Russ Roberts

Bhide on Outsourcing, Uncertainty, and the Venturesome Economy

EconTalk Episode with Amar Bhide
Hosted by Russ Roberts
PRINT
Acemoglu on the Financial Cris... Meltzer on Inflation...

Amar Bhidé, of Columbia University and author of The Venturesome Economy, talks with EconTalk host Russ Roberts about the role of entrepreneurship and innovation in a global economy. Bhidé argues that the worries about outsourcing and America's alleged declining leadership in technology are misplaced. He argues that the source of prosperity is not technology per se but the application of technology to actual products that improve our lives and that the American venture system and labor market are very effective at the application of technology. The end of the conversation turns to the role of uncertainty in both venture capital and entrepreneurship but also to the role of financial institutions and financial innovation.

Size: 30.5 MB
Right-click or Option-click, and select "Save Link/Target As MP3.

Readings and Links related to this podcast

Podcast Readings
HIDE READINGS
About this week's guest: About ideas and people mentioned in this podcast:

Highlights

Time
Podcast Highlights
HIDE HIGHLIGHTS
0:36Intro. Rise of China and India, impact on American prosperity, people worried. Initial worry was about losing low-end jobs. Turned out not to have awful consequences. High end jobs, competitive advantage, misleading and not comparative advantage. Krugman, countries are not in a competitive race, not the Olympics. High end knowledge, production of public goods, available at no cost or low cost to anyone. Increase in world supply of valuable public goods. Largest benefit is most likely to be realized in the United States and advanced economies where knowledge can take advantage of these new technologies. Google may have been invented in California but the World Wide Web was not. Invented in Switzerland; but U.S. gained more advantage from it than Switzerland or Britain. Google just introduced new browser, Chrome. Team sitting in Denmark. Psychological score card: our team is ahead. Surprisingly small part of the gain accrues to the originator. Olympic example: psychological life if we win more gold medals than anyone else. But not a matter of public policy. Philanthropists, matter of pride. Problematic when it becomes part of public policy, forget about the costs. Cuba. Not just the money, but also the capacity of government is a precious resource.
8:47Book: R&D, patents per capita, fundamental research are public goods--lots of people can enjoy them at very low cost--this knowledge becomes an input to two other levels of innovation. Three levels for purposes of simplification. Perfectly codifiable, easily transmitted general rules and principles. Invention of zero, Archimedes principle, principle of flight are examples. These general ideas don't lead to any economic prosperity. To translate them into economic artifacts you need more. To build a boat we need knowledge of ship-building, heuristic knowledge, and running a specific shipyard. Hard to transmit from place to place. Not just technical knowledge; managerial and organizational knowledge. Railroad. Organizational learning, trains have to not run into each other. Medicine, Australian doctor and ulcers; still had to know how to treat it, train doctors. Many layers of knowledge progressively less abstract and more concrete. Role of end users of technology, natural result is that much R&D uses user-feedback. Personal computer, Paul Romer, prices of transistors collapsed from 1985, consumer benefits but contributed nothing. But when we buy a new computer we are taking a risk, don't really know how much value it will have, leap in the dark, animal spirits, confidence that it will be worth the $2000 we pay for it. In 1985, $10,000, one-quarter of salary during economically rough times. Swamps the financial risk taken by the producers. Gadgets may work but not be as useful as we imagine. Even if things work out well, we never really know if it's worth the price or not. No precise measure in our heads of the monetary value, economic benefit, or non-economic benefit. Not just the first user who takes that risk. Flat-screen TVs.
18:51Resource problem-solving: many gadgets complex, incomplete manuals, have to figure it out. Even if something is problem free, we adapt them for our purposes. Tailor spreadsheet for whatever model I want to use it for. Ground-level knowledge, have to do that part yourself. Swamps resource problem solving of the producer. Feedback: Amazon Kindle, digital reader. Seven thousand reviews, tell producer how to make it better. Effort and imagination, nation that gives that feedback will get items produced for their needs. World's become more global, perfectly flat, sell product in Europe, manufacture in Asia, while sitting in U.S. Entrepreneurs tend to focus on local markets. After globalization became all the rage, did that still hold? Entrepreneurs in service sector. Venture capital backed companies. Far less globalization than expected. Most focused on local markets, drawing on local workforce. Why? What does this tell us about the nature of globalization? We used to be insulated, but because the world is flat, the claim is that everyone will be equalized. Pessimistic claim. Optimistic claim is that because China and India are growing they will provide fantastic markets for us. There are some technology companies like Intel and MS that do sell their technologies abroad, but mostly focused on the U.S. market. Sign of our economic strength, not our weakness. Trade surplus. Ultimately goods and services we use that are valuable. May have a trade deficit. When Apple invents the iPod our trade deficit increases because of the way it's measured. Hal Varian podcast. China assembles it, but value added comes from the United States. Focusing on trade deficit in technology products is silly.
27:50Mercantilist view, specie accumulated. Original formulation: some say it's okay if China and India are growing because we'll get to sell them stuff. You don't get rich by selling things, but by consuming things. Insight: by enjoying something it feeds into the process. Greater capacity to improve standard of living. Paul Samuelson article: reconstruction of Europe and Japan was headwind for growth of the U.S. after the second world war. Cannot run the counterfactual. Usually people would say the reconstruction was a good thing for the U.S. because it created export markets. May not necessarily be a big deal. Companies set up in Europe. As these companies became more advanced, they became sources of technology. Tempting to mix up companies and countries. Japanese eaten Americans for lunch in automobile industry. Ask where the benefits of Honda, etc. have been most realized. Largest proportion in the U.S.; and as produced in the U.S., advances in U.S. workforce. Anyone can invest in Ford, Honda, or Toyota stock. Ford may bemoan the loss of its technological edge. As much to our benefit as to Japan. Protectionism in the Reagan administration was part of the cars being produced here; could be made more cheaply in Japan to greater benefit.
