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>> in case you have not read the book, if you want a summary of the issues we are trying to discuss here with a very distinguished set of speakers, read this. it is a great overview and links to everything that you need to know. besides that they brought everybody you need to know right here, i recommend this. >> [inaudible] >> i assumed this was the price of admission that you had to read "the second machinage."

this panel will focus on innovation. what technologies are we talking about and how much -- one is, what technologies are we really talking about? so much of the conversation is about software coding a little bit of robots thrown in there occasionally. but what technologies are really transforming, are they enhancing productivity, have we reached a technological plateau, which some org we have. then if the technology is is changing, are our organizations changing rapidly enough? is our capability to absorb this on the decline and then finally, what are some of the business models that might work to actually help us absorb all of this and make the most of us make the most of it for all of us. so, that's what we're going to do and i will start with someone i think a number of you know well. john, he has done a lot of really important work. documenting the fact the pace of innovation and organizations in the united states may be declining, that entrepreneurship

may be stagnating, that labor markets fluidity may be less than it has been and believe me, you need fluid labor markets to make the most of this. i thought i would start a question to john by making an observation that eric and andrew make, which is that in the face of rapid change, let's assume that is happening for a minute. the benefit will not go to labor. and it won't go to capital as we traditionally know it. it will go to entrepreneurial people and entrepreneurial organizations who can create new products, new services and new business models. but i think john's worried about whether we are capacity to do any or all of these things is declining, so, is it declining? why and what are the implications and if you got a stagnate sort of structure trying to absorb this change. >> thank you, it's great to be here. i think when we get the chance

to listen to eric and andrew we're struck by this, the gee whiz aspects of the changes, but then we heard in the first panel, i think some of the skepticism doesn't seem to be showing up in key numbers like productivity statistics and i think actually, the evidence on the declining entrepreneurship and dynamism may be part of why we're not seeing those numbers and raises questions about whether or not the u.s. is well poised to deal with this. so, if we were having this discussion, in fact, none of these people were back in the 1990s, so we have lots of folks here who played important policy roles in the 1990s and the u.s. was just surging in the 1990s in terms of productivity growth and jobs growth and growth was doing

ok. sort of before the great departure and i have quotes from some of the notable policy people in the room including folks on this panel, that indicate, they were giving speeches saying why was the u.s. doing so well in the 1990's and aufb times, the two words used by these distinguished policymakers were the dynamism and flexibility of the u.s. economy. so, what have we sort of seen? one thing we know about innovation is innovation and productivity growth is a very noisy and complex process. it's not just here's some new idea come along and we can talk ab it. takes many years to figure out how to use it and that complexity, at least historically, has been when we have booming times and sectors we see a very high pace of entrepreneurship and lots of volatility.

and also what's kind of stliking about the nature of that volatility, you know, it began in the 1990s. it's only a small fraction of businesses that make it, so again, a striking feature of the united states economy, we have the surge in good times, surge of entrepreneur shim and ship. the flexibility part. well, what this means is that there's lots of restructuring going on in the united states economy as a result of this. and the u.s. has been quite flexable and fluid in terms of being able to move workers to other kinds of productivity uses. and the fluidity has helped, we've got to remember, it's not just businesses expermenting. workers themselves. a key way workers build their careers is yob hopping. we know particularly young workers, the way they find the right match, it's not just at

the high-end, it's all over the place. where earnings go up and where again, they find good, lifetime careers is through lots of job hopping. so, it showed at least cause us concern that we see now in the data, several indicators i'll say of drk ynamism and fluidity down, especially since 2000. some have been going on before that. but it's especially since 2000. we've seen a decline in entrepreneurship. actually that predates 2000. but in key sectors, the tech sector was rising. some would say, was that the dot com bubble. if you look, entrepreneurship was rising through the 1990s in the high-tech sector and has a little mountain peak, where everybody was apparently starting a dot com business, then it came down. if you look at entrepreneurship in 2005, it's lower than it was in 1995, so -- >> only wup swing since 995?

how can that be true? i'm honestly puzzled. >> so -- yes. so, when i talk about an entrepreneur, i am talking about a new business that hires at least one worker. so, what i've been doing and others have been doipg is tracking the number of businesses that hire at least one worker. and again, the u.s., what we've seen i'll say is that these entrepreneurs as so defined, have been critical for job creation and productivity with this large pace of entrepreneurs going in and a small fraction taking off and creating lots of jobs and being high in terms of innovation and productivity. so, again, we've seen a decline in the post 2000 period.

