impact of the transaction on market competition from the relevant market share, control, concentration, and the impact of the concentration on market entry and consumers of the operators participating in the concentration, and determined that this case has an impact on online music broadcasting in China The platform market has or may have the effect of eliminating or restricting competition.　

In order to restore fair competition in the market order, the State Administration for Market Regulation has accurately applied the provisions of Article 48 of the Anti-Monopoly Law and ordered Tencent and its affiliates to not reach or in disguise reached exclusive copyright agreements or other exclusive agreements with upstream copyright parties. Require or disguisely require the upstream copyright party to give the parties better conditions than other competitors, not to increase the cost of competitors in disguised form by means of high advance payments, eliminate or restrict competition, and propose to Tencent to declare the concentration of operators in accordance with the law and operate in compliance with laws and regulations. Clear requirements. This is the biggest highlight of this case and the greatest significance of the punishment decision in this case. It fully embodies the market thinking and the spirit of the rule of law, and demonstrates the professionalism of anti-monopoly law enforcement agencies and their deep grasp of the laws of platform economic development.

2. Adhere to both development and standardization, and build a new competitive advantage for the country

The ninth meeting of the Central Finance and Economics Committee emphasized that it is necessary to proceed from the strategic height of building a new competitive advantage of the country, adhere to both development and regulation, better coordinate development and security, domestic and international, promote fair competition, oppose monopoly, and prevent disorderly expansion of capital . The platform economy is a new driving force for my country's economic development. The ultimate goal of supervision and law enforcement is to further stimulate the innovation power and development vitality of platform enterprises, realize the sustained and healthy high-quality development of platform economic norms and innovation, and build a new competitive advantage for the country.　

The handling of this case is the implementation and vivid embodiment of the above-mentioned principles. On the whole, the online music broadcasting platform market is still an emerging industry, and its development is in the ascendant; related companies not only need to develop and grow in the domestic market, but also need to "go out" to compete in the international market. In the choice of attaching restrictive conditions to cases of concentration of undertakings, how to solve the effects of eliminating and restricting competition brought about by mergers and acquisitions, but also to fully stimulate the innovation power of enterprises and achieve stability and long-term development, the grasp of regulatory standards is very important and a test The wisdom of anti-monopoly law enforcement agencies. In this case, the State Administration for Market Regulation did not choose structural relief measures such as "disposal of shares or assets within a time limit, and transfer of business within a time limit" when handling this case. Instead, it adopted precise behavioral relief measures, ranging from breaking exclusive copyrights and regulating copyright payment methods. Starting from a perspective, while protecting fair competition in the market and bringing strong vitality to the development of the industry, it is also conducive to maintaining the core competitiveness of the enterprise and laying a solid foundation for platform enterprises to strive for more development opportunities and a broader development stage.

3. Accurately solve the pain points of competition and reconstruct the market competition ecology of online music playback platforms

In the field of platform economy, due to its unique characteristics of cross-industry competition, dynamic competition, "winner takes all", and high agglomeration, the competitive impact of relevant behaviors is more complicated, which is a common challenge faced by global antitrust law enforcement agencies.

As the platform is a bilateral or multilateral market, the investment of resources on one side of the platform is often of great significance to the development of the platform. In the market competition of online music broadcasting platforms, copyright of genuine music is the core asset and key resource input for platform operation. A music platform that has obtained an exclusive license can decide whether to sublicense to a competitor's platform, as well as the price and scope of the sublicense, resulting in a certain degree of exclusivity for music copyright resources. Through exclusive copyright agency, Tencent has increased the transaction link for online music platforms to obtain copyrighted content, increased the cost of acquiring genuine music content on new platforms, and formed a certain degree of "raw material blockade" for other competitive platforms to obtain necessary copyrighted music content. , Has raised the market entry barriers. Therefore, when my country’s anti-monopoly law enforcement agency chose punishment and relief measures in the case of Tencent’s acquisition of equity in China Music Group’s illegal implementation of operator concentration, it took a series of necessary measures such as requiring Tencent not to reach an exclusive copyright agreement with upstream copyright parties or in disguise. Competitors in relevant markets have fair access to upstream copyright resources, and the focus of competition has been returned from irrationally grabbing copyright resources by capital advantage to innovative service levels, improving user experience on a rational track, and promoting relevant platform companies. Level competition to achieve high-quality development is of great significance. At the same time, this case retains the exclusive form for independent musicians and new song debuts, which is conducive to protecting the platform's investment enthusiasm, fostering and enriching local music, and promoting the high-quality development of my country's related cultural industries.　

At the same time, my country’s online music copyright fee billing model is unreasonable and the prepayment is too high for a long time and has been criticized by the industry. At present, the method of high advance payment + income sharing is used to disguisely raise relevant market entry barriers, which is not conducive to industrial innovation and development. By attaching restrictive conditions to this case, requiring Tencent to negotiate and ask prices based on the actual usage of copyrights, it is conducive to gradually achieving the goal of “settlement of copyright fees based on actual usage” in line with international standards, and further reducing domestic platforms while maintaining fair competition in the market. Enterprises pay the burden of copyright costs to overseas copyright owners.

As analyzed above, the biggest highlight of this case is to order Tencent and its affiliates to take necessary measures to restore the state of competition in the relevant market. According to the current Anti-Monopoly Law, the fine of 500,000 yuan in this case is the upper limit of the fine for related violations. It is reported that the newly revised draft of the "Anti-Monopoly Law" has greatly increased the penalties for illegal undertakings of concentration, and will further increase the penalties for such violations after it is announced and implemented.

