Show a bunch of futuristic, almost sci fi looking technologies popping up all over america.

Nor are these empty promises. America DOES lead the world in tech. The United States has been at the forefront of almost all new technologies since WWII; information tech and biotech are only the latest waves. How can one visit, say, Silicon Valley and possibly believe innovation is being undermined?


The answer is that we have only looked at one side of the problem, because of a classic American blindspot: we always look toward the west, and so we have forgotten the east. Not literally the west, though Silicon Valley is, quite aptly, on the West Coast, but the west as a representation of the frontier of technology.The tale of American history has been the search for greener pastures, in this metaphor frontier sectors like biotech. Growth in these sectors has been tremendously important for the US Economy, and because they are exciting, they are also the centerpiece for technology buzz and discussion.

But the east is just as important. One of the most important features of innovation is disruption- creative destruction of the old. And where can we have disruption except in the east, where the old vanguard has remained?  The problem is that there are certain sectors which have resisted innovation. These are gigantic sectors, such as energy, health delivery, transport, agriculture, construction, and even manufacturing have resisted innovation- we can call them legacy sectors. This is a huge problem, because they necessarily constitute a larger part of the economy than frontier sectors.

How have they resisted disruption? To answer this, think of legacy technologies. Take Windows XP, an OS Microsoft tried killing for 12 years. XP support remained  until 2014 because for some firms, the costs of changing over, at least perceptually, out weighed the benefits.Due to network effects, the technology reinforces itself the more pervasive it becomes

A legacy sector isn't just bigger. It's also more complicated. A sector is made up of a cluster of industries, each with their own networks that reinforce each other. Thus a legacy sector is not just a network, but a whole ecosystem that excels at leaving disruption stillborn. If the typical ecosystem is a rainforest where the best survive, then legacy sectors make a sparse, hardly habitable tundra.

A much longer list of obstacles exists: to illustrate, imagine entrepreneur Jim with idea X to improve the economy.  What does Jim face in trying to introduce a new technology?


First, there are perverse cost structures: subsidies to old firms.
Second, there is an established institutional architecture: regulatory hurdles.
Third, there are politically powerful vested interests: think fossil fuel.
Fourth, a financing system geared to incumbents: venture capital.
Fifth, public habits attuned to existing technology: popular support for products. QWERTY key boards.
Sixth: An established knowledge structure fitted to the technology: professional standards in fields.
Seventh: Limited R&D investment.
Eighth: Market imperfections such as collective action problems and split incentives.


Thus, pushing out disruptive technologies in legacy sectors is extremely difficult. This is part of why both businesses and the government so often emphasize frontier sectors.  But there is a problem with this approach. Because current innovation policy focuses on the frontier sectors, it does not address the problem of legacy sectors directly, but attempts to mitigate it. If we reuse the anchor metaphor, we might say that instead of cutting off the anchor we're countering it with something else. The problem is that because frontier sectors are small, even explosive growth does not create a large enough offset.

 But it gets even worse. Growth in frontier sectors does not necessarily lead to jobs, due to the decline of manufacturing in the US- one of our legacy sectors. The US has taken a strategy of focusing on design, rather than production. This limits our growth, because manufacturing is so good at creating jobs. It's estimated one manufacturing job creates 3 jobs in other sectors. Experts often advise the US to focus on high tech manufacturing, because high tech production jobs can create up to 16 jobs! But, surprisingly, this strategy has not worked out- we've lost the high end. The latest Kindle could not be produced in the US. Its complex components, such as lithium polymer battery, wireless card, and electrophoretic display are all made in China or Taiwan. The splash effects of the production of one Kindle thus happens overseas. Our tech advantage is not creating jobs.


Why we've lost high end production shows just how bad the problem has gotten. Here is a fact that should startle you: every non Apple branded computer or mobile device is not just manufactured in Asia. They are designed in Asia. Our strategy to focus on design instead of production has backfired. Knowledge of the production process is often integral to breakthrough innovation in design. When a country focuses on innovating to lower costs in low end production, they end up establishing a foothold to move up to the high end. Innovations from the bottom become the basis for breakthrough innovations higher up the value-added chain, to more complex products, and even to the design of said products. Hence, we are not losing just jobs, but we are eroding our own technical innovation.


None of this is intended to be alarmist. The US is still the high tech leader of the world, and the world's growing economies shouldn't be viewed antagonistically. But from a policy perspective, the United States' has a clear national interest in dealing with legacy sectors, particularly that of manufacturing. There are integral ties between the legacy and frontier sectors, between the east and west of technology.

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