the dilemmas of technology: a reply

The Dilemmas of Technology: A ReplyAuthor(s): Robert SoloSource: Journal of Economic Issues, Vol. 15, No. 1 (Mar., 1981), pp. 204-211Published by: Association for Evolutionary EconomicsStable URL: http://www.jstor.org/stable/4225013 .

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204 Notes and Communications

aged to produce an economy which historically has performed well, al- though the benefits have by no means been evenly distributed. Clearly, the symbiosis that Solo seeks has been present to a large degree. If the symbiosis is breaking down, we have a vital need to know why.

Edward M. Graham

The author is Deputy Director, Planning and Evaluation Staff, Organization for Economic Cooperation and Development, Paris. The views expressed here are his own and do not necessarily reflect those of the OECD.

The Dilemmas of Technology: A Reply

If Edward Graham is discomforted by any neglect in naming him as the "author of the principal chapters," I do apologize.' Authorship attri- butions are hard to make in a work whose central purpose is to report on the views and recommendations of participants in a workshop. Just so, contrary to Graham's supposition, my central purpose in reviewing it was not to disestablish "establishment economics" but to analyze the opinions, outlook, and recommendations of representative elites in the hope of cast- ing some light on the ongoing and emerging nature of public policy.

What I had to say about the power of establishment economics as surveyed in chapter 2, I said in a single paragraph. With respect to its power to explain the relationship of technology and growth, I noted a total lack of any conception of a system of technological advance. I dismissed it as totally vacuous, wondering that a survey chapter concerning it could be presented with aplomb. To support this opinion, I was ready to assert that the cited body of economic literature "explains nothing and contributes nothing to the efforts that are subsequently made [in the report] to understand particular phenomena and to deal with particular problems."

I am not to be allowed to hold to this strong position unchallenged. Graham, author of the principal chapters, rides to the rescue. The survey chapter and the material it surveys, he asserts, are not "especially vacuous" (vacuous, but not especially so). To demonstrate that it was presented not with aplomb but with an appropriate humility, he cites disclaimers that so underline its vacuity that one is led back to this question: Why include it with all its 56 footnotes and 83 article citations? "It is" he ad- mits "true that, as Solo suggests, little 'conception of a system of technological advance' emerges," but, he holds, for anyone to conceptualize such a system would be "presumptuous indeed." Presumptuous? On the



Notes and Communications 205

contrary, it is presumptuous to hold forth on the "relationships between technological innovation and the economy" or on the relationship of technology to productivity increase and economic growth, or on technology and American industrial decline without conceptualizing the system whereby technology advances or fails to advance, just as it would be presumptuous for anyone to hold forth on, say, changes in the conditions of credit without a conception of the banking system or on changes in price without the conception of a market system. If Graham supposes it to be beyond the reach of human ingenuity to conceptualize the systems of technological advance as these have characterized different economic sectors and different societies at different periods, then I immodestly suggest that he take a look at my Economic Organizations and Social Systems.

And yet credit must be given where credit is due. Graham is able to cite an instance (only one, but an instance nevertheless) in which the materials presented in his survey chapter, he would maintain, explained something and contributed something to the efforts that are subsequently made to understand particular phenomena or to deal with particular problems. "The case is built," he claims, "that technological innovation follows high rates of capital formation, laying the foundation for later recommendations for government policies to stimulate capital formation."

The case that "technological innovation follows high rates of technological formation" is made in the following two paragraphs from the book in question, quoted here in full:

The quality of the stock of capital goods of a nation also can affect productivity. The quality of capital goods is a function of both their age and their design. Probably, newer goods tend to embody more recent technology than do older goods, resulting in newer goods being more efficient. Additionally, newer goods on balance ought to be subject to less downtime per hour of operations than are older goods. Thus, because of embodied technology and maximum attainable utilization rates, new capital goods ought to be more efficient than are older ones.

It is through improvements in the quality of capital that technological innovation most profoundly affects productivity, because new process technology enables greater unit output to be achieved per unit of factor input. However, realization of the benefits of technological innovation in an economy is not instantaneous. The rate of realization depends on the rate of diffusion of the innovation. It is only when new capital is added to the economy, or when old capital is replaced by new capital that the po- tential increases in productivity are realized (pp. 35, 36).

