How Superstar Companies Like Apple Are Killing America’s High-Tech Future

By Lynn Parramore, Senior Research Analyst, Institute for New Economic Thinking. Originally published at INET

Few would argue that America’s fortunes rise and fall on its ability to generate technological innovations — to put bold ideas to work and then bring them to market. William Lazonick, professor of economics at the University of Massachusetts Lowell, and Matt Hopkins, research associate at the Academic-Industry Research Network, have investigated how the technology knowledge base gets created, what has gone wrong in America’s approach to innovation, and why the truth about who invests in the process is poorly understood. In the interview that follows, Lazonick shares findings from two recent papers that are part of the Institute for New Economic Thinking’s project on the “Political Economy of Distribution.” He explains why successful companies like Apple need to make fundamental changes to the way they allocate resources and stop throwing away America’s most valuable asset for future innovation — you.

Lynn Parramore: Let’s talk about where high-quality, low-cost technology products actually come from. Who pays for the research that goes into creating a product like the iPhone?

William Lazonick: The iPhone didn’t just magically appear out of the Apple Campus in Cupertino. Whenever a company produces a technology product, it benefits from an accumulation of knowledge created by huge numbers of people outside the company, many of whom have worked in government-funded projects over the previous decades. Öner Tulum, a researcher at The Academic-Industry Research Network (theAIRnet), has shown how all of the technologies in the iPhone ­– things like touch-screen technology, GPS, and so on — originated with government spending, funded by taxpayer money.

That’s why a company like Apple should be using a substantial portion of its super-profits to support government investment in the next generation of innovation. Instead, the company runs an entire division devoted to finding ways to avoid taxation.

LP: Your work shows how the process of developing high-tech products has changed in recent decades and how the fruits of success are distributed. Who is reaping the rewards of high-tech innovation in today’s economy?

WL: If you were an employee in the “Old Economy” business model that was dominant in high-tech companies coming into the 1980s, you got to share in the success of innovation through a stable job, salary increases, and retirement security. Under a “retain-and-reinvest” allocation regime, a company reinvested profits in your capabilities and worked to keep your valuable human assets. You, then, would contribute to innovation by engaging in collective and cumulative learning about the company’s proprietary technologies, many of which had been developed in its corporate research labs. The pay of top executives was largely tied to the gains shared with the mass of salaried employees. IBM in the mainframe era is a prime example; through the 1980s the company had an explicit policy of “lifelong employment,” bragging that it had never laid off an employee involuntarily since 1921.

When “open systems” in information-and-communication technologies (ICT) came along in the 1980s, exemplified by IBM’s PC with its Microsoft operating system and Intel microprocessor, things changed. Older employees who were skilled and versed in a company’s proprietary technologies got pushed aside in favor of younger workers with the latest open-systems skills. Old Economy companies now had to compete for talent with “New Economy” startups that used stock options to convince high-tech workers to give up secure employment with the established companies. Top executives began to embrace a new and strange ideology: a company should be run not for its products and employees, but for its shareholders, even though these shareholders merely bought and sold the company’s stock and contributed nothing to the success of the company. In the name of shareholder value, these executives could avoid the uncertain process of investing in people, the source of all innovation.

In this new regime, executive pay became increasingly stock-based, rewarding top executives for the company’s stock-price performance, no matter how it was achieved. Executives got quick boosts to company profits by laying off experienced, and more expensive, employees, especially when the shift to open systems made their existing skills apparently obsolete. And a prime way of jacking up earnings per share was to do massive stock buybacks, a practice that was sanctioned by the Securities and Exchange Commission in 1982.

In the early 1990s, the Old-Economy icon IBM led the way in transforming from “retain-and-reinvest” to “downsize-and-distribute.” Sadly, over the past two decades, this has become the dominant resource-allocation regime among U.S. companies, high-tech and otherwise. My detailed research at the industry and company levels shows that this financialized mode of corporate resource-allocation has helped to concentrate income among the top 0.1 percent, and it has led to the ongoing erosion of middle-class employment opportunities in the U.S.

LP: You’ve noted a growing consensus that America’s is falling behind other countries when it comes to innovation and technology. How did this happen, and how do your findings tell a different story from what is commonly believed?