4. Pay attention to the market competition in the platform economy and continue to strengthen anti-monopoly supervision and law enforcement in the platform economy

The platform economy has become the world's most important business model and new economic form, and has triggered the "digital butterfly change" in various fields of economy and society. The super platform has grown rapidly, has a huge scale, and has a wide range of business, which is changing people's social life and economy. Life, with strong social mobilization ability and social order shaping ability, while bringing efficiency improvement and consumer welfare to society, it may also bring a series of clear or potential risks such as damage to personal privacy. Among them, competition The issue of risk regulation has aroused global attention. For example, on July 9, 2021, the United States issued an executive order aimed at establishing a "full government" mechanism to strengthen economic competition and prevent anti-competitive behavior in the technology industry and other industries. What’s notable is that the executive order specifically emphasizes the use of anti-monopoly laws to deal with the challenges posed by new industries and new technologies, including the rise of dominant Internet platforms, especially as they stem from continuous mergers and new technologies. Competitor acquisition, data aggregation, unfair competition, user monitoring, and the existence of network effects.　

The platform has the characteristics of data as the production factor, digital technology as the support, multilaterality, openness, unique resource allocation, network effect, lock-in effect, and leverage effect. China’s anti-monopoly law enforcement agencies should be based on China’s relevant market competition and platform’s characteristics. Market power, behaviors engaged in and the impact of behaviors on competition and consumer welfare, etc., actively carry out continuous market research and market competition status research on the market where the platform is located, and pay close attention to the behaviors that the platform engages in that may generate competition risks, especially for Stifling mergers and acquisitions of start-ups, etc.　

At the same time, my country’s anti-monopoly law enforcement agencies should also track and evaluate the follow-up effects of typical anti-monopoly cases in the field of platform economy to determine the impact of anti-monopoly penalties on the market, and evaluate the relief and penalties taken by the anti-monopoly law enforcement agencies for violations The subsequent impact of the measures on market competition and the impact on the development of the industry, in order to further enhance the scientificity and accuracy of anti-monopoly supervision and enforcement, promote the continuous improvement of anti-monopoly legislation, enforcement and competition compliance in the field of platform economy in my country, and prevent capital loss Orderly expand, and promote the healthy and sustainable development of the platform economy. ( The author is a professor at Renmin University of China Law School and a member of the Expert Advisory Group of the Anti-Monopoly Committee of the State Council )

Justin D. Lee 7/25/21 Justin D. Lee 7/25/21

The State Administration for Market Regulation, Ordering Tencent Holdings Co., Ltd. to lift the exclusive copyright of online music and other penalties in accordance with the law .

In January 2021, the State Administration of Market Supervision filed an investigation into Tencent Holdings Co., Ltd.'s (hereinafter referred to as Tencent) acquisition of shares of China Music Group in July 2016 for allegedly illegally implementing operator concentration.

The General Administration of Market Supervision, in accordance with the Anti-Monopoly Law, ascertains the fact that this transaction is illegally implementing concentration, and fully evaluates the relevant market share, control, concentration, and the impact of concentration on market entry and consumers of the operators participating in the concentration. At the same time, it has extensively solicited opinions from relevant government departments, industry associations, experts and scholars, and competitors in the industry, and has listened to Tencent's opinions on many occasions.

The investigation shows that the relevant market in this case is the online music broadcasting platform market in China. The copyright of genuine music is the core asset and key resource for the operation of the online music broadcasting platform. In 2016, Tencent and China Music Group accounted for about 30% and 40% of the relevant market respectively. Tencent obtained a higher market share by merging with major competitors in the market. After the concentration, the entity owns more than 80% of the exclusive music library resources. Has the ability to urge upstream copyright parties to reach more exclusive copyright agreements with them, or require them to be given better trading conditions than their competitors, and may also have the ability to increase market entry barriers through copyright payment models such as high advance payments, and have or It may have the effect of eliminating or restricting competition.

In accordance with Article 48 of the Anti-Monopoly Law and Article 57 of the “Interim Provisions on the Review of Concentration of Undertakings”, the State Administration for Market Regulation has made an administrative penalty decision in accordance with the law, ordering Tencent and its affiliates to adopt 30 Measures to restore the state of market competition, such as the removal of exclusive music rights within days, the suspension of payment methods for copyright fees such as high prepayments, and the prohibition of asking upstream copyright parties to give them conditions superior to their competitors without justifiable reasons . Tencent will report to the State Administration of Market Supervision on the performance of its obligations every year for three years, and the State Administration of Market Supervision will strictly supervise its implementation according to law.

This case is the first case in which necessary measures have been taken to restore market competition since the implementation of China’s anti-monopoly law . Ordering Tencent to lift its exclusive copyright and other measures will reshape the relevant market competition order, lower market entry barriers, and provide competitors with fair access to upstream copyright resources, which is conducive to returning the focus of competition from using capital advantages to grab copyright resources to innovation Service levels and improve user experience are on the rational track; it is conducive to promoting a reasonable way to calculate copyright fees in line with international standards and reducing downstream operating costs; it is conducive to cultivating new market entrants and creating a fairer competitive environment for existing companies to ensure Consumers’ right to choose will ultimately benefit consumers and promote the healthy development of the online music industry’s normative innovation.

More news >>

Anti-monopoly regulation falls a heavy hammer

The long-maligned exclusive copyright of online music ceases

Meng Yanbei

1. Release of regulatory dividends, and take necessary measures to restore competition to the concentration of business operators after illegal implementation for the first time

2. Adhere to both development and standardization, and build a new competitive advantage for the country

3. Accurately solve the pain points of competition and reconstruct the market competition ecology of online music playback platforms

4. Pay attention to the market competition in the platform economy and continue to strengthen anti-monopoly supervision and law enforcement in the platform economy

Justin D. Lee 7/25/21 Justin D. Lee 7/25/21

Program Report: Productivity, Innovation, and Entrepreneurship

Nicholas Bloom, Josh Lerner & Heidi Williams TwitterLinkedInEmail

The Productivity, Innovation, and Entrepreneurship (PIE) Program was founded as the Productivity Program, with Zvi Griliches as the inaugural program director, in 1978. The program benefited tremendously from Griliches’ inspirational leadership, which was continued by Ernst Berndt. In recent years, the program has expanded to incorporate the vibrant and growing body of research in the affiliated fields of innovation and entrepreneurship.

