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The Messy Business of Innovation — From Local to National

May 2, 2012 11 minute Read by Carl J. Schramm

It is astounding how quickly the fortunes of cities can change. Many once extraordinarily innovative and wealthy cities are found along the Erie Canal in upstate New York, which I once described in a lecture as America’s first Silicon Valley (a characterization that seems to have gained currency, perhaps because it is so appropriate). Rochester still trumps every other city in terms of patents per capita. How about that, Palo Alto? Recently I was talking with Bob Litan, who was my colleague at the Kauffman Foundation, is my co-author of our forthcoming book “Better Capitalism,” and is my compatriot in thinking on growth issues at the Bush Institute. Bob has argued that air conditioning is among mankind’s most important inventions. We were joined by Iqbal Quadir, from MIT, who suggested that Syracuse, once renowned for its industrial innovation, serves as an example of a city hurt by its own inventions. Willis Carrier, working in Syracuse, introduced air conditioning to the world and with it made vast parts of the United States (and the world) inhabitable. His invention allowed the people of central New York (sometimes known as the beta site for winter itself) to imagine that Florida might be a good place to live in retirement. More important, it allowed factories to be built in the South, when unionized labor costs made economic comparisons with other parts of the country undeniable. When compared to the inventive products of Apple, Intel, and Google that have certainly changed the world in our times, we often treat inventions like air conditioning and the telephone as products that always existed — they had to! The miracle of innovation that these products represent is taken for granted. We forget that there are political scientists who seriously argue that air conditioning is the single most important force enabling our central government to debase our federal republican model. Previously, Washington in summertime was deemed so unbearable that foreign diplomats received supplemental compensation from their governments similar to that paid to their comrades assigned to the tropics. Carrier is the hidden member of the foursome that literally moved the world, or at least its population. Ford and the Wright brothers we know. The railroad had too many fathers for any one person to get credit. Carrier, unlike the people who figured out how to get us there, made the destination! The creativity of these inventors not only made cities (Baltimore, Chicago, Minneapolis, St. Louis, and Denver would not be what they became without railroading), they also made states. Henry Flagler literally made Florida out of a swamp, with the railroad that ran all the way to Key West, and Carrier made Florida a place to live. Ford’s technology perhaps played a more singular part in shaping cities — no car, no suburbs. And the Wright brothers’ airplane made small cities big (e.g., Charlotte) as they successfully played out their role as “hubs” in the airline and banking systems. Carrier’s invention also has had an enormous impact on improving the health status of huge portions of the population. Two themes relating to growth emerge from the stories of these innovations. First, by now history is not whispering but shouting the obvious to us: Cities are a transitory phenomenon made so by social and economic forces. Not the meta-phenomenon of cities — the world continues to become more urbanized with over half of the human population now living in cities — but individual cities, which present a history of growth, flourishing, and decay. People want to live in places that are flourishing, and American history shows we want to like the places we live (even though we keep changing where that is). We grow a network of family and friends in a given place. And we stay there until we need to or want to move. Why do we move? Mostly it’s because economic opportunity compels us. Economic forces that play out at the national level compel us to move, even though the national economy is the sum of the economies of locales.  The relationships between local economies and the national economy shape the history of every city, no matter how much the city resists change or seeks to shape its own future. Carrier’s brilliance contributed to American economic growth on a scale that is similar to that credited to Gates’s Microsoft, but in time it wounded the city where it all started. Air conditioning cooled America but could not keep warming the Syracuse economy. Labor costs, taxes, and more efficient logistics, as well as management that was emotionally tied to its historic home and resisted economic reality as it encroached, led the company to be bought by United Technologies and have its manufacturing operations moved south. Second, municipal political culture is no longer congenial to seeing the city as an instrument of economic advancement. In the age of Ford, the Wrights, and Carrier, the mayors of Detroit, Dayton, and Syracuse had to make sure the city worked as a provider of services required to make them orderly and livable places. City governments prided themselves on prosperous downtowns, beautiful neighborhoods with nice trees and clean streets, good policing, and schools that produced well-prepared citizens competent to make their way in increasingly technological economies. As tax revenues grew in the prosperous 1960s and 1970s, these outsized government ambitions led to spending and enlarged commitments that can