the great recession was insult to injury, so, young businesses were already on their way down prerecession and just got hammered and they've been slow to recover. so, so, we're obviously concerned about what this might mean for productivity, earnings and wage. do we fully understand this decline? and the answer is i'm happy during the questions and so on and the panel to talk about what are ideas? let me just talk briefly about what we -- both the costs and consequences. the quenss are going to depend on the costs. one thing we see, one thing we've done in working with steve davis, presented at the jackson hole conference last august is we look carefully at the impact of this decline and labor market fluidity for something that was on a topic of the first panel, which is unemployment rates and what we found is that it looks like they're closely connected. this rate has been especially for young and less educated workers and especially, young,

less educated males. it turns out there's lots of variation across states in where we've seen this and we've found the states with the biggest declines are exactly the states that have had the biggest deklains in, in the employment rates for young, less educated males. i've pushed further, but we try to use instrumental variable procedures to try to generate effects. in fact, our results were consistently bad. so that says that it looks like there's at least some adverse consequences. the second thing we've done is we've tried to look at what the productivity implications of all this are. so, one possibility of this decline, you might say maybe the business model in the united states has changed. maybe we don't need to do as

much exper menation as we used to. maybe we've gotten better. a lot of that was waste. you have entrepreneurs coming in. many fail. very costly. maybe we got better. maybe information technology has made that, we need less of that. so, one way to look at that is we've seen it in the micro data that there's lots of dispersion in product across frms. that's very much what's driveing it. lots are experimenting. some do well, they take off. some not doing well, they shrink and contract. so, what we want to do is look at the dispersion of productivity across businesses. particularly young businesses in high-tech, so, one possibility is maybe that dispersion has declined, so we just don't need to see so much of that. actually, what we see is the opposite. if anything, dispersion has gone up, rather than down. so, something's causing at the end of the day, it's not that the shock businesses, you could say not that the technological

changes have slowed down, so this is kind of consistent with the story we're hear, but the responsiveness of businesses to this change has slowed down and again, that has by construction, that has adverse consequences for productivity, so in a mechanical sense, part of the way we were getting gains is we were moving resources away from less productive to more protective businesses. we're just not doing that as much. >> so, a question and i don't expect not an answer now, but a question to put out there to try to relate to the previous discussion is to what extent might we think that these amazing changes in technology that are labor displaceing or potentially labor displacing actually are discouraging the formation of a entrepreneurial

venture with one person? what's the point? i mean, a lot of the entrepreneurial ventures with one person are very labor intensive local things and if you can do those things online you don't need the local entrepreneur and the one person that person hires and by the way, i would link that to the fact that a lot of those one-person shops are like mom and pop shops. a lot of them are founded my women. there's the whole issue of labor rates of participation rates of women stagnating around 2000. so, technology and as a cause of this, is something to think about. let's go from there to technology and to our team. the head of the darpa, very well-known source of technological innovation in the united states and economists tend to, when looking at this technological change, tend to raise two issues. one is, it's not showing up in the productivity numbers. the other is is is just these technologies are not that

important. we're not doing major innovations in health. we're not doing major innovations in transportation and energy. nothing similar to electrification or telephonic communication. what's the big deal, right? so, i don't think we have a better person on our team to sort of talk about these pessimistic views of technology come rg from the economics community andin your sense of where the big technological changes are coming from and is it all it and software? >> that's very muchsoftware? >> that's very much what i would love to talk about. thank you, lawyerura. i want to say first how very much i appreciate the chance to participate in this dialogue the work that you and erin have done. it's subcore to what is important to our country, for our values and our country. i really think this is terrific. i want to take the conversation in a different direction and

talk about technology itself. the word technology has almost become synonymous. many people use it synonymously with information technology. if you read "the new york times," their technology section is only about information. everything else is relegated to the science section. but, in fact, technology is much, much broader than that. and what i thought i would do is take a few minutes and share with you some perspectives about the bubbling pot of things that are happening in some very, very different areas. first of all, let me say there is a lot more to be said about the technology factors driving the many dimensions of technology. we can come back to that. let me set that aside. let me give you very different examples. one is something that is bubbling today in the maker movement. part that have is neutrals like 3d printing, which everyone has talked a lot about. but part of it, too, is finding different ways to make those kinds of tools available to lots of people. one example is a tech shop here

in alexandria, virginia, that we helped get started a little while ago, co-funded it, working with the veterans administration, in part, to be able to provide a gym membership-like access here. for what it costs to belong to a gym, they or anyone else can have access to advanced 3d printers but also sewing machines, welding tools and every production equipment that a wonderful machine shop. i went by to visit there right before christmas. i wanted to get a sense of the vibe there. one of my most engaging conversations is with a young fellow in high school. he found out about tech shop somehow. he drives an hour and a half each way many times a week, as often as he can break away, to come to the tech shop and build things. what do you do with these things? well, i put them up on pinterest and all my friends and family buy them.