WL: A growing number of academic studies by experts on industry research are concluding that there is an “innovation crisis” in the U.S. In the Old Economy, decades of research collaboration between government agencies and business enterprises put in place the ICT infrastructure and knowledge base that has permitted companies like Netflix, Facebook, Uber, and Airbnb to emerge as dominant in a number of niches. But other nations are starting to catch up and even take the lead in developing the most advanced technologies. In 2007, researchers in France and Germany shared the Nobel Prize in Physics for the scientific discoveries that made possible the iPod and countless other digital devices.

So what is the U.S. doing wrong? A lot of observers of investment in science and technology point to a decline in government R&D spending as a consequence of the end of the Cold War. Others view the problem as a lack of business spending on R&D because of a financial-market environment that results in “short-term” thinking on the part of corporate executives. But research on investment in the high-tech knowledge base that I have done for INET’s Political Economy of Distribution series with Matt Hopkins demonstrates that the problem is not a lack of R&D spending, either by government or business. Rather we argue that, with the rise of the New Economy business model, the main problem is the failure of U.S. high-tech corporations to invest in the “collective and cumulative careers” which you need if you want R&D spending to result in more high-tech knowledge. Government policy-makers have added to this failure by not recognizing that long-term careers are key to the creation of a world-leading high-tech knowledge base, the subject of our second paper for INET’s Distribution project. Just throwing more R&D money at the problem won’t bring you the next breakthrough product.

As I showed in a recent Harvard Business Review article, “Profits Without Prosperity,” the business failure stems directly from the obsession of U.S. top executives with doing massive stock buybacks with the sole purpose of giving manipulative boosts to their companies’ stock prices. This behavior cannot be understood as “short-termism.” It’s really the direct result of the economic incentives inherent in the ample stock options and stock awards that corporate boards of directors, dominated by CEOs, bestow on top executives in order to maximize shareholder value. Neoclassical economists have assured corporate executives that maximizing shareholder value results in the superior performance of their companies and the economy as a whole. In fact, as I have shown in many theoretical and empirical studies, this strategy is ruinous. It undermines innovation and results in income inequity and employment instability.

Over the decade 2004-2013, 75 companies included in 11 high-tech industry categories in the 2013 Fortune 500 list expended $1.1 trillion on stock repurchases and more than half a trillion dollars on cash dividends. The employment practices of these 75 companies are very important to the operation and performance of the U.S. high-tech economy.  Yet many if not most of these companies are operating in a  “downsize-and-distribute” mode of resource allocation. For the U.S. to remain a world technology leader, this broken business model requires a major overhaul.

LP: A report by the American Academy of Arts & Sciences, “Restoring the Foundation: The Vital Role of Research in Preserving the American Dream,” acknowledges that something is getting in the way of U.S. innovation. Explain the report’s findings and how your own research offers a different perspective.

WL: Yes, the 25 people on the “Committee on New Models for U.S. Science & Technology Policy” in whose names “Restoring the Foundation” is published are a Who’s Who of the U.S. science and engineering (S&E) community.  The report begins with a warning that American research enterprise is at a critical inflection point, and that the decisions made over the next few years will determine the trajectory of American innovation for years to come. Yet the people who signed off on this report show themselves to be more than willing to give business executives a free ride in “restoring the foundation.” The report states that, and I quote, “companies – finding it increasingly difficult to justify such long-term investments in a market environment focused on short-term results – have made it clear that the federal government must continue to be the primary funder of basic research.”

These S&E luminaries take it as a given that “the market environment” makes it difficult for companies to justify long-term investments. That position is unacceptable. For the sake of an innovative economy, let’s change the “so-called market environment” so that high-tech business executives can do their jobs of making the investments in productive capabilities that innovation requires. If the tax dollars of U.S. households are going to fund basic research that is critical to business innovation, then we should expect business executives to allocate corporate profits to complement those government investments. Given what we know about the need for business-government collaboration for investment in the high-tech knowledge base, it will be futile to spend more taxpayer money on funding basic research if business does not do its part in investing in the collective and cumulative learning that is the essence of the innovation process. That means a transformation of the dominant corporate resource-allocation regime from downsize-and-distribute to retain-and-reinvest.

LP: Business executives often argue that lower tax rates for companies and wealthy households are necessary for innovation and entrepreneurship. What do you say to that argument?