no longer be paid for. New York State and her cities tell the story. In the postwar years, New York City was the only financial capital. General Electric and IBM were New York State companies; Rochester was the home of Kodak, Xerox, and Polaroid; Buffalo was the railhead for 80% of the Midwest’s grain; Syracuse made the nation’s typewriters and air conditioners. With such vast wealth, New York politicians invented ways to enlarge government. Governor Nelson Rockefeller created a state university (even though New York had and still has more private engineering schools than any other state), made over its capital city on the grand scale of Brasilia using the same architects, and virtually invented public unionism at the state level. The state government itself assumed the responsibility of inventing new ways to improve social welfare — or so it thought.  The abomination of deinstitutionalization grew from this time of enormous wealth when the state’s mental institutions would be replaced by publicly funded community clinics in every neighborhood. (Once the system’s costs were realized the idea was scrapped, leaving souls suffering horrific mental disorders to fend for themselves on the streets.) It seems political leaders never appreciate the centuries-old lessons that markets tell us about cities. Economies, driven as they are by technological innovation, make some places more or less competitive over time. Today’s fat times will inevitably be followed by tomorrow’s lean. This is particularly so at the city level, because in a large and dynamic national economy, there is constant jockeying for comparative advantage. These forces cannot be stopped, ever. But the institutional and legal commitments that governments promise remain in place. The level of taxation necessary to sustain such promises is now so oppressive that New York’s cities continue to shrink along with the population of the state. While New York was the most populous state in 1960, it now ranks third. California is home to 37 million more people. America’s real income has nearly doubled in that time. What is to be done? Well, the logical prescription might be to limit the benefits of transformational technology only to those places where it was invented or developed. Airplane rides could be had in Kitty Hawk or Dayton, and you could drive a car if you live in Detroit. But the demand and rewards of national and global markets make such a suggestion laughable. The big lesson is that most cities cannot be reborn unless they do it the way they once did. Indigenous creativity and entrepreneurship can happen. But cities and states have to make the environment congenial to the birthing of new businesses. And the difficulty arises here. Are physical places, such as incubators, and new city infrastructure, such as low-cost housing for “the creative class,” key? Or, are politicians of the old style required? Perhaps we need those who, like Mayor Joe Reardon of Kansas City, Kansas, see it as their job to “sell services — clean streets, clean water, good schools, nice sidewalks — that’s about it.” In Mayor Reardon’s vision, entrepreneurs will want to stay when they get their businesses going, that is, if the taxes don’t drive them out. Cities are, as noted, social, economic, and political entities; but they are also competition machines, with little to hold them together. Civic culture cannot do it, nor can infrastructure “projects,” and certainly higher-than-market public employee salaries will fail as well. Local political leadership must establish a modest expectation of its obligation to directly improve the social welfare of its citizens, especially when the costs of this obligation threaten the economic competitiveness of the entire civic entity. By now it is clear that taking guidance from the federal government about city preservation and growth is dangerous. All cities are not valued in Washington on equal terms. It is increasingly obvious that officials in Washington have their own plans for which American cities will be favored. In a world where cities must compete against each other and where the federal government plays favorites, the smartest policy for cities is to make sure that the native entrepreneurs are recruited, succored, and supported in every possible way. This requires the local government to establish an environment where innovation happens on its own, without officials being directive about how or where innovation is supposed to occur. Cities, like capitalism, are a messy phenomenon. America’s best chance of seeing a 4% growth rate is to let mess prevail at the local level.


Author

Carl J. Schramm
Carl J. Schramm

2012 Economic Growth Fellow

Carl J. Schramm is recognized internationally as a leading authority on entrepreneurship, innovation, and economic growth. Currently he is university professor at Syracuse University. For 10 years he served as president of the Kauffman Foundation, making it into the world’s premier organization dedicated to the development of high-growth firms and understanding the role they play in economic growth. He serves as a visiting scientist at MIT and as a fellow of the Bush Institute. He is a Batten Fellow at the University of Virginia’s Darden School of Business and is a member of the Council on Foreign Relations. Schramm's most recent book, "Better Capitalism" (co-authored with Robert Litan) was published by the Yale University Press in September 2012. He has written several other books, including “Good Capitalism, Bad Capitalism” and “The Entrepreneurial Imperative.”

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