To be sure, in the body of the report one finds the following (again quoting the relevant recommendation and discussion in their entirety):




There was agreement by most of the workshop participants that the most effective indirect means by which the federal government could act to increase the rate of technological innovation would be to stimulate the rate of new capital formation. It was noted that empirical studies have shown that innovation rates tend to be highest in industries where there is a high rate of capital investment. (See Chapter 2 of this report.) It was further noted that capital investment rates have been low throughout the 1970s (p.62).

Consider the argument developed in the two paragraphs from chapter 2 cited above. It boils down to this. Inasmuch as new technology requires new equipment, new equipment must be installed in order to have the new technology. The rest is froth. I cannot regard this truism and triviality as "economic theory." Nor is any reference made to supporting studies, nor is any literature cited. No "case is built that technological innovation follows high rates of capital formation," nor can "economic theory" build such a case. Indeed, from what Graham says in those paragraphs, namely, that "the rate of realization depends on the rate of diffusion . . . ," the inference logically to be drawn is that new capital formation follows innovation as innovation is diffused. Accepting this, the cited recommendation takes by inference the circular form of the "means by which the federal government could act to increase the rate of technological innovation [and its diffusion] would be to stimulate the rate of new capital formation [by increasing the rate of technological innovation and its diffusion]." Increase innovation by stimulating an increase in the rate of innovation! Such is the wisdom distilled by this survey of economics.

Graham finds me guilty of an even more insidious and "portentous attack on 'establishment economics.'" According to him, I took sides "with organized labor's position on multinational corporations and international trade"; in so doing, evidently I committed sacrilege in the sacred groves of free trade theory. In responding, I find myself in a quandary. I am caught between explaining or defending what I wrote in the review article, and contesting Graham's personal views with which, indeed, I strongly disagree, but that are quite unrelated to the review article.

There I expressed no views and took no position on labor's policy recommendations. Nothing I said had any reference to a "call for protectionism." In what Graham singles out as my "portentous attack," I was reiterating an argument I published in 1961,2 that special tax treatment, subsidies in effect to divert America's investable resources, including the "cream of U.S. entrepreneurial, managerial and innovational talents and skills," from domestic to foreign operations, "diminishes the capacity for generating technological advance and industrial innovation in the United




States and denies to the U.S. economy the important externalities asso- ciated with such investment." This speaks to the force for innovation and technological advance in general, without reference to any particular set of industries or to any interest and policies of organized labor. Fortu- itously, the data submitted by organized labor showed the vast magnitude of this diversion, cumulating through the decades, of the prime innovation- producing resource, and the probable significance of that diversion in explaining a consequent decline in U.S. technology. All has transpired as I forewarned nearly twenty years ago. With regard to this matter of overseas investment, four points may be made.

First, it is as much an interference with free trade to subsidize overseas investment as to restrict it. Graham, in his support for and defense of the many decades of subsidy for overseas investment, and not I, should bear the mercantilist label that he so much abhors.

Second, if Graham cannot accept my hypothesis concerning the effects on technological innovation of diverting corporate effort and investment from U.S. to overseas operations, let him refer to that imperative "that technological innovation follows high rates of capital formation." This is allegedly the contribution of the economics surveyed in his chapter 2, which lays "the foundation for later recommendations for government policies to stimulate capital formation."

Third, those of us in academia (including myself) who have enjoyed the tax benefits of employment overseas can hardly take seriously his easy dismissal of those benefits. The advantage of tax deferral provisions for corporations operating abroad have been enormous. So much the better if "recent modifications of the tax code," as Graham would have us be- lieve, "limit this ability" to use untaxed profits indefinitely for operations and income distribution overseas. It remains an outrage that there should be any tax advantage whatsoever for such investment and such operations. According to official estimates for 1979, tax expenditures subsidizing operations and investments abroad amounted to $2.4 billion per annum.3

Fourth, Graham finds it "interesting to note that few nations other than the United States make any attempt to tax the foreign source income of their citizens, private or corporate." If he is looking for lessons from abroad, let him take note that, taxation or not, the Japanese have tightly, closely, and continuously controlled Japanese overseas investment. Until a few years ago, when the size of their trade surplus was becoming an international scandal, they allowed no Japanese investment overseas save that which could be justified as corollary to and supportive of domestic operations.