WL: They like to repeat this line, but the facts explain why the opposite is actually true. From 2004 to 2013 about 9,000 companies in the Compustat database wasted $6.9 trillion on stock buybacks — that’s equivalent to nearly half their profits. They also spent $7.5 trillion on dividends, the normal way of providing holders of corporate stock with income on their portfolio investments.

The U.S. companies in the S&P 500 Index, which account for over 70 percent of total U.S. market capitalization, did half of those buybacks, representing about 50 percent of their combined profits. In 2012, the average compensation of the 500 highest paid executives on company proxy statements was $30.3 million, with 83 percent from stock-based compensation that incentivizes massive buybacks to manipulate the stock market. And the take-home pay of hedge fund managers, most of it taxed at the low capital-gains rate, makes the outsized remuneration of corporate executives look puny.

Why give tax breaks to people who actively manipulate the stock market, helping to ensure that they remain comfortably ensconced among the 0.1 percent? And why give tax breaks to companies whose profits are used for this purpose? The broken tax regime is part of the problem of concentration of income at the top and the loss of middle-class jobs. It incentivizes value extraction, not value creation. To give more tax breaks to the rich or to the corporations that they control would be utter folly.

LP: How can we change America’s business culture to get more innovation and higher standards of living?

WL: First, we need to rid business of the ideology that companies should be run for the sake of “returning” value to public shareholders. You can’t “return” value created by a company’s productive assets to people who never actually invested in those assets. Taxpayers and workers, on the other hand, do play major roles in investing in the productive capabilities that create competitive products.

You, the taxpayer, do this through government funding of the knowledge base. Employees do it through their on-the-job expenditures of effort. It is highly damaging to industrial innovation and employees’ earnings to run the corporation for the sake of those participants who matter least. Public shareholders are traders in corporate stock, not investors in corporate assets. The actual investors in corporate value creation are households as taxpayers and workers. Let’s run the corporation for them.

LP: If you could give one piece of advice to Apple CEO Tim Cook to position the company for success in the future, what would it be?

WL: That piece of advice would be: stop the stock buybacks.

In October, I wrote a critique of Carl Icahn’s call, in an open letter to Cook, for Apple to do $100 billion in buybacks as a massive tender offer on top of the $51 billion that Apple had repurchased over the previous two years (Joe Nocera of the New York Times featured my arguments in his column, Carl Icahn’s Bad Advice). I then wrote my own open letter to Cook in which I let him know that my research shows that Apple’s buybacks have been a major misallocation of resources.

Just in case he is willing to entertain that piece of advice, I offer him a number of suggestions related to the company’s relations with its employees and society on how Apple might use its profits productively, in ways that are consistent with the company’s innovative business model. These are things like investing in the educational attainments of its employees and letting performance pay do its job of incentivizing employees to invest their skills and efforts in the innovation process. A person like Tim Cook could take the lead among corporate executives in recognizing the debt that is owed to taxpayers for Apple’s profitable products .He should advocate that profitable companies like Apple pay their fair share of taxes, and he should allocate some of Apple’s creative assets – its employees – to making innovative contributions to solving some of America’s greatest social ills, like discrimination, poverty, and climate change. Instead of doing massive stock buybacks, a profitable company like Apple should extend its innovative business model by allocating some of its technological capability to help our society confront the major issues of our times.

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  1. TG

    Yes, stop the stock buybacks. But also:

    If under ‘free’ (corporate managed) trade, Americans invest in creating new industries, and then these industries are immediately shipped overseas, how do we benefit? Innovation cannot make America more competitive, that’s absurd.

    As far as investing in employees, well, that’s all down to supply and demand. When labor is scarce companies will pay high salaries and train people up on their own nickel because they have to. And when the market for labor is flooded, they won’t. Period.

    1. Vatch

      “When labor is scarce companies will pay high salaries and train people up on their own nickel because they have to.”

      Well, maybe. More likely, they’ll demand more visas to bring in lower wage foreign workers. And then when the market is flooded, as it is now, they’ll still claim that they can’t find qualified workers (e.g., the imaginary STEM worker shortage), so they’ll continue to demand more visas for lower wage foreign workers. And the government will accommodate their demands.

      Meanwhile, compensation committees will keep ratcheting up the pay of the CEOs, COOs, CFOs, and CIOs, because every company’s top executives are above average.

      1. Vatch

        Oh, I almost forgot. There’s also the collusion among Sillicon Valley high tech companies to avoid hiring each others’ employees. Not exactly supply and demand.

