This week Fortune ran an article on some of the academic research done by Ufuk Akcigit at the University of Chicago on Business Dynamism.

The basic idea goes something like this: in the long run economic growth is driven by technological progress and innovation. That is no big surprise as we knew this from Solow's work in the 1950s. But what makes Akcigit's work interesting is that he has an explanation as to why innovation and technological progress have slowed in the US over the past few decades. He blames increased market concentration in the U.S. and an overall decline in competition in U.S. markets for the slowdowns. He and his co-authors ultimately argue that there is a lack of "knowledge diffusion" which results from this increased market concentration.

"Knowledge diffusion" is when innovations or insights spread across an industry. This is also sometimes referred to as a "spillover effect." But, when markets are highly concentrated, with few competitors there can be knowledge hoarding. Worse yet, large firms can gobble up any would-be competitors and kill off the new innovations. This is sometimes called "merger to kill".

The same hoarding (or sometimes called hogging) also goes on in the labor market for innovative people. In a recent 2023 working paper Akcigit and Nathan Goldschlag develop a model where knowledge diffusion does not take place because innovators take good paying stable jobs with large existing firms instead of joining newer, smaller (think more entrepreneurial) firms. Then they use data on the employment history of over 760 thousand U.S. inventors and pair it with information on jobs from the Longitudinal Employer-Household Dynamics (LEHD) Program from the U.S. Census Bureau to test the hypothesis that large existing firms are gobbling up innovators instead of those innovators joining smaller and or new firms. Sure enough, consistent with their model, they find (i) inventors are increasingly concentrated in large incumbents, less likely to work for young firms, and less likely to become entrepreneurs, and (ii) when an inventor is hired by an incumbent, compared to a young firm, their earnings increase by 12.6 percent and their innovative output declines by 6 to 11 percent. Thus, innovator hogging makes it easier for existing firms to kill off any new innovations.

So what to do about this?

Ackigit also (quite rightly) argues that there is not a "one policy" that fits all economies to increase knowledge diffusion. He points out that there needs to be country or regional specific policies to increase innovation, productivity, and knowledge diffusion.

Specifically for the U.S., Ackigit argues in the Fortune article that there is something broken in the competitive landscape of the United States. As Joseph Schumpeter pointed out in the early 20^th Century, markets need "creative destruction" as new, innovative firms destroy and replace established market leaders. Schumpeter saw this as the key to success of market-based economies over centrally planned economies. Ackigit argues that anti-trust policies should be used to increase competition in US markets to drive Schumpeterian creative destruction.

What is Ackigit missing?

One should be careful how far one wants to go in using the work of Joseph Schumpeter in defending any policy that will make capitalism more robust. Remember Schumpeter also argued that capitalism would ultimately fail. Schumpeter didn't see capitalism failing under a revolt of workers as Marx did, rather Schumpeter saw capitalism collapsing as those who benefitted from capitalism's success would fail to understand why that success came about. Basically, Schumpeter argued that capitalism was going to collapse as society fails to appreciate that entrepreneurs and innovators are key to the economy's survival.

This is what, I think, Ackigit misses in his formal models and empirical testing. To me the "something" that is broken is how Americans today think our economy works. That is, far too many Americans think the purpose of our economic system is to "make as much money" as they possibly can. Thus, we see things like the financialization of our markets.  We see the Federal Reserve more worried about how to keep the stock market booming than they are about stable price levels (until it is far too late – remember the taper tantrums?). At a microeconomic level we see bright innovators and would-be entrepreneurs seek out employment as asset managers or a desire to spend their time "doing deals" in investments banks rather than diffusing knowledge.

If this is the "something" that is broken, Ackigit's changes in anti-trust enforcement (while desirable) are not going cure what ails the US economy. Instead, we need to focus on how to end our decline in innovation and technological progress. Simply put, we need cultural changes so that "true" risk taking (e.g. solving systemic problems, disrupting inefficient systems, creating new processes, etc.) and innovation are rewarded and admired. It's not just "how much money" one earns that should matter; it should be much more of an issue of "how much does that person contribute to the betterment of our society" that determines how we see market participants.

Joseph Schumpeter warned us almost 100 years ago that if that "something" does not get repaired there are dark economic days ahead.