Higher Return to R&D in U.S than in Japan and Europe


The following may be further support for Martin Neil Baily’s claim that the U.S. is more productive than Europe and Japan because the U.S. is more open to creative destruction.


<615> . . ., most reserachers conclude that the rates of return to R&D are comparable magnitudes in different countries. This is confirmed by our <616> meta-analysis. However, the elasticities are significantly lower in Europe and Japan, as compared with the USA. (pp. 615-616)


Source:  Wieser, Robert. "Research and Development Productivity and Spillovers: Empirical Evidence at the Firm Level." Journal of Economic Surveys 19, no. 4 (2005): 587-621.

Also see: Baily, Martin Neil. "Macroeconomic Implications of the New Economy." Proceedings, Federal Reserve Bank of the Kansas City (2001): 201-268. (Especially see graph on p. 220) Martin Feldstein’s Jackson Hole presentation, was also supportive of the Baily claim.


Brozen and Demsetz: Modern-Day Schumpeterians

The dominant view among economists in the field of industrial organization in the 1960s was that industries with a few firms were monopolistic and that this explained why profit rates were higher in concentrated industries than in unconcentrated ones. Harold Demsetz, a former Chicago colleague who moved to UCLA in 1971, dubbed this the “market concentration doctrine.” Brozen, with Demsetz, was a modern-day Schumpeterian who saw a dynamic competitive process at work. In industries in which a few companies had a large market share, they believed, concentration didn’t cause high profits. Rather, concentration and high profits were caused by successful competition. In his 1982 book, Concentration, Mergers, and Public Policy (Macmillan), Brozen weaves together evidence from Demsetz and other economists, along with his own findings, to drive home that point.

Henderson, David R. “In Memoriam: Yale Brozen.” The Freeman 48, no. 6 (June 1998). Posted online at: http://www.libertyhaven.com/thinkers/yalebrozen/memoriam.html

Software Industry Exemplifies Creative Destruction

(p. 4)  In our view, Microsoft’s dominant share in operating systems evolved legitimately from a free-market competitive process. The PC software industry was legally open and contained many talented players (Sun, Netscape, Novell, Oracle, Apple, IBM), some larger than Microsoft, some smaller. The market process in this industry has always been characterized by intense innovation, rapid growth, sharply falling prices, and bitter rivalry (and occasional cooperation) between rivals. The industry exemplifies Austrian economist Joseph Schumpeter’s vision of competition as a process of creative destruction. Microsoft achieved its market position by aggressively innovating and promoting an open, standardized operating system platform . . . 



Armentano, Dominick T. Antitrust: The Case for Repeal. 2nd ed: Mises, 1999.


The Impossible Dream?

In Locked in the Cabinet, Robert Reich’s amusing allegory about life in Washington, Reich laments that the Democratic Party — and in particular the labor constituents in the party — did not support his vision of education and training as a means of enabling the labor force to adapt to and flourish in a time of rapid economic change and dislocation. Instead, they constituted what Reich called the "Save the Jobs Party," which wanted to preserve the industry, the companies and the jobs that exist today.

I think there is a similar phenomenon in antitrust. Antitrust is about process, and a particularly arduous one at that. We are proud that antitrust "protects competition, not competitors". We say that the market has winners and losers and that that is good.

Unfortunately, process is less attractive, in the concrete world in which real disputes arise and real grievances are formed, than is a comforting end-state. And political actors, I fear, are generally more zealous in guarding the latter than in seeking the former.

So, I can imagine constituents and lobbyists and public interest groups demanding the intervention of antitrust authorities to prevent the BA/NYNEX merger, to open up Korea for more car exports, or to restrict the imports of Japanese television sets into the United States. And I can imagine constituents urging that competition authorities in the EC should leave the Boeing/McDonnell Douglas merger alone or that the antitrust agencies here should stop meddling with hospital mergers in Michigan. But it’s hard to imagine tens of thousands of people gathered on the Mall, carrying placards with pictures of Joseph Schumpeter, and demanding that the government give them more "creative destruction."



A. DOUGLAS MELAMED. "International Antitrust in an Age of International Deregulation." Address Before George Mason Law Review Symposium: Antitrust in the Global Economy, Washington, D.C., October 10, 1997.

(Note: At the time, Melamed was Principal Deputy Assistant Attorney General, Antitrust Division, U.S. Department of Justice. Bold emphasis was added by Diamond.)


The Creative Destruction of New York City

. . . the eyes of the city are focused firmly on its future, not on its history, and as a result, it subscribes to what the economist Joseph Schumpeter has called “creative destruction.” New York is constantly remaking and reinventing itself, both in its physical structures and in its population.

From the preface of:
Kenneth Jackson and David Dunbar. Empire City: New York Through the Centuries. New York: Columbia University Press, 2002.
(Note: ellipsis added.)

Infinite Jobs to Be Done

Marc Andreesen was the cofounder of Netscape.

“If you believe human wants and needs are infinite,” said Andreeseen (sic), “then there are infinite industries to be created, infinite businesses to be started, and infinite jobs to be done, and the only limiting factor is human imagination. The world is flattening and rising at the same time. And I think the evidence is overwhelmingly clear: If you look over the sweep of history, every time we had more trade, more communications, we had a big upswing in economic activity and standard of living.” (p. 231)

Friedman, Thomas L. The World Is Flat: A Brief History of the Twenty-First Century. New York: Farrar, Straus and Giroux, 2005.

Bill Clinton’s Brief Presentation on Schumpeter

(p. 173) We read all the books, but each week a student would lead off the discussion with a ten-minute pesentation about the book of the week. You could do what you wanted with the ten minutes–summarize the book, talk about its central idea, or discuss an aspect of particular interest–but you had to do it in these ten minutes. Sharabi believed that if you couldn’t, you didn’t understand the book, and he strictly enforced the limit. He did make one exception, for a philosophy major, the first person I ever heard use the word “ontological”–for all I knew, it was a medical specialty. He ran on well past the ten-minute limit, and when he finally ran out of gas, Sharabi stared at him with his big, expressive eyes and said, “If I had a gun, I would shoot you.” Ouch. I made my presentation on Joseph Schumpeter’s Capitalism, Socialism, and Democracy. I’m not sure how good it was, but I used simple words and, believe it or not, finished in just over nine minutes.

Bill Clinton. My Life. Random House Large Print Edition, 2004.

No Known Upper Bound for Economic Growth

Given the limited state of our knowledge of the process of technological change, we have no way to estimate what the upper bound on the feasible rate of growth for an economy might be. If economists had tried to make a judgment at the end of the 19th century, they would have been correct to argue that there was no historical precedent that could justify the possibility of an increase in the trend rate of growth of income per capita to 1.8% per year. Yet this increase is what we achieved in the 20th century. (p. 226)

Romer, Paul M. “Should the Government Subsidize Supply or Demand in the Market for Scientists and Engineers?” In Innovation Policy and the Economy, vol. 1, Cambridge, MA: MIT Press, 2001, pp. 221-252.