The Innovation Economy – not here in America

The nearly continuous puffing up of Silicon Valley, the construction of an enormous bio-pharma complex in Cambridge, and other examples of high tech ebullience are offered up by the mass media and the business press as evidence of a dynamic economy. The actual facts show a different story that should concern us.  The US economy has been very lackluster in creating new companies, reinvesting profits in research and new capacity, and there has been a significant decline in government funds for basic research which historically has been a lynch pin in keeping the economy refreshed.

Birth Rate vs Death Rate in the Economy

In the post Great Recession era (since 2008-9) there have been four years in which the number of companies in the economy actually declined. More companies expired than were started. This is unique back to the Great Depression. More significantly for the long run this phenomenon comes in the midst of a general slow down in the enterprise birth rate for the economy as a whole for more than two decades.

Rate of business births and deaths since 1978
Start-Up Slump is Drag on Economy
Rate of New Entrepreneurial Activity by Age (1996-2013)

Corporate Profits Not Being Reinvested for Productive Uses

The financialization of corporations has resulted in a massive shift in the uses of retained earnings (profits) by corporations. For many decades corporations for the most part used their retained earnings to fund research and development, new plant and machinery, and more employees. Now these profits are being used to swell the pockets of managers and buy back company stock to raise stock prices.

Concentration – the economy as oligopoly

When markets are dominated by several large firms new entrants are inhibited by lack of access to capital and labor. This is not to mention the ability of the monopoly firms to set prices and extract excess profits due to their dominant positions.

Dominance of Corporate Behemoths - NYTimes - 11/25/2108
Dominance of Corporate Behemoths – NYTimes – 11/25/2108


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