Quite aside from anything in the report or my review of it, in his com-




ment Graham expresses certain of his private opinions and passions concerning investment and trade. Evidently, my reading of history is quite different than his. I am not so sanguine as he concerning the "net benefits ... occasioned by an open international system" in producing "the general prosperity of the past two and a half decades." That prosperity was above all spearheaded by the extraordinary economic performance of Japan and Western Europe, to be related in the first instance to a tight and careful control of imports, exports, and the influx and efflux of investment, and in the second to the installation of a new and powerful instru- ment of regional protectionism, the Common Market.

I would suppose in the modern era that just two nations have played a leading role as international investors where such investment carried with it an outflow of entrepreneurial, managerial, and engineering resources for the establishment of operations overseas: Great Britain in the nineteenth and twentieth century, and the United States in the twentieth, but most particularly in the decades since World War II. Both nations offered overt and covert support and subsidy to divert their available pool of investable resources to overseas in contrast to domestic operations. In their time, the British, whose industrial and technological leadership seemed beyond challenge, installed modern industries and advanced technologies throughout the world. As a consequence, by far the largest leisure class in Europe, an elite of beautiful people reaping the untaxed yield of such ancestral investments overseas, came to live in unparalleled luxury and essential idleness. Meanwhile, industrial plant in Britain became aged and archaic. British industrial productivity lagged and sagged. The economy took a downward slide that has never ceased. Mighty Britain became a third-rate power with a per capita income low on the West European scale. Since 1945 we have followed that very path of massive, subsidized overseas investment and, correspondingly, industrial and technological decline.

The frustrating thing about responding to Graham is that he quite fails to understand the intent of my article. At the outset I wrote of the book under review: "Its importance lies in the insight it provides as to the current level of awareness and the outlook that prevails among the represented elites." It was to make explicit and to suggest the implications for policy and practice of that "current level of awareness and outlook" that my piece was written, certainly not to disestablish establishment economics, or to challenge the beatitudes of free trade theory, or to propose some comprehensive role and policy for the state in organizing and stimulating technological advance. In order to put Graham's comments in context, I must recount briefly, even at the risk of calling a spade a bloody




shovel, certain of the findings that can be gleaned from the book concerning the outlook of the represented elites.

First, there is a shallow, unanalytic, uncritical kowtowing to the gripes and complaints of big business, a bland acceptance of their ad hoc bag of special interest pleadings. There is no attempt to compare the tax, regula- tory, and profit parameters of U.S. corporate enterprise during this period of decline with that of other times and places (such as Sweden, Japan, and Germany) where there was a superior record of performance. Graham's defense of the decades of tax expenditure subsidy of corporate investment overseas exemplifies this uncritical kowtowing to those interests.

Second, and conversely, labor's arguments struck no sympathetic chord among conference participants. "The labor representatives were isolated and patronized, and their arguments and policy suggestions were ignored in a manner that would warm the cockles of a Marxist heart. The academics, public officials, and corporate executives together did not waver in their commitment to free trade for free enterprise, and no meddling with hard-won tax advantages."4 This contempt is reflected in Graham's attack on "labor's position," whose "policy implications" he calls "a recipe for disaster." Characteristically, he takes his stand on the high moral ground and "all but self-evident" value of "trade liberalization." I would have found all of that more impressive if the report and Graham had also specified and attacked trade protections installed under corporate pressure, such as the system of trigger pricing that shelters the obsolete technology of big steel.

Third, as we reap the bitter harvest of the chemical revolution in air and water polluted, in poisons buried and upseeping, in species vanished and bodies cancer-ridden, and in a threatened biosphere, short shrift is given even to the inadequate environmental protections that now exist. They, too, must be dismantled, reduced, eliminated, all in the name of technological progress, to satisfy corporation gripes. In his defense of the report, Graham tries to show that in the discussions, the demand for the total condemnation, for the full elimination of those protections, "did not go unchallenged." So be it. I referred in my review not to the discussion but to the recommendation, specific and concrete, made by the workshop as a whole. It is obvious to me, given the nature of our political system and given what cost-benefit analysis in fact amounts to, that to require (as the recommendation of the report would require), before any positive action can be taken by the state, "a careful cost-benefit analysis of economic consequences . . . reviewed by representatives of all major interested parties, including industrialists, labor, consumers and environmental protection groups" (p. 67) would "put effective consumer, en-




vironmental, and health protection forever in limbo."5 It is for the reader to concur with this or not as a matter of judgment.