i got his business card. it was right before christmas. maybe i'll buy something that he built. it turns out i don't know anyone who wants accessories for guns to play paintball, which is pretty much what he was building. but, you know, it just -- that's what's happening today. people are experiment inging this is a kid who is building a business. i don't know what tomorrow holds. it might be something that broadens and taps the skills and energy from the creativity of new sets of communities. that would be awesome. i don't really know yet if that's going to happen. that's one thing that's bubbling. a major area of research that we're very excited about at dartmouth because we think it holds the seeds for technological surprise, that's our business, that's happening in research, biology is intersecting with the information science and technology and also the physical

science and technology world. i'll tell you what's happening today but also try to take you out into what i think could be a very wild future. let me start with synthetic biology. this is, of course, the ability to engineer microorganisms to create chemistries and materials the world has never seen before, trying to scale it up and do it in factories. what is happening today is we're able to build new specialty chemicals, new medicines and very interesting beginning. in fact, it's only a beginning. we can see in these capabilities a progression of new materials chemistries, but also functional systems and self repairing systems. we can imagine a future where you might be able, in your environment, you might live in a building in which the walls are able to sense the environment around them, add just to temperature and lighting conditions. they might support microbial communities that can disinfect the air, purify the air. they might be materials that can self repair so that, you know,

when your teenager puts a gouge in the wall, it could fix itself and when the time comes and you want to, the wall could biodegrade and not perpetuate this waste we live with today. imagine a century ago if someone told you about this magical pvc material that would be super lightweight and so corrosion resistant, it would have changed way you do plumbing. some of these things today technically look like they might be possible. how we turn those into businesses and products is another question. let me finish with an example from neurotechnologies. we're just at the very beginning of this adventure of understanding the brain and how to harness its amazing

capabilities. today, much more work in this area is about the restoration of function. but in that work, you can start imagining what might be possible out into the future. one of our areas of focus here has been revolutionizing prosthetics, moving beyond the simple hook that's been a standard of care for upper limb prosthetics, to pursue that vision, our program manager developed a very sophisticated robotic hand with many degrees of freedom. and that was one branch of it. because he's a neuroscientist he also did the research that helped us understand how neuro signaling from the motor cortex actually controls that arm. that work culminated in early human trials. most notably, a woman named jan, who lives in pittsburgh, who is a quadriplegic, volunteered to have these two small implants surgically plasd on the surface of her brain, on the motor cortex. as she thinks, she's able to

move this arm and she can shake hands, she can give you fist bumps, offer you a stack of cookies with this robotic arm just by thinking about it. so first and foremost, of course, the health care implications in that dimension but many other dimensions of restoring function as we understand the brain, that's going to be amazing in itself. as we do this work, of course, we also understand that we have opened the door that could free the brain from the limitation of the body. as we start thinking what else is possible beyond restoration of function, we opened the door to many possibilities. some of them will be great and many so of them will be terrifying. the societal issues will make the work issues we're dealing with today look simple.

technology has many quandaries that it raises. i hope some of those ideas give you a sense of the very wide range of things happening today that could lead to alternative futures. >> you mentioned the work issues. and another -- and then you mentioned that there are other issues we're not even thinking about. there are also issues that you obviously think about, too. those would be in the realm of national security. you didn't mention that as an area, but i think that's one we might want to talk about. >> behind everything we're doing. >> right. technology and moving to business models is a concern that i have, and i think many americans have, which is how we finance basic science and applied science and whether we are doing enough and -- because we're pulling back on the

