May

21

The 19th century expansion of trade with America and India (thanks to the British Navy dominance and the imperialist policies of that century) caused the growth of population in cities, the increase of demand of labor and, therefore, wages. High wages associated to the availability of low cost energy (coal) were the main driver of the industrial revolution in Great Britain according to some studies. Basically, the demand for technology was meant to substitute capital and energy for labor. High wages contributed also to increase skills and education. In other parts of Europe and of the world energy costs were higher and labor cheaper making the use of new technology not economical when in Great Britain it already was.

The move from the Industrial Age to the Information Age changed relative values of labor and capital. The value of labor has remained high, but the value of intellectual labor has greatly increased. Western nations (and especially the US) have experienced initially an advantage in exploiting the transition to this age because of the higher level of education relative to other countries. An important characteristic is that less capital is necessary to enter markets in order to develop information related products and distribute them. The Information Age has lowered previously high cost barriers to entry. Geographic barriers as well have been lowered. One can now participate in this sector of the economy from anywhere.

The Information Age has affected the sources of wealth, but it has also altered the balance of economic power. As emerging nations improve their education and skills level, they are able to better compete with traditionally advanced and mature nations because entry barriers to markets are lower. Moreover, these countries have the advantage of low wages. This combination is explosive in the long term.

Not only western countries are moving to emerging countries ever more important parts of the manufacturing sector, but they are moving the higher value added activities typical of the Information Age. Emerging (are they really still "emerging"?) countries are entering these markets with their own companies. At the same time, we see the big innovators and winners of the nineties become gradually mature and slow down their rate of growth (MSFT, YHOO and so forth).

Many believe that renewable energy is the answer. I personally believe this is very important, but it will not provide the solution: solar panels will be made in China! As we will live in the Information Age for some time in the future, we may not see any actually disruptive innovation that will give back to the US the huge technological competitive advantage the country had in the past decades. And it is not a given that the US or Europe will be the leaders in the next innovation era. What will be the drivers? Education and skills again, I think, because, with time, the cost advantage of emerging countries will decrease. The proposed US budget includes $147.6 billion for research and development. After four years of decline in spending on basic and applied research the 2009 spending and the 2010 budget proposal represent a turnaround in federal research investments. This is big money, but I am not sure it is a panacea. May be we should also let the free entrepreneurial spirits at work providing only a sound market and property rights framework as incentives.


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