34:03Entrepreneurship study. 1989-1990 study: some 30-40% in personal computer industry, tweaking computers to make them useful for end-users. Value-added. California, Massachusetts high tech companies are adding value. The more break-through ideas, the more they can do and the more their customers benefit. Silicon Valley derives very little direct benefit from the technologies from Stanford, taking technologies from all over the world. Technical workforce, engineers, tweaking and adapting for the customer, very little high-end science. That's the guts of our entrepreneurial effort and crucial resources that drives our economy forward. Middle-level knowledge. Want to expand the world supply of raw materials--the ideas. More important that Nobel Prizes, patents, and number of engineers. Romanticize the great inventors, Edison, Steve Jobs--created the environment for his staff to thrive. Bulk of innovation that is going on is going on in the middle and lower levels. Wal-Mart staff size larger, retail entrepreneurship, technologically advanced company. Say we must subsidize technology and science because of spillovers. Wal-Mart has produced spillovers in supply team management. West Coast company has raided Wal-Mart for its technology. Remaining retailers use Wal-Mart's techniques or they wouldn't be here. Spillovers at all levels of know-how.
41:10Hayek. Schumpeter romanticization of the entrepreneur, one heroic entrepreneur bursts upon the scene. In Hayekian world, innovation takes place on a hundred or thousand fronts; cumulative effect of decentralized knowledge-building is what pushes the economy forward. More trial and error, huge amount of uncertainty. Competitive process weeds people out but not in Schumpeterian way. Ground game rather than an air game. Schumpeterian entrepreneur creates the wrong image. Information in the modern world is a diffuse process. Elitist, Schumpeterian view: What can we do for high tech? Should be thinking about education for all, not for just the few. Political prejudice in favor of the few. Need a lot of singles and don't need to worry so much about home runs. Misconception of the entrepreneurial process. Not just an accumulation of capital that sustains prosperity.
46:10Role of immigrants in entrepreneurial process. Both more and less. Belief that immigrants are disproportionately large contributors to entrepreneurship. Chinese and Indians. True, but not if you correct for the percentage of Chinese and Indians who have Ph.D.s. In that same, more. Less: person with just Bachelor's Degree, some knowledge of a particular kind of coding plays an invaluable role by filling gaps in the technological team that you need to advance the technology. Can think of immigrants as completing wealth and displacing native, or as people who are enhancing the game. More valuable in rounding out the team than in doing any displacement. Not as natural geniuses in math and science but in doing more mundane stuff.
49:15Frank Knight, mathematically inconvenient. Entrepreneurship is taking responsibility for unmeasurable and unquantifiable risk. Some kinds of risk can be reduced to quantifiable probabilities: what are the odds that if you toss a coin it will fall heads? Insuring someone's life, actuarial tables. But there are many situations in life where this cannot be done. John Kay example: Think about a criminal trial, standard for conviction is beyond reasonable doubt. Does this have anything to do with probabilities? What happens in a criminal trial is prosecution presents a narrative, defense tries to poke holes in it; jury decides if there are weak links. Not a probabilistic game. Credit cards, can have probabilities of defaults. Starting a business. Head and heart. Beautifully described by Knight, but vanished in modern economics because he was talking about something not quantifiable. Investor, venture capitalist is rational but not in an engineering kind of way. Even engineers are not as calculating as one thinks.
54:49Insights about Knight for banking system and financial crisis. Keynes: For every nut who hears voices, some scribbler has produced a theory. Every social movement and financial crisis, intellectual underpinning: all lending and investment risks can be reduced to probabilities. Only need clever statisticians constructing proper portfolios, no due diligence. Effectively drove out due diligence to a dangerous degree. Knightian uncertainty. Automation of credit scores instead of sitting across from a borrower to try to think about if they are a good credit risk. What will asset contribute to portfolio as a whole? Direction everyone is attracted to is that we just need better credit scoring, we just have to regulate more. Insight is that we have to go the other direction. Market based solely on rating agencies is inherently vulnerable; encourages free riding and discourages the effort of looking at individual securities. If everyone free rides, opportunities for scams. Mathematical properties of diversification falsely leads you away from examination of real risk, not always quantifiable. Not new problem. Old view progressively flushed out. Old finance textbooks "full of this old prudent man rubbish," replaced by capital asset pricing model. Not all innovations good--improving crack manufacture probably not good. Most good, but in some cases it leads to dangerous consequences. Financial sector is one. Banks and anyone taking deposits from the public should return to borrowing and lending. Money market funds. Future of securitization. Out of fashion right now; government wants to bring it back. What natural forces would emerge? Short run vs. 30 years from now. Segments of financial markets where risk taking is appropriate. Appropriate if you knowingly take on the risk. Too big to fail, too politically important to fail. Average person who puts $300 of savings into something advertised as safe, hard to say he knows it's risky. Could be mature enough to let internet bubble burst, understood that government should not make people whole. If government looks after people, people have no reason to not believe the government will do that. Hand-holding. Even if you believe in a hand-holding society, your parent has only two hands to hold you with.