With the generous support of the Ewing Marion Kauffman and Alfred P. Sloan Foundations, the program has generated a large and diverse volume of research activity. Currently, 128 researchers are affiliated with the PIE Program. Since the last program report, in September 2013, affiliates have distributed more than 1,050 working papers and edited or contributed to several research volumes, including the annual Innovation Policy and the Economy series.

The activities of the program are organized into four large project areas: economic research on the measurement and drivers of productivity growth; innovation, which examines R&D, patenting, and creative activities; entrepreneurship, which focuses on the measurement, causes, and effects of new business creation; and digitization, which focuses on the creation, use, and impact of digital information. This review summarizes the research in the first three of these areas.1 In the interest of space, we will not detail the PIE group’s many activities, including boot camps for graduate students and an annual conference in Washington that communicates research findings to the policy community.

Productivity

Recent years have seen growing concerns that US gross domestic product (GDP) growth is slowing. A factor that accounts for about half of this slowdown is the decline of labor productivity growth [Figure 1], which fell by roughly half, from 3 percent to 1.5 percent, between 1950 and 2019. The other half of slowing growth is due to declining growth of labor hours, due roughly equally to declining population growth and declining labor force participation.2 National productivity is defined as the amount of GDP that can be obtained with a given set of inputs. In this sense, productivity growth is “growth by inspiration” in that it yields more from less, in contrast to growth from increasing the use of inputs, which has been labeled “growth by perspiration.” As such, productivity growth is critical to driving long-run increases in the standard of living.

One immediate question is whether the productivity growth slowdown is real. An alternative view is that the observed slowdown in productivity growth could be an artifact of some measurement issue such as the increasing importance of online activity, much of which may not be recorded in conventional GDP statistics. Several recent studies argue against this view: they conclude that the decline in productivity growth is real, rather than due to measurement issues in inputs and outputs, transfer pricing, or cyclical issues related to the end of the 1990s information technology boom.3

This then leads to another question: what is driving the fall in productivity? Robert Gordon argues that a combination of headwinds accounts for this slowdown.4 One is the slowing growth of educational attainment, which began around 1980 with the annual growth rate of the percentage of the population completing high school falling from 3.3 percent per year until 1980 to only 0.2 percent after 1980, with similar slowdowns in college enrollment growth.

The second headwind Gordon highlights is the slowdown of productivity growth after the end of the Great Inventions Era. He argues that inventions such as sanitation, antibiotics, steam and electric power, radio, telephone, and air conditioning drove rapid national growth during the first part of the 20th century, and that comparably high-impact inventions have not been produced as frequently in recent years. Nicholas Bloom, Charles Jones, John Van Reenen, and Michael Webb build on this idea, arguing empirically that new ideas like these great inventions are becoming increasingly hard to find.5 They document that innovation output per R&D dollar or per scientist is falling, perhaps because the lower-hanging fruits on the knowledge tree are getting plucked over time.

A final, more positive headwind may be that the huge productivity benefits derived from modern information communication technologies (ICT) like computers, the internet, and smartphones take time to show up in national productivity. Erik Brynjolfsson, Daniel Rock, and Chad Syverson argue that since it took almost 50 years in the first half of the 20th century to incorporate electricity fully into modern factories and offices, we should be more patient in looking for the productivity impact of ICT.6 This is the ICT productivity J-curve — an initially slow productivity impact as society has to reorganize to use these new technologies efficiently, but a longer-run acceleration once they are effectively exploited.

Following this narrative, a reasonable outlook is that these modern great inventions will eventually raise productivity growth, overcoming some of the first two headwinds. But it may take another 10 or 20 years for society to reorganize itself to exploit them. Of course, one step toward that has potentially been the massive shift to working from home during the pandemic, for which ICT has been invaluable.7 Indeed, one could argue this almost certainly improved productivity versus any pre-computer version of working from home, so in that sense the enormous productivity impact of modern ICT has already begun.

Innovation

A second focus of academics and policymakers in recent years has been trying to understand the causes and consequences of rising inequality in the United States and other developed countries.8From an innovation policy perspective, several questions are of interest. Have innovation policies — such as government-awarded market power through patents and antitrust policy decisions — contributed to the observed rise in inequality? How does inequality at a societal level impact who becomes an inventor and what they invent? Tremendous progress is being made in developing new conceptual frameworks, datasets, and empirical approaches to tackle these questions at both the macro and micro levels.

At the macro level, two recent studies consider how innovation affects inequality in Schumpeterian growth models.9 One of these studies also leverages variation in the composition of the US Senate Committee on Appropriations to empirically test for a causal link between innovation and inequality, and argues that a 1 percent increase in patents increases the top 1 percent’s income share by 0.2 percent.10

At the micro level, research in fields such as health economics and labor economics has provided evidence on how innovation affects inequality. David Cutler, Ellen Meara, and Seth Richards-Shubik point out that when the most common causes of death vary across demographic groups, a policy of equalizing the expected marginal benefit of research across diseases can increase cross-group disparities in mortality outcomes.11 Taking this idea to the data, they suggest that National Institutes of Health-funded research increased the Black-White infant mortality gap between 1950 and 2007.

