Capital Business | Perspective
March 5, 2018 at 7:00 AM
Last week, the Trump Administration proposed tariffs on imported steel and aluminum and the resulting public discussion suffered from a “forest-tree” problem. International trade economics are just the trees. The forest – the big picture – is that this is just one more data point confirming the Trump Administration’s anti-growth world view.
Although we take growth and an increasing standard of living as expectations for a well-functioning economy, neither are an absolute certainty. In fact, for most of economic history, economic growth was slow or nonexistent.
Technology changed that. In a common business pattern, new technologies are invented and brought to market by small, new businesses. Some of these technology products and services will be such high demand that sellers can change premium prices and earn high profits. Those profits are the fuel that lets them compete successfully with established competitors.
At some point, even if there is a period of intellectual property protection, a sophisticated technology product will become progressively less unique, as new sellers enter the market offering similar products. Eventually, enough new sellers enter the market so that their products won’t differ very much, if at all (personal computers are a good example of this move from new and high priced to cheap and undifferentiated). Their products’ fungibility limits each seller’s ability to charge a high price, because their respective products are no longer special. This lack of specialness means businesses in a commodified market must drive out or acquire enough competitors to allow them to raise prices by limiting supply. Or they can become more efficient than their competitors so that they can remain profitable at lower market prices. In either case, commoditization rewards scale and efficiency and not introducing new or competing technologies.
This cycle of technology introduction and commoditization has shaped the world economy since the late 18th century. With each new technology wave – steam power, electrification, oil and natural gas, automobiles, aviation, software and telecommunications are some examples – new businesses generated stupendous profits and wealth and eventually turned into commoditized industries.
U.S. businesses led substantially all technology adoption cycles and industrial development from the late 1800s through the 1970s. National wealth increased dramatically. Other countries participated in new technology industries as followers; they competed on the basis of efficiency, relying on lower wage costs and less stringent regulation.
From the United States’s perspective, this cycle has changed in two significant ways since the 1980s. First, many fewer revolutionary technologies have reached the market. Many things hailed as new are just iterative, not world-changing, and don’t command extraordinary prices or generate extraordinary profits. Second, the United States originates less of the new technology than it used to, as Japan and China in particular have taken leadership roles in many technology areas and are positioning themselves to lead emerging opportunities. Meanwhile, commoditized industries have increasingly dominated the U.S. economy. This introduces into the political process a strong bias in favor of preserving their market power and expecting policy makes to adopt policies that discourage new entrants or alternatives. Meanwhile, the focus on protecting the status quo means helping U.S. companies beat foreign competition at its own game, either by lowering wages and lessening regulation at home or by allowing them to build products abroad and bring them back to the United States for sale.
The commoditization of our existing technology industries has very much shaped the viewpoint of what business wants from government. The voices for protecting what we have, rather than creating what’s new, are very loud.
Tariffs, lax environmental regulations, policies to depress labor costs, tax changes that favor passive income and other current policy positions now promoted by the Trump Administration all are a consistent part of a world view that favors existing and commoditized industries. They are touted as policies that will allow the economy to recover the high growth rates that prevailed at an earlier time. But they are not designed to recreate the conditions that actually created that growth. Instead, they are largely designed to protect the status quo.
History shows that the U.S. economy grew fastest when it was at the leading edge of new technological waves. Adopting policies that hinder this growth, whether by imposing tariffs that lead to retaliatory tariffs on our most desirable exports, by not funding basic science, or by adopting tax and regulatory changes that favor existing industries will not take us forward.
Looking backward to the time when our now-commoditized industries were dominant will not help them regain their former glory. The cycle of technology cannot be reversed. Failing to examine where our growth comes from and adopting policies to promote the status quo can only be explained by ignorance or a willful decision to avoid an inconvenient truth.
Either way, looking backward is not a strategy for success. It is a strategy for stagnation.
Jonathan Aberman is a business owner, entrepreneur and founder of TandemNSI, an organization that connects innovators to government agencies. He is host of “What’s Working in Washington” on the radio station WFED, a program that highlights business and innovation, and he lectures at the University of Maryland’s Robert H. Smith School of Business.