Comments and Sharing



TWITTER: Follow Russ Roberts @EconTalker

COMMENTS (12 to date)
Johan Sigfrids writes:

Mercantilism may be mistaken economically, but I believe that it exposes an intuitive understanding of power-relations. While growing the economic pie may not be a zero-sum game, power most definitely is. There the question is not if you are rich, but if you a richer.

To mind comes the US military base in Kyrgyzstan which is to be closed down as part of a $3.2Bn loan from Russia. Here there is a economic dimension of the power relation. Kyrgyzstan being in economic straits puts it in the tragic choice of being caught between two much richer (thus more powerful) powers. US and Russia is also at odds, and their ability to throw money at the problem has a significant impact on how it will turn out. US loosing this base will negatively impact their ability to wage the War on Terror in Afghanistan.

emerich writes:

Lots of original (at least to me) insights. Fascinating point that risk-taking by, and the accumulation of feedback from, consumers is a more important contribution to technological progress than scientific breakthroughs or than the actual producers of the products (iPod, PC, etc.). Also a great insight that the benefit of growth in other economies is not so much availability of their growing export economies as the benefits to us of the ideas and products they create that we enjoy as consumers of products and ideas. Also very interesting that the quintessential high-tech firm is, contrary to stereotype, not so much creating “high-end” technology as adding value to existing technology, and that the number of patents and nobel prizes won by Americans is irrelevant to our prosperity. What matters is making new knowledge usable in useful ways to consumers.

This interview puts in a new, more realistic light the billions being appropriated for “research” for NIH, the Department of Energy and other lucky targets of the "stimulus" bill. Frightening to think of all the myths and muddled thinking that are the basis of economic policy not just in the U.S. but more-or-less everywhere. Not to mention the billions upon billions of dollars being spent for delusional reasons on the wrong goals for projects that will generate dubious benefits that in any case will accrue marginally, if at all, to the investor—i.e., the taxpayer.

Jim writes:

It is too bad more was not discussed about outsourcing trends and the debate between Blinder who thinks it has the potential to dramatically increase and may happen "too quikly"
and Bhagwati who blows it off.