        1. Pelham

          Good points. We’re constantly told there’s this crippling shortage of STEM graduates in the U.S. But three-quarters of college grads who majored in those fields can’t find related work.

          In fact, two-thirds of the real cream of the STEM crop — minority STEM grads from the very top technical universities — can’t find work in their fields.

          One wonders why these screamingly obvious and relevant points aren’t hammered home in the mainstream media.

      2. Cynthia

        Now if these CEOs, COOs, CFOs, and CIOs were really above average, among the so-called best and brightest, they would know that most of what they do can be automated, freeing them up to do the more intellectually challenging work that STEM workers do. But they’ll make sure this never happens because the truth is that they really aren’t among the best and brightest. They really aren’t smart enough to do STEM work and the money is just too darn good for them to ever admit that their job in the corporate suite can be replaced by a few finely-tuned robots, developed by their STEM workers.

      3. Roger Mercer

        Executives are paid as little as possible to attract the cream of the crop.
        Many fail.
        But most, especially at large corporations, make millions or even billions of dollars a year for their companies by bringing the right talents, resources and money together to create wealth.
        The wealth they create extends potentially to millions of people worldwide. They create cheaper, better products, thousands of jobs (taxpayers) and better ways of life that can lift millions of people out of poverty.
        All of this leads me to two simple questions: If you could pay someone $100 million a year to make you $110 million a year, would you do it? Or would you refuse to pay someone so much because he was making so much more than the assembly line worker you were paying $40,00 a year to tighten a screw on a part you were losing $10,000 a year to produce because it was essential to a profitable product?

        There are two views of the world at work here. One is that companies and individuals who make a lot of money must be taking it away from the poor or middle class. The other is that companies and individuals who create growing businesses offer the only means for most people to escape poverty, attain wealth, live better, learn more and give more to their fellow man.

        I favor the second vision. As examples, I cite the fact that millions of people moved out of poverty during the strong private sector growth of the Bill Clinton and Ronal Reagan presidencies. While in the last 50 years our government has spend more than $20 trillion on the war on poverty. As a result, we now have the highest level of poverty in our nation’s history.

        1. Vatch

          The executives don’t create products. Their employees do, but the executives get most of the rewards. You’re absolutely right when you say that many executives fail. When that happens, they pocket their incentives, and they just move on to the next lucrative job. Or maybe they get a government bailout, financed by you and me. In that case, they don’t have to move on to a new job when pocketing their incentives.

        2. Veri1138

          They create products. Not wealth. Products that are sold for money in a trade with money being a substitute for working for the product. The money is then used to reimburse for expenses; including worker’s wages, which is why companies are desperate to engage in wage suppression in order to suppress wealth distribution to the people who actually assemble products.

          As evidenced by the tech industry facing yet another lawsuit involving wage suppression schemes as illustrated by the famous Job’s email complaining about poaching.

          CEOs are managers. They rarely create anything. The allocate resources. Resources that include money; frequently to their own bank accounts.

        3. lyman alpha blob

          “…cheaper, better products…”

          I don’t find that those two adjectives describe the same product. Cheaper often means crappier. It’s cheaper because quality has been cut. Which is what companies do when their products already saturate a market and they still need to increase profits somehow. Because groaf. And they cut wages to get cheaper products meaning there is a large portion of the population who can only afford the crappy stuff. Which is why there are thousands of mal warts all over the place and the “better” products become difficult to find. But a few people become fabulously wealthy from this system while the ” thousands of jobs” they “create” don’t pay squat and require employees to receive public assistance.

          I don’t believe things really work quite the way you believe them to.

        4. different clue

          I read somewhere that in big industrial companies, the average high executive got paid an average of 40 times as much as the average unionized worker . . . during the Eisenhower Administration. Income increments above the already-recieved-million $s per year were progressively taxed at 90%. Corporate boards saw no reason to pay executives much above that million because any increment above that million would be near-entirely taxed.

          By the time Reagan began Kennedy’s work of sub-progressively undertaxing the high and highest increments of income above that million dollar cutoff, most of that over-a-million that an executive got paid, that executive kept. So executive pay rose fast and hard to way above a million dollars apiece.

          Are executives any creamier today than they were during the Eisenhower era? Is American industry better led and executized by all these creamy multi-million dollar executives? Well? Is it? Is it?