support for basic science. this gets to andrew in the following way. the most research and development in the united states, most spending is done by the private sector. not by the public sector. and actually most of the private sector is done by very large companies. 85% of the r & d spent in the united states in the private sector is done by the u.s. multinational companies that are big. now, let's get to andrew. andrew is concerned that the existing companies cannot cope with the new technologies. and that we have to develop whole new organizational structures and business models to take advantage of. but, remember, right now, we have the situation where we've got government doing the basic science and being very resistant to doing more and wanting to do less and wanting to know what the business model is right way. then we have these large companies who you're worried about, they won't be able to make it. what kinds of companies and how would they support their ongoing investment in r & d, unless you become huge overnight like google or apple and then you're running your own venture capital firm, your own r & d, your own everything. >> can i highlight, first of all, how interesting this panel is? i say this with no pride because

i haven't started talking yet. we're hearing about this time of deep technological ferment coupled with institutional sclerosis. we don't fully understand this phenomenon at all. i really don't understand why at a time when the tools of entrepreneurship are really good, more widely available than ever, and getting better all the time -- you described a really good example of that. it's on the decline in this country. this is a deep, deep puzzle and we better spend some time figuring out. a lot of it is completely opaque to me. some of it is clear. some of it is self-inflicted damage. some of the ways of approaching the situation and our reactions to it are making the sclerosis worse. i live in cambridge, massachusetts. pray for the people of cambridge right now, by the way.

the city council in cambridge made a very sincere effort to specifically ban uber from operating in the city of cambridge. they wanted nothing but the taxis to be able to pick up anybody in the city fof cambridge. i think my head came close to exploding when i heard about this i had trouble imagining a worse response to this situation we're in. uber is a very conversation company. its management has done them no favors in many ways but i want to go on the record to say i love uber and their model. the more i understand about the opportunities they're providing to put labor back in the economy and to provide a decent living for people, the bigger fan i become of the company. laura, you probably saw the study that alan krueger just worked on and published. the average. uber driver, comparison hard to

make. pretty clear they get paid as much as a cab driver does. >> per hour. >> per hour in contrast to all other part-time workers they appear not to suffer a penalty on a per-hour basis for working fewer hours. you make $15 an hour if you drive three hours, you make $15 an hour if you drive 30 hours a week. especially to the point that larry was making earlier, if we want to bring jobs in demand back, here is a platform bringing jobs in demand back. the harshly negative reactions to it honestly don't make any sense to me. i get the idea that people want to legislate secure jobs in the middle class back into existence. i think that's a fundamentally misguided approach. are today's great big companies able to navigate this transition that a lot of us feel is beginning? and the pattern of history is not encouraging one. when we look back at these big

technology trends, the pattern is very clear that the companies on top at the beginning are not usually the companies on top at the end. there appear to be two main reasons for that. one is financial. when you have a factory totally set up for steam it's hard to get out your pencil and justify the retro fitting for this weird new thing called electricity. that's part of it. the deeper problem is a mind-set problem. if you're used to thinking about a factory with this big thing in the basement, pulleys that drive your machines when some weirdo shows up with an electric motor, you say that thing is more powerful, costs more, why would i do that? you don't see the opportunity to get rid of those belts and pulleys and replace them with overhead cranes and things like that.

well managed companies today, i see that mind-set challenge coming up over and over. one example i'll give, one of my messages to large establishment price sincere your management needs to become a lot geekier. by that, i mean a lot more driven by the numbers. a lot more rigorous, a lot more evidence based in things like human resources where the dominant mode right now is you interview me and you look deep into my eyes and judge my character and fit for the job and make a recommendation based on that. we've got ample evidence that's a terrible way to make human capital decisions. being a lot more analytical and a lot more geeky is the way to do it. they didn't grow up with that tool kit. they didn't get to where they are by virtue of their geekiness and familiarity of quantitave stuff. there are one that is feel challenging to me. a huge open question is whether today's successful enterprises are going to navigate into this

technologically very different future. i think some of them certainly will. a lot of them are really going to struggle. >> can i sort of connect your question, which is this confusion -- and a agree with it, about the technology not only changing rapidly, but creating all kinds of enabling technologies like -- and i think makers was a wonderful example. and yet this decline in entrepreneurship. might that be -- look at the issue but just the overall demand. the overall macro economic climate here is, in fact possibly the biggest determinant. it doesn't change that fast productivity. the macro conditions in terms of the excess demand or excess supply in the labor market can

actually change. and then i think about 2000 and then 2007. a lot of mom and pop entrepreneurs, particularly 2007, there was no bank capital for these people. absolutely none. you could not keep your establishment open from one day to the next because your demand fell off the cliff and your ability to finance fell off the cliff at exactly the same time. so i wonder how, john, in terms of -- maybe -- the technology may be enabling. if you don't have the demand for your product then you don't have the financing to set up your little enterprise which may some day be google. you can't do it. >> i think that's right. all those factors are right.