Two recent studies have explored the link between innovation and earnings inequality. Patrick Kline, Neviana Petkova, Heidi Williams, and Owen Zidar develop a novel firm-level linkage between patent applications and US Treasury firm/worker tax filings, and document that patent allowances raise average earnings at the firm level but also exacerbate within-firm inequality on a number of margins — with earnings of top-earning employees, firm officers, and male employees responding more strongly to patent grants.12 Related research using a novel firm-level linkage between patents and US Social Security Administration earnings records suggests that rising inequality in innovation activity across firms in the 1990s, as measured by patenting, can account for a significant share of the recent rise in income inequality.13

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Of course, inequality at the societal level might also affect who becomes an inventor, and what they invent. Several recent studies have constructed linked data enabling new analyses of how demographic factors are associated with the probability of inventing, as measured by patenting.14Figure 2 documents that children from high-income (top 1 percent) families are 10 times as likely to become inventors as those from below-median-income families. While the results from these papers suggest that public policies could influence who becomes an inventor, it is difficult to derive quantitative conclusions from these descriptive analyses. An important step in closing this gap is provided by the work of Chang-Tai Hsieh, Erik Hurst, Chad Jones, and Peter Klenow, who estimate that between 20 and 40 percent of the increase in US output per person between 1960 and 2010 can be explained by an improved allocation of talent, notably the convergence in occupations across gender and race.15

Entrepreneurship

Given the concerns about stagnant productivity and rising inequality, it is natural to wonder whether either or both concerns are being — or have the potential to be — addressed by the burgeoning number of new high-potential ventures. Much attention in recent years has focused on the role of venture capital (VC) in fomenting innovation. The level of VC financing has rapidly increased over the last decade, in contrast with federal R&D which has been stagnant in the US. A number of economic models suggest that VC funds should be uniquely positioned to promote innovative growth in risky and uncertain environments, given their combination of careful screening, intense monitoring, and staged financing.16

The empirical literature, however, suggests a more nuanced picture. VC funding is increasingly concentrated in a relatively small number of startup firms that raise far more capital than in the past and stay private much longer.17 Much of the funding comes not from the venture investors themselves, but from investors who traditionally focused on public firms, such as mutual and hedge funds, as well as pension funds and other large institutional investors.

This concentration of capital may or may not be socially desirable; after all, the list of long-gestating firms that garnered extensive financing while private would include Alibaba, Facebook, and Uber, each of which undoubtedly has had profound economic impacts. But Josh Lerner and Ramana Nanda argue that while venture funding is very efficacious in stimulating a certain kind of innovative business, the scope is increasingly limited. For instance, using data on the patents filed at the US Patent and Trademark Office, they found that the top 10 patent classes using the US Cooperative Patent Classification (CPC) system represented 48 percent of all US VC patents filed over the 2008–17 period, compared to 24 percent for the top 10 patent classes for patents not filed by comparable VC-backed firms.18 This concentration has increased substantially over time.

This suggestion is underscored by computations by Sand Hill Econometrics. Susan Woodward and Robert Hall describe this firm’s indices, which suggest that an investment in all software deals between December 1991 and September 2019 would have yielded an annualized gross return of 24 percent, far greater than investments in hardware (17 percent), healthcare (13 percent), or clean tech (2 percent).19 These data further illustrate that the divergence in the performance of these categories has been particularly stark in the last decade. Thus, the shift of venture investment to software is not surprising.

A related concern is the increasing concentration of venture funds in the hands of a number of small groups. Not only are these funds concentrated geographically in a few urban areas, but the makeup of the most influential US firms is very different from that of the country as a whole. At VC firms and among the founders of VC-backed startups, women represent less than 10 percent of the entrepreneurial and VC labor pool, Hispanics about 2 percent, and African Americans less than 1 percent.20 This concentration appears despite the fact that women, Hispanics, and African Americans have much higher corresponding levels of representation in education programs that traditionally lead to careers in these sectors, as well as higher rates of representation in other highly compensated professions.

The disparities are also manifested in financing raised. For instance, using data from the Kauffman Firm Survey, Robert Fairlie, Alicia Robb, and David Robinson show that the typical White-owned firm had 35 times the amount of outside equity financing as the analogous Black-owned firm at the time of the initial survey, a difference that persists over time.21

These findings suggest that while VC is a powerful tool for boosting innovation, it is far from a panacea for addressing rising inequality or stagnant productivity across the economy.

Justin D. Lee 7/25/21 Justin D. Lee 7/25/21

Market Concentration Has Declined from the Consumer Perspective

THE DIGEST: No. 7, July 2021

Viewed from the consumer’s vantage point, 44.4 percent of all industries were highly concentrated in 1994, compared with 36.6 percent in 2019.

Screen Shot 2021-07-25 at 10.30.04 AM.png

The extraordinary growth of companies like Alphabet, Amazon, and Apple, and high-profile mergers in fields such as airlines, hospitals, and media, have generated intense interest in the changing nature of competition in the United States. As megafirms have emerged in a number of industries, many studies have pointed to rising concentration as a possible explanation for the declining share of labor in national income, as well as low rates of corporate investment and productivity growth.

A study by C. Lanier Benkard, Ali Yurukoglu, and Anthony Lee Zhang suggests that determining whether concentration has been rising or falling depends critically on the boundaries one draws between different markets. From the producer’s perspective, data on business sectors collected by the Census Bureau show clear evidence that concentration has risen. In Concentration in Product Markets (NBER Working Paper 28745), the researchers instead focus on concentration in product markets as experienced by consumers — the approach that antitrust regulators adopt — and estimate that concentration trends have been falling, rather than rising, for the past 25 years.

To illustrate the different perspectives, the researchers consider the case of metal cans. The Census Bureau puts all metal can production into a single category, including soda cans, aerosol cans, and paint cans. But these products are not substitutes for one another and do not compete in product markets. Meanwhile, soda cans can be replaced by glass or plastic bottles, goods that have their own, separate, Census categories.