Fourth, among the represented elites in the workshop there prevailed "even in these decades of decline, the arrogant insularity of the habitual victor thinking of himself as without a peer, who has everything to teach and nothing to learn from others." Thus "no interest is shown in, no knowledge of is made manifest, there is not even a pretense of any syste- matic inquiry into the policies and experiences of those other countries that have so spectacularly outperformed the United States in recent decades."6 I called this outlook and attitude "arrogant insularity." Graham responds first with a total non sequitur concerning the activities of international corporations, and then leaves us gasping with a statement that is the perfect expression of "arrogant insularity." He brushes aside the possibility of learning from the experience of Japan on the grounds that "the Japanese experience could not at all easily be replicated in the context of the United States." Imagine what the fate and position of the Japanese would be today if they, in the nineteenth and twentieth century, had ruled out the possibility of learning from the United States and Western Europe on the grounds that western experience could not be at all "easily replicated" in Japan's different culture and circumstances. On the contrary, they sought and continue to seek most systematically to learn, understand, select, assimilate, and put into practice that which is of value for them in the achievement and experience of others.

Fifth, the representative elites participating in the workshop, blind to the state's great and inevitable role in the system of technological advance, looked upon it "as a peripheral annoyance, a transfer agent merely to be, if not ignored, then summarily denigrated and denounced. Their concerns with it were purely negative-to limit and exclude it from any significant and creative role in economic affairs. Not only the academics but also, perhaps paradoxically, the officials and executives of massive organizations-public agencies, great trade unions, and multinational corporations alike-conceived of economic reality through the archaic imageries of neoclassical thought, as a universe of free trading, free wheel- ing, free enterprise, with each enterprise understood as the striving, profit- seeking, entrepreneurial individual engaged in the seething matrices of price-competitive markets where the state has no positive role at all."7

Does Graham agree or disagree? I am not sure. He seems to agree while making negative-sounding noises, demanding to know what it is that I want, what it is that I am looking for.

My purpose in the brief review article was to make explicit and to suggest the implications for policy and practice of the "awareness and out-




look" of a representative set of elites. What I looked for and found want- ing was any realistic awareness of the state in its potentials and in its problems, and the complete lack of any effort constructively and crea- tively to develop the positive role of the state in the organization, promo- tion, and stimulation of technological advance.

Robert Solo

The author is Professor of Economics, Michigan State University, East Lansing.

Notes

1. Technology, Trade, and the U.S. Economy (Washington, D.C.: National Academy of Sciences, 1978), discussed in Robert A. Solo, "The Dilem- mas of Technology: A Review Article," Journal of Economic Issues 13 (September 1979): 733-42.

2. Robert Solo, "Economics of the International Base Company," National Tax Journal 14 (March 1961): 70-80.

3. Special Analysis of the Budget of the United States Government, Fiscal Year 1979 (Washington, D.C.: U.S. Government Printing Office, 1979), p. 158.

4. Solo, "Dilemmas," p. 739. 5. Ibid.,p.737. 6. Ibid.,p.739. 7. Ibid.,p.740.

The Microeconomic Efficiency Argument for Socialism Revisited

In a recent article, James A. Yunker presented a challenging new argument on the relative efficiencies of capitalism and socialism.1 It is based on the widespread existence of the separation of ownership and control in modern capitalism. With such separation, Yunker claims that managers will not be oriented toward the maximization of profits, and therefore substantial inefficiencies will exist. To remove these, he advo- cates "pragmatic market socialism," in which all nonhuman factors of production are publicly owned.

In a pragmatic market socialist economy, managers would be free to make all enterprise decisions except for the determination of their own bonuses. These would be proportional to profits, with the factor of proportionality fixed by a Bureau of Public Ownership (BPO). Yunker



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