i think that's mostly a post 2007 story, right? and i think that's really important. i mean, the great recession clobbered the whole u.s. economy, especially young businesses for exactly the reasons you're talking about. but this was going on before that. i would say that we've seen decline in dynamism, fluidity, decline in productivity predates this. >> is there a reason for why that is? >> this is going to be very much the two-handed economist kind of thing. on one hand -- >> laundry list. >> on the other hand, what might be going on. so one or more sort of benign interpretations, but may actually have adverse implications for the united states. we talked about this in the first panel. we have seen this big shast way from young businesses to mature, large businesses. their share is going up. one can make the case that especially i.t. has been especially good. it's enabled the multinationals to be able -- and eric talked

about this as well -- to be able to communicate with all their activities around the world instantaneously. and so as a result, the question is, the big guys are saying maybe the u.s. isn't the best place to do all these things. the u.s. is going through some disruption kind of factor. the second thing that does seem to be going on that again may be associated with the change in the business model, not so much an explanation, is again one of the -- it's good to remember that most entrepreneurs fail. only a small fraction really grow rapidly. so, really striking in the data were these high-growth young firms that played such a vital role in the '80s and '90s. we've seen -- i don't want to say a -- but a tremendous decline in high-growth firms. >> who is distracting us from the real story? >> there are exceptions. one question is whether the business model now is -- maybe it used to be maybe you want to be google.

now the business model is i want to be bought up by google. you could make a case maybe that's not such a bad thing. that's a change in the business model. then again, if this is all good news, if this is all entirely benign, then why is the productivity statistics so very bad? where are we looking? the obvious concern is the u.s. through -- has it changed its business climates and regulations, its labor market regulations in some fashion so that we see this gradual decline? we work on that and find some evidence of this. i think in trying to think about that question, it's useful to think about the cross country studies that have been done on this. on the one hand, we have now -- i would say increasing evidence that countries that are successful are precisely those countries which have the successful productivity enhancing reallocation so that countries that are not doing well are countries in which they have lots of dispersion of

activity and they're just not able to get resources to the most productive businesses. it's actually been harder. and that all suggests -- we know countries differ quite a bit in terms of labor market relations and all the rest. financial markets and so on. so we're pretty convinced that this matters a lot. in cross country evidence, we struggled in exactly finding what the cause is associated with why this country seems to have a bad environment relative to the other. one view that's increasingly been taken in the macrodevelopment community is to think of this as a death by a thousand cuts. lots of little things. don't look for one big thing. in fact, i don't think there's any evidence -- there's no evidence that there's a big smoking gun that, aha, the u.s.

suddenly did something around 2000 and so we're seeing this decline. i think we are beginning to look at smaller things. what are two smaller things that looks like they might matter and as a suggestive, we need to push harder on this. this is not a complete explanation. one of them actually builds upon david otter's work. we took it and applied it particularly to our more recent data and also applied it, i'll say, to more comprehensive data. one part of david's very nice -- a lot of nice research contributions is he found there has been an erosion of will doctrine in the united states in presence through the u.s. court system that made its way sort of gradually through the nature of how judicial precedence are set. and it's precisely that variation that allows you to identify these effects. in his work, we followed up.

that actually looks like it's associated with this decline. that's at least working in the right direction. that's not saying the whole story. it's saying, oh, yeah, you actually can see. here is one of 1,000 cuts we're looking at. inspire bid very recent work by krueger and kliner. occupational licensing has risen dramatically and those are the kind of regulations where you could easily imagine, wait a second. that's exactly the kind of thing that again could sort of stifle the kind of regulation. we even heard a little bit about this in the first panel. not on occupational licensing but the permit process. the question is, has the u.s. become more sclerotic? our worst nightmare, of course. become more sclerotic because of accumulation of problems in the way things are working? i'm not going to argue that i