The Census Bureau also defines industries nationally, even though many products are not transportable and compete only locally. That can lead to skewed conclusions. For instance, at the national level, concentration in cable TV has risen dramatically over the last few decades. But at the local level, in the market that matters to consumers, competition has increased and more consumers have multiple cable and satellite suppliers to choose from.

From the perspective of consumers, the researchers show that concentration fell across the board in the past quarter century. Herfindahl-Hirschman indices (HHI) are a common measure of market concentration. The median HHI decreased from 2,265 to 1,945 between the years 1994 and 2019, and the HHI at the 90th percentile dropped from 5,325 to 4,570. Industries with HHIs between 1,500 and 2,500 are considered moderately concentrated, while those with HHIs above 2,500 are thought of as highly concentrated. In 1994, 44.4 percent of all industries were highly concentrated; in 2019, the comparable value was 36.6 percent.

Many manufacturing sectors have seen HHI decreases, while most nonmanufacturing sectors have seen no substantive change. Some industries were exceptions to the general trend. In the car rental industry, for example, HHI rose from 1,937 to 3,677.

Industries with the largest decreases in concentration often saw a new brand enter the market. In 1999, for example, Gorilla Glue started challenging dominant brands Elmer’s and Krazy, both of which are owned by the same company. By 2019, Gorilla had more than 30 percent of the market.

The researchers suggest that the dichotomy between increasing concentration at the sector level and decreasing concentration at the product level could be explained by declining costs of firms entering product markets that are adjacent to ones in which they already operate. In such a setting, efficient companies in a single-product market enter closely related product markets in which other firms are dominant. This process results in larger firms and higher concentration at the sector level and lower concentration at the product level. Overall production is more efficient, so if prices are determined primarily through product market competition, this process can benefit consumers.

— Laurent Belsie

Justin D. Lee 7/25/21 Justin D. Lee 7/25/21

The IT Revolution and Labor Market Activity of Older Workers

THE DIGEST: No. 7, July 2021

Limited skill with workplace computing raised the retirement rate for older workers by more than 1 percentage point a year when computers were introduced to jobs after 1984; these differentials began to disappear after 2000.

The revolution in the use of workplace computers that began in the 1980s took a toll on older workers who were not tech-savvy. They faced pay cuts, early retirement, and transfers to less intensive jobs.

In Computerization, Obsolescence, and the Length of Working Life (NBER Working Paper 28701), Péter Hudomiet and Robert J. Willis study how computerization affected older workers between 1984 and 2017. They find that the computer knowledge gap between older and younger US workers peaked in the 1980s and early 1990s, and then began to decline. It had disappeared by the mid-2010s.

The researchers use responses to a number of government surveys to calculate the probability that workers over age 50 were equipped with the computer skills called for in their occupations. Their measure of the knowledge gap captures the extent to which workers fall short of computer literacy. For example, if 70 percent of secretaries aged 40–49 in 1992 used word processors rather than typewriters, while 60 percent of secretaries over the age of 50 did so, the knowledge gap would be 10 percentage points.

The researchers estimate that computer knowledge gaps increased the likelihood that older workers — ages 50–69 — would retire by 1 to 1.4 percentage points per year. This raised the retirement rate for this age group from about 8 percent to over 9 percent per year. They also estimate that a 10-percentage-point knowledge gap reduced annual wages by at least 2.5 percent, and perhaps as much as 7 percent.

Four subgroups of the population were particularly hard hit by knowledge gaps: women, workers in office jobs, workers with some college education, and workers between the ages of 60 and 64. Women may have been more affected because they were less likely to learn to use computers than men. Office workers such as bookkeepers may have seen computers replace their jobs altogether. More highly educated workers may have had greater opportunity to find non-computer-intensive work. And for older workers in general, companies may have decided that it was not worth retraining those who were already near the end of their careers.

The impact of computers on a worker’s prospects was associated with his or her education. Among high school dropouts, the fraction of computer users at work remained low throughout the study period. Among high school graduates, computer use in the workplace became significant during the 1990s.

For some occupations, such as maintenance and food service, computer use remained negligible. Older workers in moderately skilled occupations, such as property management, sales, and factory floor supervision, lagged behind their younger peers in computer knowledge well into the current century.

— Steve Maas

Justin D. Lee 7/25/21 Justin D. Lee 7/25/21

The Rise of High-Skilled Workers as ‘Human Capitalists’

THE DIGEST: No. 7, July 2021

Labor’s share of corporate earnings has shrunk in recent decades, but when equity-based payments are included in compensation, the decline for high-skill workers is almost entirely eliminated.

Standard estimates of the recent decline in labor’s share of national income are likely to overstate the drop by failing to account for a large fraction of compensation in the form of equity grants and stock options. In Human Capitalists (NBER Working Paper 28815), Andrea L. Eisfeldt, Antonio Falato, and Mindy Z. Xiaolan report on a new class of high-skilled workers who, since the 1980s, have seen equity-based compensation increase to 40 percent of their earnings. The researchers estimate that equity compensation now constitutes 7 percent of corporate value-added, up from under 1 percent in 1980.

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The researchers find that 78 percent of equity-based pay now goes to employees below the level of the executive suite and that human capitalists own a 10 percent stake in the public companies analyzed. Including equity-based compensation reduces by nearly a third the decline in wage-only income as a share of value-added since the 1980s, they calculate. For high-skilled labor, counting equity-based compensation almost eliminates the decline.

Even after equity-based compensation is factored in, labor’s share of corporate earnings has shrunk in recent decades. But the gap is far more evident among lower-skilled, wage-dependent workers. Augmented by stock options, capital gains, and dividends, the high-skill share of total labor income increased from 46 percent at the start of the 1980s to 58 percent today while the employment share of high-skilled workers remained flat at 30 percent.

