To the casual observer Magnale’s primary objective to serve as an intermediary in support of regional prosperity may appear to be an overly idealistic notion … To get disparate groups from the public sector, private sector, and academia to collaborate to establish and support distributed commerce networks, which create regional prosperity is just too unrealistic. This post is an effort to convince you otherwise.

As stated in our last post, our intent with this blog is to create a contextual framework of understanding for our community as we apply and integrate technologies within our CommerceAuthority technology infrastructure.

To accomplish this objective requires our community share an intimate understanding of the nature of power and self-interests within the profit system. The current state of social, economic, and political transition manifests itself in the differences between the state of how power is held in society and the economy (the nature of the system) and who holds power (the individual or group) this is shown in the following tables developed by Harvard economist Daniel Bell:

Class Base denotes not a specific group of persons, but a system that has institutionalized the ground rules for acquiring, holding, and transferring differential power and its attendant privileges. In the U.S. society today, there are three modes of power and social mobility:

It is Magnale’s position that every region in the U.S. is in a state of transition relative to this economic system structure and that policy must be aligned to manage this transitional state within the context of the existing and emerging industry and occupational clusters. For policy context there has been three main phases and time periods of Research and Development relative to product and service innovation driven by distinct attributes:

• Individual Innovators -- Who Drive High-Tech Innovations -- 1850’s to early 1900’s
• Organized Large Scale Research -- Industrializing Innovation, Cold War, Big Science -- 1900’s to 1989
• Global Networks of Innovation -- 1989 through 2020

For these classes of technology development, the evolutionary patterns of technical and market risk over the relevant development life cycle can and do result in inadequate investment at key points in the life cycle. This under investment results from a much wider set of economic conditions (market failures or structural problems) than commonly believed.

Specifically these market failures or structural problems can be categorized by:

• Technical complexity: The need for multiple disciplines to be combined within one organizational structure to conduct R&D.
• Time: The negative effect on investment decision making associated with excessive discounting.
• Capital intensity: The effect on risk assessment of the capital intensity of many research processes (i.e., the cost of these processes, especially as a percentage of a firm’s R&D portfolio).
• Economies of scope: A broad and uncertain scope of potential market applications for many of the most important emerging technologies.
• Spillovers: A tendency for excessive “leakages” or “spillovers” of the technical knowledge produced by individual companies to others that did not contribute to the research.
• Infra-technologies and standards: Public good character and low visibility that cause inadequate investment.
• Market segmentation: The emergence of sophisticated users who demand sets of performance attributes that cannot be provided by existing industrial R&D capabilities.

Three particularly important negative impacts of these market failures are:

1. Corporate investment decision dysfunction with respect to longer-term, complex, and multi-disciplinary technology research. Underinvestment is particularly pronounced in the early phases of the R&D life cycle, which most strongly exhibit the investment barriers resulting from the intrinsic technical risk of the technology and its mismatches with existing corporate strategies and competences.

2. Excessive compression of R&D life cycles with resulting disincentives to undertake long-term, high payoff research. Global competition is forcing shorter total product life cycles which, in turn, are forcing corporate R&D portfolios to overemphasize product-line extensions and incremental process improvements. In general, less market risk is assumed by the private sector.

3. Failure to project access to the markets for increasingly system-based technologies. Many of today’s most important technologies have complex system structures, which require equally complex interfaces to enable market entry by small and medium businesses and system optimization by users.

Without the needed technology infrastructure, inefficient industry structures evolve. Given the nature of technology market failures and the significance of rectifying them, the two major R&D policy issues facing the U.S. economy today are:

1. Understanding and providing appropriate policy responses for the early phases of technology research. Efficiently bridging the widening gap between federally funded basic research and industry-funded applied research and development — this does not require large amounts of funding. However, this funding for generic technology research is essential to lowering the substantial technical and market risks typical of early phases in a technology’s life cycle and must be available when the window of opportunity is open. All industrialized nations have or participate in industry-government partnerships of various forms to provide this essential category of technology infrastructure.

2. Identifying and providing technical infrastructures needed by technology-based industries. The needs for these infrastructures vary over the typical technology life cycle and have strong public good content, thereby requiring effective government support. As with generic technology, research support for the needed range of infra-technologies requires relatively modest amounts of funding focused on existing and emerging industry and occupational clusters within the specific region.

This funding must not only be adequate, but it needs to be directed to unique capabilities that can achieve the large economies of scale and scope that characterize this type of technology infrastructure and that can also efficiently diffuse it to industry, standards organizations, and other regional users.

The major technology trends identified here obviously have implications for the amount and type of technology infrastructure needed to achieve steady, high rates of economic growth to support high wage jobs.

Equally important, technology trends interact with corporate strategy, industry structure, and government policy (in particular, policies that provide technical infrastructure at the various phases in a technology’s life cycle). Technology trends or trajectories, once established, can have dramatic effects on a number of industries or even sectors of the economy in terms of both rate and directions of growth. Hence, early evaluation of the multiple trajectories afforded by the timely development of generic technology and supporting infra-technologies is essential.

Bell emphasized that the changes effected by a post-industrial society cause a disconnect between social structures and culture. Most of today's unique modern regional problems can be generally attributed to the effects of the post-industrial society. These problems are particularly pronounced where free trade and the free market dominate. They can include economic inequality, the outsourcing of domestic jobs, etc. ^[1] He argued that post-industrialism would be dominated by information-led and service-oriented business and that the post-industrial society would replace the industrial society as the dominant economic system. There are three components to a post-industrial society, according to Bell:

• a shift from manufacturing to services
• the centrality of the new science-based industries
• the rise of new technical elites and the advent of a new principle of stratification

We at Magnale share this perspective.

Economist Jared Bernstein reported disturbing trends yesterday, that by 2005, the average post-tax household income of the bottom fifth of the U.S. was $15,300, the middle fifth: $50,200, and the top 1 percent: $1.1 million. "Such concentration of income is unsustainable in a democratic society," concludes Bernstein. (See link for complete posting). Jared Bernstein Post

We also share this perspective.

Much has been written about the “haves” and the “have not’s”. As commerce and prosperity continues to aggregate within regions of specialization and given the mobility of the enterprise and labor this class stratification will be segmented by region creating social, economic, and cultural problems that are difficult to manage. This is happening at an accelerating pace. The only debate is what regions have the capacity to navigate this economic system in transition.

This post summarizes complex macro market forces driven by free trade, globalization, and the shift to a post-industrial society. Few regions are prepared to effectively manage these market forces to ensure regional prosperity as measured by an increasing average household income. If history has taught us anything it is that change is driven either by enlightened leadership or financial crisis. What do you believe will drive change in your region?

^[1] Bell, Daniel. The Coming of Post-Industrial Society. New York: Harper Colophon Books, 1974.