think we know this for sure now but i am going to come back and say, one, we've seen this decline in dynamism and, two when we look at the statistics at the microlevel, we should see an increase in dynamism, not a decrease. that almost can't be good news. >> one follow-up here. do you have -- you suggested in looking cross country. historically speaking for a very long time the view was that, by far, the u.s. was the most innovative, most fluid. so who is surpassing us now? maybe we're just less. but our gap to -- our gap of excellence has declined but we're still number one? >> i think it's more the latter, by the way. i think that the rest of the world is not necessarily become that much more dynamic and entrepreneurial. and eric tryied to push this. things are not that dire in the united states. they've slowed down but we're not in a crisis. we are, i would say, in a crisis in terms of employment rates the point that came up that larry -- i think that is

connected to this. my concern about this decline in dynamism and flexibility is, i'll say, both at the top and the bottom. at top, are we poised to take advantage of all these technological changes or is that going to happen elsewhere? are we going to fall behind or not be as successful as werp in the 1990s when the economy was rocking? i'm probably even more concerned, it doesn't seem we're accommodating that nearly as well. the worker whose get caught up in this -- what used to be happening, because we were such a dynamic and flexible economy other opportunities were arising. they're not. and so i think they're just not participating in the labor

market. >> so, i guess what i would like to say is that another of the many pieces of david otter's work, which actually suggest that -- there's the issue of demand and the fact that we were running at a very low level of demand. so we had a problem across the skill spectrum. is increasing employment problem that existed before, high school dropouts or -- but, in fact -- in fact, that issue -- and you run sortative high demand, high intensity economy -- shows up not in unemployment numbers but poor job numbers. it's about the quality of the job not the percentage of people who are employed. and if you think about it -- someone said on the last panel we have to worry about the fact that the technology itself may be leading to the disruption of

jobs that are quality jobs. and then you have care giving, education, janitorial services. all of things which actually in a number of the periods david was looking at, you saw employment growth there. it was actually pretty strong. it was one of the reasons unemployment in the u.s. are down so far because low-wage jobs, low-quality jobs, many part time, have increased and people took them. that's a demand phenomenon. the technology has taken out the middle. it may be in david's more recent work taking out some of the top in order to run a high employment economy if the technology is taking out those kinds of jobs, more and more people will have to be employed in low-end jobs which brings me back to talk a little bit about some -- when you think of these technological breakthroughs, they're very, very exciting. think about them in terms of -- i would say distribution issues. this is not inexpensive stuff. does everybody get it?

if so, how do we generate the revenue stream for the societal promise that everybody gets to live in their brain outside of their body or everybody gets an arm when their original arm no longer can, you know, be a baseball player level hitter. >> those are huge issues. but before we boil that entire ocean, because i think that one, we do have a little bit of time before it hits us. we need to be thinking those through. my hope is that we will create a plethora of opportunities.

so think about tying it fwack. if you think about synthetic biology i was talking to a spall company that wants to tacking and to enhancing the production of specialty chemicals that people already build through. that's a company that's 30 people today. as those think about scaling up those will look like a traditional company. right now it's very phd heavy. it will continue to be a place where very smart people can get employed. but they will also need technicians at all different skill levels. and i think we're going to really need that kind of diversity of different technological opportunities that lead to this whole range

of different kind of skills. i don't know how this is going to play out. one of the interesting things coming back to your point, very much as you said twice as much of our nation's r&d investment today is made in the private sector. that was flipped when we were small children. it's a trend that is overall healthy. it's good if we have a more innovation driven economy and private sector investment. but that of course companies make not thinking about the jobs they make it in order to pursue their business plans and profits. the government part of that investment i make my share of that for national security objectives, national science foundation and national institutes of health are creding basic research but with no particular focus or drive or ability to shape how that turns into jobs. in a market economy there are

no formal drivers to shape the way this comes out. i think that's the richness of our approach but it also, it makes it very hard to predict where any of this is going to go. >> i think one of the stats ticks that is misleading, maybe all are misleading, that's why we're struggling here is the stats ticked on r&d and large business.

that was these are businesses they have in revenue but they're spending enormous amount of resources it's all r&d and we're not picking that up. i think this is going back in this decline in entrepreneurship is troubling because we're seeing less innovation and less and we're not measuring it in the statistics. it is not that well geared to pick up applied innovation. it is more geared to pick up

more core basic research. >> i think we can agree this is much more product development driven and still remains government function to fund the basic research the university core. >> we're all thinking about the pace of technological change has picked up. things we can't imagine are going to be very transformative. we need a policy debate that reflects reality. the policy debate is not about this reality including even the fact that so much of this has been driven at the beginning from support for basic science and universities.

