U.S. losing its economic edge? Not a chance

Do you find that entrepreneurs behave differently than large corporations in the way they view markets?

Most entrepreneurs, even those who build high-growth companies, tend to be more naturally focused on sales and marketing, because they cannot afford the luxury of R&D. And they tend to be skilled at taking inventions or innovations developed by someone else and putting them into use, because they can't waste money doing R&D. If you think of Microsoft in its early years, they didn't do any formal R&D. They couldn't. There was no cash flow to do that. Now, they spend a few billion dollars on R&D. It's not clear to me that this is producing a huge return, either for the economy or for Microsoft.

So entrepreneurs are good innovators?

Entrepreneurs are great innovators because of the contributions they make on the ground level. It's critical to take a broad view of the innovation process. When people think of innovation, they often think of a technological breakthrough and scientists in white coats. They don't often consider all the effort and initiative of putting that innovation into use. But unless it is put into use, a technological breakthrough is useless. It requires marketing, sales, and organizational efforts. And the consumer is also a key part of the process. Someone who buys a spreadsheet program off the shelf and, with diligence and resourcefulness, creates a homemade CRM system is an important player in the innovation game -- a real innovator.

You write a lot about the power of consumers to spur innovation. You call it venturesome consumption. What exactly do you mean by that?

Venturesome consumption has three important dimensions. One involves being the leading-edge user, where you help whoever is producing the gizmo develop the gizmo and thereby become a partner in its development. The second level of venturesomeness is a willingness to take a chance on new goods and services where you haven't a clue whether they will give you good value for money.

Any kind of consumption in particular?

It could be flat-screen TVs, some new electronic gadget, or anything, really. This goes beyond early adopters. As a country and a culture, we just like to take chances when we consume. Let's just buy it, with no regrets. We equip our houses with all kinds of weird objects. And that brings me to the third level of venturesome consumption: the amount of time we are willing to invest in learning how to use technology and make it work for us. An illiterate peasant can buy and start using a mobile phone. But most modern gizmos are not like that. They require a considerable amount of resourcefulness and problem solving. So it's not just the person who is creating the object who needs to figure out how to use it; it's also the person who is using the object. And then the willingness to stay with it until it works is unusual in the U.S., at every level -- at the consumer level and at the company level. In Germany, according to interviews I've done, people don't want the latest generation of what you have to sell; they want something they know will work. In the U.S., they say, Hey, give us your latest and greatest, and we'll figure out how to make it work.

How do you measure how this consumption benefits the economy?

Consumption is underappreciated by policymakers and economists. And I think the failure to understand its value is broad-based. So we have investment tax credits, but they apply only to certain bricks and mortar and pieces of steel, rather than the much larger investments people and companies make in learning how to use new technologies. Why should tax policies discriminate against these investments? Why do we make such a fuss about low savings and investment when, in this day and age, we don't even know what investment is? I invest a great deal of my time in learning how to use computers. That never gets counted in any savings account. The fact that you and I know how to use computers is an enormous national asset.

Most economists worry about the trade deficit and its toll on our country's economic strength. But you seem unconcerned about the trade deficit. Why is that?

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A high propensity to use IT generates trade deficits because we buy a lot of this equipment from overseas. But it also enhances productivity in IT-using service industries, which account for a much larger share of economic activity than the IT industry itself. Another great example is the iPod. The invention of the iPod has increased the trade deficit, because we import the physical iPods, and there's no offsetting export associated with the iPod, right? Is it a bad thing for the U.S. that the iPod was invented? I don't think so.

You also turn on its head the concept of creative destruction -- the idea that new technologies tend to destroy industries and jobs in their wake, even as they create new industries. You focus, instead, on what you call nondestructive creation. What do you mean by that?

Well, first of all, if we just had creative destruction, we'd have massive unemployment, and the economy would grind to a halt. So nondestructive creation is a vitally important complement to creative destruction. And it is the reason we ought not to worry about the loss of service-sector jobs, either to increased productivity or to outsourcing or offshoring. Each new gizmo creates new service-sector jobs that didn't exist before.

What's a good example of nondestructive creation?

Thirty years ago, the only diagnostic techniques that people used to use were X-rays. We still use a lot of X-rays. But then we had CT scans, then PET scans, and now we have MRIs. And with each of these innovations, we now can diagnose diseases that you wouldn't have been able to diagnose previously. So it's not that MRIs simply substituted for X-rays. In fact, most MRIs are used to do things that X-rays could not do. An X-ray could not show you a tumor in your back because of the soft tissue. So an MRI is largely an example of nondestructive creation. In addition to helping the early detection of tumors, it also created a whole bunch of jobs, both for radiologists and for the people who maintain the MRI equipment and the technicians who operate it. And because this keeps happening, we shouldn't worry if some X-ray reading goes off to India.

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