The increased prevalence of equity-based compensation has been a win-win for high-skill employees and their employers. These workers benefit from lower tax rates on capital gains after exercising stock options, and firms use the prospect of stock grants as an incentive for retaining prized employees. Further, substituting equity pay for wages historically reduced reported labor costs and boosted annual earnings. The researchers estimate that 91 percent of equity pay has been used to replace wages rather than as compensation for increased productivity.

Standard data sources, such as the Bureau of Labor Statistics, do not capture the majority of equity pay, much of which is taxed as long-term capital gains, not as ordinary income. Additionally, since stock options are not exercised immediately, they often do not show up in income data for the year in which they were granted.

The researchers overcome the measurement hurdles by mining Securities and Exchange Commission filings on shares reserved for compensation reported by a broad range of firms in the manufacturing, health, consumer goods, and high-tech sectors from 1960 to 2019.

Their compensation calculations show that the greatest earnings gains go to human capitalists working in sectors that have experienced the largest declines in prices of investment goods. For example, as firms purchase cheaper and more powerful computers, they increase the productivity of high-skill workers. That complementary relationship between high-tech investment and high-skilled workers is not evident when wages alone are counted. By contrast, capital goods investment is negatively correlated with wage-based, low-skilled workers, reflecting the substitution of machines for people.

While total compensation at the C-suite level appears to have peaked around the year 2000, the researchers find, equity-based compensation to a broader set of high-skilled labor continues to rise.

— Steve Maas

Justin D. Lee 7/18/21 Justin D. Lee 7/18/21

Can private controlled high-speed rail stir "a pool of spring water"?

Gu Yang Economic Daily

Recently, two pieces of news about high-speed rail have attracted much attention. First, the Beijing-Shanghai high-speed railway, which operates at the fastest speed in the world, has ushered in its 10th anniversary; Second, Hangzhou-Shaow-Taiwan Railway has achieved full track laying and running, and will become China's first private controlled high-speed rail line after its official operation by the end of the year.

*This is the business room on the Fuxing smart EMU G6 train taken on June 25. Photo by Wang Xiang (Xinhua)*

As one of the world's busiest rail lines, the Beijing-Shanghai high-speed rail is far ahead in profitability. Public information shows that between 2014 and 2019, The net profit of Beijing-Shanghai high-speed railway increased by 39.4% annually. Even under the severe impact of Xinguan pneumonia epidemic in 2020, it still achieved a profit of 4586 million yuan, which is a veritable benchmark for high-speed railway profitability.

Such a high return, I am afraid there is no social capital not tempted. But for a long time, social capital has mostly played a supporting role in railway construction, especially in such an important infrastructure field of people's livelihood as high-speed rail. It was unimaginable for social capital to achieve absolute control. Now, the Hangzhou-Shaow-Taiwan high-speed railway is the first to "eat crabs," taking the lead in realizing the absolute control of social capital.Although its market prospects are uncertain in the short term, it will be a far-reaching icebreaker for the reform of the national railway investment and financing system。

In recent years, social parties to open and encourage social capital to participate in major infrastructure construction calls are increasing. For the need of economic development, some localities have made some useful exploration to attract social capital to participate in the construction of infrastructure projects and made some progress. But overall,Social capital in participating in the construction of projects is still lack of a clear grasp, asymmetric information, high financing costs and other factors, so that many social capital deterred。

Because of this, the "pool of spring water" stirred by the Hangzhou-Shao-Taiwan high-speed railway brings confidence to the social capital in the wait-and-see hesitation. This confidence comes not only from innovation in equity structure,More from the social capital to obtain a more adequate operating rights, income rights for good expectations。

It is understood that Hangzhou-Shaow-Taiwan high-speed rail holdings from the beginning to establish a "railway + PPP + industry" operation model, clearly proposedThrough property, shops, advertising space and more flexible exploration of commercialisation, replacing the traditional model of relying solely on ticket revenue. For example, the development reform, the State Railway Group and other departments have made it clear that they will support enterprises to determine their own fares, determine the number of trains, and give them the right to make decisions freely. In addition, social capital will benefit from the potential benefits of upgrading urban efficiency, industrial agglomeration and expanding employment brought by high-speed rail.

*April 17, construction workers in the last section of the Jiaojiang Super Bridge of Hangzhou-Shao-Taiwan Railway hoisting construction. Photo by Huang Zongzhi (Xinhua)*

It should be said that these policy initiatives demonstrate the government's determination and sincerity to attract social capital to participate in infrastructure construction, and also fully demonstrate the rational attitude of all parties to the project to respect the law of economic operation and follow the principle of marketization. As market analysis points out, under the new model,More emphasis on the rate of return on investment social capital is expected to be more focused on the people's livelihood security functions between the formation of a more benign and efficient interaction between the state-owned capital, which will help further the key role of investment.

At present, China's economy is continuing to recover. It is expected that consumption and investment demand will slowly recover in the second half of the year, which will give a stronger impetus to economic recovery.In this context, to further enhance the growth stamina of private investment, we must continuously stimulate the vitality of various social capitalOn the one hand, we should open up the market access of private enterprises, support their innovation and development, encourage private capital to participate in the construction of "two new and one heavy" projects and complement the weaknesses; On the other hand, we should strengthen the investment capacity of social capital, innovate investment methods, promote the implementation of cost-cutting policies for private enterprises, and make good use of bank credit, market bonds and other financial instruments.

Of course, to fully mobilize market subjects and social forces to participate in infrastructure construction, we should also make overall plans to strengthen the foundation, increase functions, benefit the long-term, benefit people's health, and prevent risks.In this process, we should fully stimulate the endogenous driving role of innovation. At present, in addition to the Hangzhou-Shaow-Taiwan high-speed railway taking the lead in the investment and financing system, The pilot of real estate investment trusts (REITs) in the infrastructure sector is also steadily underway, and we can expect more such innovations in the future to expand the scope for social capital to participate deeply in infrastructure construction.

