Refinancing

As the country struggles with “the great recession,” many solutions are being offered for our economic ills. Some come from academics; others from government leaders. Most sound like a renewed argument for a national industrial policy. In my view, America needs to reinforce the existing model for U.S. high technology; the worst thing that the country could do is allow politicians and bureaucrats in Washington to reinvent it.

Over the past few decades, the U.S. private sector evolved a strikingly competitive model. In part, it involved in-sourcing the best of the world’s entrepreneurial talent and outsourcing low-value-added jobs. It was brilliantly successful because many factors gave the U.S. a competitive advantage in the commercialization of emerging technologies. They included:

• An unrivaled university system
• A relatively free domestic market that honed the competitive skills of its companies
• A robust venture capital and IPO market that fueled and then rewarded winners
• Clusters of activity that provided a depth of infrastructure and human talent
• A culture that encouraged risk taking

An entrepreneurial high tech industry is, by its very nature, somewhat messy and erratic environment. Order and efficiency are subordinated to trial-and-error experimentation. Huge egos dominate a world in which greed is a given. It’s not a comfortable environment for the technocrat or theoretician. But this apparent free-form organizational anarchy is what has enabled many start-ups to outmaneuver and out-compete existing market leaders.

The elements of this model are still essentially intact, but the current economic and financial crisis has undermined some of its foundation. Capital is far less available. Confidence has been shaken, and perhaps most ominously, the political reaction to these challenges threatens to be counterproductive. To be more specific:

• There is great political pressure to shift resources to the industries of the past
• The priority has become income redistribution, not wealth creation
• Government, because of its huge deficits, competes aggressively for available capital
• We are raising barriers to the in-sourcing of productive human talent from overseas
• There is a growing trend of letting the government pick competitive winners

Because of the public backlash against business triggered by the near-meltdown of the financial system and the recession, the private sector is poorly positioned to resist these threats.

In theory, Washington could help America’s technology industries compete globally. But in practice, government decisions are determined too often by political influence. Until our elected officials understand and accept Schumpeter’s theory of creative destruction, the best we can hope for from them is benign neglect.

In sum, while it is politically incorrect at this time to champion the concept of a relatively-unfettered private high-tech sector, I still find the track record of the free market very persuasive.

Stephen R. Hardis
Retired Chairman and CEO
Eaton

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