Commentary: Business dynamism, a key feature of capitalism, refers to process of new firms arising, dyeing, expanding, and contracting, and is a key driver aggregate productivity growth. But there is growing evidence the dynamism is on the decline with all the implications of this for economic growth.
Dynamism increases productivity through a process of creative destruction. Lethargic, elderly businesses are replaced by more innovative firms. Industries rise and fall in response to these innovations. In this way, resources are re-allocated from low to high productivity activities. Buggy whips are gone, replaced by automobiles; landlines are replaced by smart phones.
Dynamism has declined. Older firms are holding on to market share. Entry rates of newer firms has slowed. And productivity gains have declined. The question is, why?
On idea, put forward by Northwestern University professor Robert Gordon among others, is that we are running out of good ideas. The low hanging fruit has already been picked. In-door plumbing, vaccines—great ideas; Angry Birds—not so great.
A variation on this is the hypothesis that innovation comes in waves. Electrification that began in the 1880 resulted in tremendous increases in productivity during the 1920s but had play out by 1940. Similarly, computerization that began in the 1960s led to major innovations in the 1990s, but is played out now. The next big source of innovation is not obvious as of now.
Another leading candidate for the cause of dynamism decline is regulation. Regulation prevents new businesses from innovating. Regulation is also a barrier to entry as it represents a fixed cost that must paid regardless of how large or small the firm. Complying with regulation is a major cost for small firms.
Here the Republicans may have a point. If in fact it is excessive regulation that is the cause of the decline in business dynamism, then President Trump’s policies aimed at reducing regulation could help. The problem is that the dynamism downturn is not just a U.S. phenomenon, but appears to be affecting other countries as well. How would U.S. regulation affect foreign economies?
Another potential problem increased intellectual property rights enforcement. Historically, an import source of innovation was diffusion of ideas among companies. But in recent years, there has been a global step up in property right enforcement. Increased enforcement has been a major goal of the United States in international negotiations, and there has been increased enforcement domestically. Penalties for stealing trade secrets have been beefed up in recent years, for example.
This stricter enforcement of intellectual property laws has had the positive effect of increasing the rewards to innovation by allowing innovators to suppress competition. But it also limit diffusion of ideas, thereby limiting knock-on innovation and slowing innovation. There is a balance. Many—and by many, I mean me—believe that the pendulum has swung too far toward overly strict intellectual property rights.
Christopher A. Erickson, Ph.D., is a professor of economics at NMSU. He supports many of Trump’s, like deregulation, but still thinks Trump is temperamentally unfit to be president. The opinions expressed may not be shared by the regents and administration of NMSU. Chris can be reached at chrerick@nmsu.edu.