if there's not a lot of support they go to the companies. that's where the jobs are going to be for them. so we actually need to have a policy debate which focuses on if we think these are going to improve our lives dramatically how we finance this appropriately. i do worry about that. so we have some questions here. one is a question i think we probably should address. this is regarding the decline and dynanism and fluidity are businesses more focused on increasing shareholder wealth than investing in risky ventures? now, this is not directly related to entrepreneurship but i wonder you're sort of thinking about what kind of business model is out there. is shareholder value driven by activist investors a good

environment? >> i gave a version of the talk that eric gave and showed these slides. you can see this great decoupling happen. i was giving this presentation to the open societies foundation and he said you're misattributing the root cause here. it's the rise of market fundamentalism which he associates with the reagan-thatcher revolution. so he was saying look it's that turbo charged fairly selfish version of capitalism that's causing what you're seeing here instead of any surge in technology. i think that's a really intriguing idea. but my career as someone who kind of tries to understand what's going on in the business world is on the order of 25

years old, throughout that entire career i have been reading about the excessive short-termism of american business and its overreliance on this quarter and the bottom line and keeping wall street happy. the names have changed. that critique has not changed for two plus decades. i don't know how much weight to attach to that. i don't see that as a major factor here. and the most -- among the tech companies that i know, the most ruthless growth hungry vicious competitors are also the ones investing the most in basic technology. >> so this is a hard set of questions. again i think there's evidence that historicically the major innovations have come from the newer businesses.

then the second concern here is whether what the incumbents are trying to do. they have an installed base of products. this is a concern that's shown up in the economics literature and the popular press. are they trying to protect and grow their market share? back again i said maybe the goal now is not to be the next google but to be bought by google. and the question is what's google's goal in that? >> i spent half of my professional life here in washington and half in the private sector.

i think you're right that perhaps that's the core market drivers of shareholder value of earning returns. nothing has changed. on the other hand, i think those are actually huge drivers. they are fundamental core drivers of every business decision that i ever participated in. and i just think the fact that this unchanging market-driven decision making process i think how it's grappling with this new set of changes and technology, maybe it's that nexus. but i do think -- the premise of laura's question i think is really a core issue because we do rely on the markets. whoever asked. we do rely on the markets to solve a whole host of problems and i think we are in a regime where some of these problems are not going to get solved

that way. >> every one i know encourages their companies to hit home runs not to do an incremental innovation. >> that's how you return for the lp's. that's the business model. exactly. >> absolutely. that's not part of the problem that we're talking about. i think that's a good thing instead of a bad thing. >> but let me translate it to what happens when you have a small startup. actually the conversation around the board table every single month is about the burn rate not hiring too many people because you'll run out of runway before you get the product built. so there's never a condition about it would be really good if we can employ more people. that's only a consequence of achieving that sometimes. once in a great while. >> i've heard someone say -- and there's a kernel of truth in this and it goes to your point about globalization. the u.s. has the very best

incentives. we have great incentives to do the research in the united states. we have weak incentives to do the employment in the united states. and very weak incentives to keep the products in the united states. so basically you have a situation where all the incentive structure in our tax law and a whole bunch of other things says yes yes yes locate around great universities and start the googles apples, aps don't worry about employment except the people you have to employ on your premises you can actually do most of this work some other place. and don't worry about your revenues because you can put them in places where they're not highly taxed. so i do think this issue of thinking about the employment effects certainly is not something which a wealth generation venture capitalist has on the top of their agenda.

it's not even on the agenda because labor is a cost. so sometimes there's discussion of talent. and when you talk about talent. talent is something you want to acquire. it's not a cost. labor is a cost. so you were both in and out. do you think that to what john and andrew were saying, you might think that the rate of diffusion of ideas that are generated is slowing down. they're not being picked up. the private sector is not making the most of it. we were really worried about whether there was enough dual use technology to spill over. now we believe there's a huge amount of dual use technology to spill over. but is the recipient, the catcher not there to catch? >> we think all the time about how our technologies are going to move out into the world. some are specific military systems and they will only move

forward through d.o.d. and the defense industrial base. but a number of enabling technologies, also in the information technology arena do depend on graduate students going off and starting new companies or establish companies, adopting things out of basic research. but fundamentally at some level or another a business decision has to be made around a commercial opportunity. and there was a time in darpa's history when we were scaling the net and the sisco's and this huge number of amazing companies was spinning out from mostly from the university research that we were funding. i would tell you i think that is a very lumpy thing. we're in our sixth decade and there were seasons when there was a huge amount of that activity and only a modest amount. it's just ebbs and flows.

