Ofuk Akcegit is a distinguished economist. that it Arnold C Harburger Professor of Economics at the University of Chicago, one of the most influential departments of the discipline of the last century (the so-called “Chicago School”), and holds a Ph.D. from the Massachusetts Institute of Technology. The Turkish citizen has also received several awards for his research, including the Germany Prize Max Planck Humboldt And as an institute And also prestigious Guggenheim Fellowship.
A pioneer in the field of quantitative economic growth, Akcigit examines how market innovation and policy combine to improve an economy’s expansion — or vice versa. Akcigit’s work onBusiness dynamismIt is a very important metric that measures the economy’s ability to maintain growth, and it brought grim tidings to its adopted country, the United States. Simply put, it was found that over time, the US economy has become a hostile environment for innovation.
In 2019, Akçicet and co-author Sina T. Ates issued a statement from the Federal Reserve the findings He blamed the fading dynamism of the United States on “weak dissemination of knowledge”. Four years later, he said luck The problems did not go away.
“For productivity to improve, we need ‘creative destruction’ and spin,” said Akçicet. luck. “Better firms must replace the worse firms in the economy, and that turnover will drive productivity forward.”
(Atis, a chief economist at the Federal Reserve, was unable to speak on the record because of his position. The researchers’ findings do not reflect the Fed’s view.)
Something is broken
Business dynamism, as measured by the rate at which new firms are created in markets, is directly related to innovation and productivity. In the field of Akcigit, researchers have known it’s been declining in the US since the 1980s, and have pushed why diverse theories. This decrease in dynamism is significant because it is associated with General slowdown in productivity and creative momentum, which must be strong for the United States to remain the world’s dominant economy over the long term.
It became the majority of American markets more concentrating, and thus less competitive due to slower company turnover, the authors argue. The result has been that markets are increasingly dominated by large players who are not moving their sectors forward, and that greater barriers are emerging for new firms to enter markets. The decline in new entrants is a blow to the economy, as new entrepreneurs are the engines of growth under capitalism.
“creative destruction,” a phrase he coined in 1942 Austrian chief economist Josef Schumpeter, is the process in which unproductive firms are periodically pushed out of the market as a natural result of healthy competition and as new, more productive firms move forward. It is, therefore, a bad thing, according to Axigate, that the number of new companies that kick-started the American economy has declined over the past several decades along with slowing productivity.
The 2020s provide evidence of the green shoots of dynamism. In the three years since the pandemic, it has been well reported Rise in new business formationwhile Productivity has decreased greatly as CEOs nationwide Remote and hybrid workonly for a zoom In the second quarter of 2023. However, the United States has seen a steady secular decline in births for decades. This is particularly worrisome, says Akçicet, because the United States is dramatically increasing its investment in research and development. The government’s investment was in research and development Estimated at 792 billion dollars in 2021, nearly double the $407 billion it spent in 2010.
“Something is off in the background, these are the indicators according to the textbook definition,” says Akcegit, who is also a researcher at the Halle Institute for Economic Research in Germany. “Normally as we invest more in R&D and innovation we should grow faster, but that doesn’t happen… and the amount of knowledge that spreads from market leaders to followers seems to be the dominant factor to explain all of these facts together.”
Akcigit and Ates formulated various “alternative horse race” models to test which factors—including possible corporate taxes, inflation, or subsidies—could cause dynamism to decline. They worked with quantitative data on firm entry rate, job redistribution, productivity dispersion, and other vectors, building on previous research with new models. Ultimately, their research suggests that the key to sustainable economic growth may be the democratic distribution of great ideas.
“Knowledge diffusion” is the dispersal of innovation across an industry. If a company achieves a breakthrough, the spread of its ideas can increase productivity across the sector, but isolating this information only benefits the original business. Spreading knowledge is crucial to economic productivity, because productivity brings all firms together and cannot be accelerated by a few strong leaders. For the whole community to benefit from new knowledge, it must be shared with as many potential users of that knowledge as possible.
But for now, Akcegit and Ates are finding that new breakthroughs are getting more and more in focus. The large players present across the markets are becoming more established, and turnover among the market leaders is declining. This means that firms that would historically have been replaced by newer and more innovative firms remain in power and drive down the productive potential of the market.