Justin D. Lee 7/18/21 Justin D. Lee 7/18/21

Global Emerging Technologies Summit in Washington, DC

U.S. Embassy in China

The National Security Council on Artificial Intelligence (NSCAI) hosted the Global Emerging Technologies Summit on July 13, 2021 in Washington, DC.

Secretary Blinken said at the summit: “We need America and its partners to continue to be the world's innovation leaders and standard-setters, Ensure that all future innovations remain centred on universal rights and democratic values and that they bring tangible benefits to people's lives.”

Read the full text of the Secretary of State's speech by clicking "Read More" or by following the link below:

https://www.state.gov/secretary-antony-j-blinken-at-the-national-security-commission-on-artificial-intelligences-nscai-global-emerging-technology-summit/

Justin D. Lee 7/9/21 Justin D. Lee 7/9/21

Steps to Consider Before Investing a Divorce

Bernstein

Despite a couple’s best intentions, divorce remains remarkably common, with the American Psychological Association estimating that 40 to 50% of married US couples will eventually part ways. Divorce can be fraught with emotion and logistical considerations. But while the circumstances of a split can vary, a desire for clarity is universal—especially for the non-monied spouse. To help alleviate anxiety, structure is vital for the spouse earning less income, who is likely wrestling with many questions:

Will my settlement be enough to sustain my lifestyle?

How should I invest settlement funds?

The market is at (or near) an all-time high; is it prudent to wade in right now?

Does it make sense to invest all at once, or should I stage my entry over time?

While these questions may seem daunting, tackling them head-on—and sooner rather than later—can help lay a stable foundation during a transition. With robust modeling, a financial advisor can map out a course of action that makes the most sense for a recently divorced investor.

Strategize for a New Reality

Consider the case of Sheila, a 55-year old woman recently divorced from her wife, who was the high-income earner in their household. Sheila received a healthy cash settlement. However, it was clear she would need her assets to grow to meet her lifestyle needs moving forward. Her liquid and retirement assets totaled just over $9.0 million; her spending, just over $265K annually.

We started by determining Sheila’s core capital—the amount she’d need today to sustain her lifestyle with a high degree of confidence for the rest of her life. Then we determined if she had any surplus capital—wealth above and beyond her core that can be used opportunistically in the pursuit of secondary goals. From there, we mapped out Sheila’s investment strategy.

One of the more important decisions Sheila made was to decide on the appropriate asset allocation to meet her risk tolerance and income needs, which were very different from how the assets were invested during her marriage. Working with her Bernstein advisor, Sheila felt comfortable allocating 50% of her portfolio to stocks and the other 50% to bonds. However, as the time to deploy her cash came near, she felt torn.

Market Highs: A Red Flag?

The reason for her concern was valid: markets were close to all-time highs. Some analysts anticipated a correction, with high volatility and lower returns from traditional asset classes over the near term. While it’s understandable how these sober forecasts could give any investor reason for pause, they were even more concerning for Sheila. Her divorce settlement proceeds were her entire nest egg. Wouldn’t investing at a market high bring on the risk of losses in the months and years ahead?

Unfortunately, there is no way to fully remove the potential for market dips for an equity investor. But trying to time a perfect entry point almost always leads to losses. That’s because cash that sits uninvested for too long misses out on gains. Context is helpful: because the market has historically trended higher over the long term, it has traded near its all-time high roughly 43% of the time. Since World War II, investors buying at each market low earned an average of 11.5% annually, versus 9.6% for investors buying at each market high. The takeaway: buying even at market highs still provides an attractive return.

Inaction Is Action: The Cost of Delaying Investment

To aid Sheila’s decision, her advisory team ran a Wealth Forecasting Analysis, which quantified the cost of delaying her investment. The results were striking: If Sheila invested promptly, her assets were conservatively projected to grow at a rate that would meet her core capital needs. She would, in effect, have a secure financial future. If, on the other hand, she delayed investment for five years, she would forfeit critical portfolio growth, which could have increased her required core capital from $8.9 million to $9.8 million, costing her nearly $1 million and potentially putting her long-term financial security at risk.

Delaying Investment Increases Required Core Capital*

When to Enter the Market

Understanding the market’s historical patterns—and how they’re playing out today—helped reassure Sheila. However, she still wrestled with the potential for a market downturn shortly after investing her entire settlement. Sheila’s advisor recommended a dollar-cost averaging (DCA) strategy—keeping six months’ worth of expenses in cash and investing the remainder at regular intervals over the course of three months.

Dollar-cost averaging is an effective way to achieve the most important step for a reluctant investor—getting invested—while hedging the risk of a near-term portfolio decline. It is important to note, however, that because markets tend to climb over time, DCA strategies typically generate less overall wealth than an “all at once” approach. That’s the trade-off: the longer the investment period, the lower relative returns will tend to be in typical and strong markets; returns will, on the flip side, be relatively higher in poor markets.

In any DCA strategy, time is the key. Beyond a six-month investment period, the benefit is outweighed by the cost of cash sitting undeployed. That’s why Sheila’s advisor believed that a three- to six-month investment timeframe was ideal for balancing her concerns against her need for growth.

The Benefit of Dollar-Cost Averaging Comes with a Cost over Time

Your Goals Are Our Benchmark

Whether you enter the markets all at once or more gradually, as Sheila did, the most important thing is to invest. It’s natural for investors to turn to frequently cited indices like the S&P 500 or Dow Jones Industrial Average as benchmarks for evaluating performance. A better measure of success in our view, especially in periods of life transition, is to consider your progress in light of the personal and financial goals you and your advisor agreed upon when developing your investment plan:

Is your asset allocation matched appropriately with your time horizon?