it goes on today but i wouldn't say at that level. >> so some of this is whether there's beep a secular decline in the ability of the private sector to keep this up and move it forward. >> what i see my sense is that it is much more about when preerns see market opportunities. and it's more that organic drive that fuels this big burst of activity or then it mod rates some of the things i talk about today we do see entrepreneurial activity but it's fairly modest because there aren't 20 companies. >> because it's too still too far from the market. whereas when you have the arpa net it goes to the market and blew out. in all the stuff that has grown up in the last decade would follow. >> and just to finish about the arpa net the first decision of darpa to put money against the

idea of putting computers was 1968 and it was 1993 was the year all of a sudden er business card had an email address on it. >> we talked a fair amount of decline about productivity growth. i think it's important to remember that that same data says it's especially the high tech sector that's had a trend break in productivity. so it declines in about 2003 according to the very nice work by john. so that says in terms of what whatever darpa happens to be doing it's certainly not showing up in the productivity statistics in 2003. >> i really have to caution you. darpa is 2% of federal spending and r&d. >> i think i'll make the point that i think andrew can make is that a lot of people dispute

the measurement of productivity from these kind of technology. we heard this morning about how the retail sector may have not shown any productivity increase because you put in the machine. i would say that the quality of locating the product you want at the price you want has really improved. so the quality of the shops experience, the productivity as measured by quality may be entirely missing from the productivity numbers. so we really have a problem here. >> productivity has been growing. so that statement this morning was off base. >> all right. >> and in that case it was -- this is related in a good way to the decline of mom and pops. the shifts away has been very good for the retail trade sector. >> so my point whether the retail sector was the right one to use or not.

do you think that given the nature of the technological changes we're going through that a lot of this is not going to be measurable in terms of output of unit of input unless you do a huge amount of improvement of what the output actually is? >> we moved increasingly to parts of the economy that are hard to measure. we're already back 20 years ago moving and that's increased. so i agree our productivity statistics needs lots of work. >> but the first thing everyone says is we have very severe measurement problems. i don't want to rely on that evasion. i think the productivity numbers are weird especially in the face of this idea that we're in this technological surge. so all i can do is fall back on the other evasion of somebody whose evidence is not supported is wait and see. because i do think -- let me --

the near future i believe is going to look fairly different even in some of these very labor intensive low wage service sector that have seen growth in employment without much growth in productivity and therefore big increases in their contribution to cpi. you talk about health care which has gone from 100 to 600 there's a hospital that just opened up a little while back in san francisco where every meal has not been cooked by robots but has been delivered to patients by robot. the dirty laundry is being carpetted throughout the hospital by robots. automation is coming quickly. >> so this is a good point on which to draw the panels together. because the positive part of that argument is how much better you are off -- if you're a patient in one of these places and you're going to get your food well prepared on time by somebody who is not going to

make a mistake. the bad news is that in every projection i've seen for employment growth in the united states and for other countries around the world giving and health care is a major source of employment growth for, let's say, middle educated to low educated workers. if the robots are smarter and the robot ks do it more precisely then that's where you start to get to the issue we talked about earlier today. who is going to be technologically displaced and what do we say as a society if -- one of the most brilliant lines in the book that andrew wrote with eric is the essence of capitalism is that most people get their income from their labor. what if machines -- what if brilliant machines take away certain jobs altogether and undermine the return to labor for a large fraction of

society's workforce? that is a social problem that we have to boo gin to think -- begin to think about. i really thank the hamilton project for having us here today. i thank my distinguished panel for forcing us to think about this and how can we get this to work better. it's been a great session. more to come. thank you very much. [applause]

>> on tuesday the house foreign affairs subcommittee on the middle east and north africa heard from former u.s. ambessdor to yemen. he discussed the ongoing conflict and what the administration's commitments partnerships and plans are for counter terrorism efforts for yemen and the region.

after recognizing myself and ranking member deutsche for five minutes, as soon as he shows up, each for opening statements, i will then recognize other members seeking recognition for one minute. we will then hear from our witness and without objection, mr. ambassador, members may have five days in which to insert statements for the record subject to the length limitation and rules. the subcommittee invited the department of defense to send an official to testify before us this afternoon built dod stated that they were unable to participate at this hearing. and declined to come. but we got the better of the deal because we have you, mr. ambassador. the chair now