I think both are partly correct and partly wrong. Bhagwati is clearly wrong thinking that technology won't increase outsourcing, but I think Blinder is too pessimistic about adjusting.
Maybe you have already discussed this.

tw writes:

Russ,

Enjoyed the podcast as it was full of different insights that make you think.

More than once, Mr. Bhide brought up how government can only do so much...whether it can only focus on one or two big problems at a time. Or whether it can only do so much hand-holding because, after all, you only have two hands. It's a nice line and nice logic, but how do we stop government from overreaching? I would have liked to have heard his opinion on that.

I think the most meaningful takeaway is the idea that it's not who invents something that's the most important, it's who takes that something and makes it useful/makes it into an economic good for all.

Pietro Poggi-Corradini writes:

Loved the Hayekian critique to consumer surplus. Yet another place where the static supply-and-demand model can maybe be amended because of time and trial-and-error considerations.

BoscoH writes:

Russ, This podcast is an instant classic. I can't predict exactly where it will be on my Top 3 EconTalk Podcasts List in 2 months, but it will be on that list.

Your discussion of distributed innovation, and of customers participating in that innovation (Kindle) is a far better and deeper story that of open source software that you explored with Eric Raymond. The thing that just flummoxes me about the open source software movement is that the only thing particularly innovative about it is tying participants' hands so that all products are effectively free as in $0. And even that wasn't the case when BSD style licenses dominated and the GPL was seen as extreme. Participatory development doesn't require the GPL, doesn't focus on compilable source code, and doesn't preclude people making money and their paying customers having a problem with that. Participatory development also invites participants who aren't expert enough in the code of the product under discussion.

I know it's way more practical than you usually get into (except for the car dealer), but it would be interesting to find a real business where user communities contribute a whole bunch to product development and overall strategy and hear a podcast with its CEO. I could point you to a commercial software developer in a space where open source claims to have solved the market completely that has been churning for a decade with lots of customer involvement. See REALbasic.com. I'm a happy customer, and one of hundreds of prominent, regular participants.

emerich writes:

Now Bhide has written thoughtful and nuanced op-ed for the WSJ. Unfortunately, the headline is ambiguous. Is a "stimulus scaremonger" someone who tries to create opposition to the stimulus or who railroads the public and opposition legislators into enacting poorly thought-out policies? It becomes clear in the article that the latter is intended but the confusion in the phrase is unfortunate.

Is Bhide a little too nuanced in the article?

Greg Ransom writes:

At the L.S.E. in the 1930s and 1940s Hayek & Robbins used Frank Knight's _Risk, Uncertainty, and Profit_ as the benchmark of mainstream microeconomic thinking -- a core text in their graduate and undergraduate curriculum.

Hayek's discusses this fact in his 1978 interviews with Armen Alchian, et al, and you can see it in Hayek's course syllabi.

So the the notion of "Knightian uncertainty" was mainstream thinking into the 1940s at the L.S.E.

Pavan Tallapragada writes:

Russ,
I listen to Econtalk regularly and this is a great podcast. I think his insight that innovation is democratic and not individualistic is very interesting. I would like of you to have another session with him talking about the financial crisis..and his take on the stimulus package and how it will encourage or hamper innovation. I noticed that he wrote a very interesting article in the WSJ a couple of days back on similar lines.
Thank you for producing these podcasts..I am a student of economics and I derive great value out of listening to them. Please keep up the good work!
Pavan Tallapragada

Jayesh writes:

This is in reply to Johan Sigfrids (comment#1) who says that even if not justified economically, mercantilism is a justified position practically to tilt the balance of power to your side.

That sounds like a brilliant insight until you realize that if you practice mercantilism, you never get rich, so the balance will always be away from you. Be a capitalist, and you have a chance to become rich, maybe richer than your rival. So it may be a useful thing, post-facto, to use your economic power, but striving for more economic power by being a mercantile never helped anyone.

By the way, awesome podcast. I'm a long time listener, and got so many new things from this! In fact I'm blogging it. Look it up here

Steve M writes:

The fundamental reason why people fear outsourcing is that military power follows economic activity, so that a richer India, China, etc, will alter the balance of power, and likely lead to war. Economists always seem to be entirely blind to the broad lessons of history.

Ajay writes:

Amar was excellent, you need to have him on again.

Comments for this podcast episode have been closed
Return to top