Do your investments align with your values?

Is your portfolio operating in such a way that you are sustainably able to get what you want and need, while also sleeping at night?

If you can answer “yes” to these questions, you’ve not only weathered the transitional storm—but are well on your way to a financially stable and empowering future.

Justin D. Lee 6/15/21 Justin D. Lee 6/15/21

Healthcare Stocks: Four Questions for the Recovery

Bernstein

Disappointing returns for healthcare stocks through the market’s recovery from the pandemic have raised concerns about the sector. But there’s still plenty of promising growth potential to be found. These four questions can help investors identify areas of interest.

Since the pandemic began, many investors have paid close attention to the healthcare sector. Yet global healthcare stocks have trailed the broader market since the recovery from the COVID-19-related crash began in April 2020 and in the year to date (Display).

Why the underperformance? First, the sector was affected by a rotation into more economically sensitive industries and out of more defensive industries such as healthcare as investors positioned for an economic reopening post COVID-19. Second, unprofitable small- and mid-cap biotech companies have sold off this year, following strong but volatile gains in 2020. Lastly, rising interest rates have suppressed gains for growth stocks in general—including healthcare—which tend to benefit from lower discount rates. But these trends don’t undermine the long-term appeal of innovative healthcare companies with strong business fundamentals, in our view. The following questions can help guide the way to attractive opportunities in the sector.

1. How has the development of COVID-19 vaccines changed the healthcare industry?

Historic efforts to develop COVID-19 vaccines have had two huge effects on the industry. First, the success of mRNA technology has added an important weapon to drugmakers’ arsenals. We’ve learned from the pandemic that this new technology can be scaled up quickly to deliver a highly efficacious vaccine. It won’t be successful wherever it is applied. But we can look forward to new mRNA-driven efforts to develop vaccines for influenza—which has similarities to COVID-19—and also potentially for malaria, for HIV and in oncology.

Second, drug development has accelerated. The urgency of COVID-19 vaccines triggered innovations to clinical trials that will be applied more broadly. For example, instead of having patients come into hospitals for tests, we believe that some clinical trials will be able to utilize new technologies to monitor trial subjects remotely, effectively decentralizing the clinical trial process. Regulators have also shown they can cut red tape and hasten processes. Time-to-market for drug development may improve from the current standard of seven to 10 years by about a year or two, in light of these two trends.

2. What do the Biden administration’s policies mean for the US healthcare market?

Since President Biden’s election, there’s been quite a bit of talk about what policies he might apply to the healthcare sector, particularly on drug pricing or health insurance. So far, there haven’t been signs of major healthcare initiatives. Even within the Democratic party, there’s formidable opposition to major drug pricing reform such as reference pricing, which would link US drug prices to what’s being charged in Europe, or allowing the government to negotiate drug prices. Efforts to waive patents on COVID-19 vaccines to help reduce costs for emerging markets are also stuck. This requires international consensus, and Germany has recently opposed proposals to waive patents. So overall, we don’t expect any extreme policy changes for the healthcare sector under the new administration, which reduces policy risk for investors.

3. Does an ESG focus identify unique risks or opportunities for healthcare companies?

Integrating environmental, social and governance (ESG) factors in an analysis of healthcare companies is becoming increasingly important for equity investors. Since healthcare is an industry that has a profound impact on society, there’s a growing focus on the value of care provided for patients and communities. We believe companies that improve the value of care delivered make a positive impact on the healthcare system, which positions them well for growth in an era of rising healthcare costs and increased government involvement.

The value of care can be improved by decreasing the cost of service, increasing the benefit to patients or both. Another way to measure value is to connect healthcare with social determinants of health, such as housing, age, and community and education, which can help reduce adverse outcomes. Engaging with companies to increase the value delivered to patients is an effective ESG framework for investing in the healthcare sector, in our view.

For example, by focusing on value-based outcomes, UnitedHealthcare has shortened the length of hospital stays per case by 40% and lowered the mortality rate for patients with congenital heart disease by 41%. Patients who have used the company’s cost and wellness transparency resources have paid nearly 30% less than patients who did not. Edwards Lifesciences produces heart valves that are much cheaper than competitors’, which fosters shorter recovery times and helps people live longer. These examples show how a value-based ESG approach focused on patient benefits can also create better business outcomes for companies—and support returns for investors.

4. What are the latest trends in healthcare that deserve investor attention?

Diagnostics is an exciting segment of the industry. The pandemic taught us the hard way that a more sophisticated testing infrastructure could have helped prevent the spread of COVID-19. So, there will be increased efforts—particularly by governments—to develop preventative diagnostics capabilities. We’ll see significant investment in surveillance and tracking systems.

Efforts to bring medical care closer to the home are growing. The more you can keep people out of the hospital and intervene earlier, the better it is for the patient and for society. Technology will also be used more broadly, for example, to identify patients who are at risk of a bad outcome, which can help determine the sequence of care.

Data analytics, too, are becoming more commonplace to improve outcomes in innovative ways. For example, data analytics can help surgeons refine their skill set and understand where their technique could be better.

These trends are creating fertile ground for equity investors. But don’t be blinded by science; exciting drugs in development and new technologies on their own aren’t good guides to investing success, in our view. Focusing on business fundamentals—balance sheets, competitive advantages, cash flows and profitability—is the best way to find innovative healthcare companies that are well positioned to deliver long-term returns to equity investors in a rapidly evolving post-pandemic world.

AUTHORS

Vinay Thapar

Portfolio Manager and Senior Research Analyst—US Growth Equities and International Healthcare Portfolio

Ryan Oden

Research Analyst—Equities—AllianceBernstein