“Companies are experimenting less, they are enjoying less radical ideas over time,” said Akçicet. luck. “They are trying to look for safer things.”
Akcigit and Ates’ research posits three main reasons for the dynamism decline. First, the United States has outsourced more and more of its production over the past four decades. When production is concentrated in the same area, different firms benefit from learning from each other by interacting in the area. More outsourcing naturally means communication – and therefore cross-pollination of ideas – between firms.
Second, the emergence of data as a form of capital has interfered with traditional means of disseminating knowledge. In decades past, a smaller competitor could better compete with a well-established player by studying its production facilities: They could find out what type of machinery was used and reverse-engineer it. But now, machines and data capital cannot be easily studied in person to be reverse engineered.
“Today, one of the main components of production is data, customer data or artificial intelligence,” says Akçicet. “Company data isn’t something you can duplicate unless you share it and make it public, which companies obviously don’t do. As a result, whoever manages to gather enough information on the largest possible customer base gets a disproportionate advantage.”
Data primacy, of course, favors established companies with larger, richer databases and customer bases from which to mine new data.
The third reason that Akcegit and Ates attribute to America’s weak dynamism is the most important: the drain on intellectual property. They measure the increasing concentration of intellectual property through patent ownership. In the early 1980s, 30% of patents were produced by the top 1% of companies. By 2019, that number had doubled to 60%.
Not only are more than half of all new inventions owned by the largest companies in the economy, but those same companies are always competing to buy more patents invented by other companies, essentially for a monopoly on new ideas. In the 1980s, 35% of patents on the secondary market were bought by the largest companies, but now it is about 65%.
“There is an enormous concentration of intellectual property in the hands of market leaders,” says Akçicet. “You buy these patents to build a wall around you so that the competition is much tougher, and your followers can’t cross your boundaries. And whenever they try to cross you, you threaten them, you sue them, you prosecute them.”
How are we going to fix this?
There are those who listen to this – including in the White House. President Joe Biden has made what he calls pro-competition reforms a priority of his administration, particularly in terms of antitrust policy, as he actively seeks to break 40 years of precedent and practice. Notably, he nominated Lena Khan, a flag-bearer of populism forcefully on the Big Tech “New Brandeis” antitrust movement, as chair of the FTC, and as chair of the agency formed a trio of like-minded pro-competitive regulators, with Jonathan Kanter In the Ministry of Justice and Wu team At the White House National Economic Council, though Wu resigned in late 2022 To return to teaching at Columbia University.
Khan is known for her antitrust campaign and her goal of reforming federal merger guidelines. I have encountered many big players in the technology industry, and endured a lot setbacks In its efforts to prevent mergers. While at Yale Law School, she published the influential article “The Amazon Antitrust Paradox,” which targets the retail giant and similar big players, and calls for increased antitrust and pro-competitive policy.
“The response to the rising power of foreign monopolies and cartels is not to tolerate domestic monopoly, but to encourage competition and innovation by businesses small and large,” the executive order reads.
For his part, Akçicet says that policies to promote the dissemination of knowledge may be more effective in the field of intellectual property. Currently, most patent authorities monitor the amount of original patents being produced, but they must also keep a close eye on the secondary market. The leap in large firms purchasing patents in the secondary market, buying competitors’ inventions, is a major contributor to the blockage of ideas in the markets.
“The secondary market for technologies should be watched,” says Akçicet. “Instead of patents being resold productively, the secondary market is used for so-called killer acquisitions. So market leaders buy other companies or their intellectual property, not to use them, but to enrich them so they don’t compete.”
said the economist luck Competition policy makers and authorities must maintain a “dynamic and forward-looking” mindset. Small businesses can be the crucible of very important ideas and become successful quickly, but they are the most vulnerable to macroeconomic headwinds. If the authorities do not know which startups to monitor, important large companies can easily fail due to their fragility.
Compare AxiJet small businesses to children in an economic family, who get sick easily and must be carefully protected. He advised: “We have to look at their future potential. Whenever there is some macro-disruption, small businesses are affected very easily – but they are the future of the economy.”
This story originally appeared on Fortune.com
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