    2. Veri1138

      Tech companies do not face a labor shortage in America, despite the scandal that is H1B visas given to foreign tech workers. This is all well documented. On the other hand, tech companies, as many well know, were engaged in a wage suppression scheme involving agreements between themselves regarding poaching of each other’s employees.

      Labor in the tech industry is not down to ‘supply and demand’. Labor practices in the industry among highly skilled workers has been manipulated to the companies benefit.

      Innovation can not make America more competitive. Well, true when business leaders are busy selling entire factories and jobs to overseas locations in pursuit of shareholder value. Actually, innovation does make America competitive. Much of the world’s basic R&D comes from government sponsored research (for other reasons that will not be discussed) here in America. Universities and government routinely auction off or lease IP to companies.

      The government created the Internet. Perhaps the greatest job & wealth generator the planet has ever seen. Who says government does not create jobs? Government has created more jobs than private enterprise has, merely by providing the tools; including R&D innovation. Who created the national highway system? It sure wasn’t private enterprise who provided the incentives; government did. Private enterprise merely road the coattails of a government program.

      As for innovative discoveries, preference should be given to American corporations when the American government is the impetus behind the new discoveries. Hell, if we had to force corporations to share the profits from government-generated IP on a percentage basis of money supplied by government and private enterprise (including testing funded by government) as a ratio (gov’t funds / corporate funds); government would be taken a significant chunk of corporate profits in many areas.

      Loss of innovation, coupled with a regime in The US that encourages shipping jobs and hardware (factories) overseas = economic suicide. All super-power status is ECONOMIC.

      The US has 10-20 years, barring a major economic collapse, before we fall into economic irrelevancy.

  2. MartyH

    Brilliant! I was at IBM from the late 1960s through 1991 and can confirm Dr. Lazonick’s assessment. I had the opportunity to consult to the IBM VP of Strategy’s staff as they prepared a Strategy Statement for Louis Gerstner when he took over from John Akers and got a front-row seat to the shaping of the future. Lazonick’s prescriptions, unfortunately, fail to take into account the shift in ethics and morality of the super-elites in commerce, industry, finance, and governance and the loss of respect for longer-term visions. Otherwise, I found this most helpful.

    1. flora

      Great comment.
      re: “…and the loss of respect for longer-term visions.” Agreed.
      An aside: Yves occasionally mentions the current period feels like the period before WWI. Then, Great Britain and her Commonwealth ruled world trade, was the undisputed leader in that arena. Globalization existed in full flower given the technology of the times. Your mention of the date 1991 reminds that was the end of the Cold War. The US ruled international trade undisputed. The new age of globalization was/is here. No doubt the “ethics” and (lack of) vision of the new economy was already well advanced by 1990, but the end of the Cold War removed any thought of considering more than immediate profits or of keeping even systemically important industries onshore. In 1910 it was assumed the current state of affairs re: GB would go on for at least another 50 – 100 years.

  3. McMike

    Has the taxpayer funded R&D really stopped, just because the companies stopped paying their share?

    Last I checked, the national security/defense sector is spending more than a trillion a year, surely some of it on toys.

    Meanwhile, over in medicine, the NiH are the only ones doing any basic research.

    1. Cynthia

      I recently read that government contracts are shifting from defense to healthcare (see link below). Unfortunately, most of these contracts are not going towards such worthwhile things like base research into cancer or direct patient care. They instead are going towards developing software products for back-office systems in the private healthcare sector. Even the big banks aren’t parasitic enough to ask the taxpayers to pay for their IT expenditures. Can you imagine Lloyd Blankfein asking for a billion-dollar federal grant so that Goldman Sachs can develop HFT software to better front run the markets! Once again, it all gets back to what Jon Gruber describes as “the stupidity of the American people.” In this case, it is their stupidity in not understanding the glaringly obvious difference between socialism for the many and corporatism for the few.

  4. theTimmy

    That’s why a company like Apple should be using a substantial portion of its super-profits to support government investment in the next generation of innovation.

    Why single out Apple? Doesn’t Microsoft, Google, Facebook, IBM and pretty much every single company in the US use technology that the government may have initially developed? The internet itself was a DARPA project, should every individual who has ever used the internet use their ‘profits’ to support government investment?

    1. Carla

      Well, actually, every American user of the internet already HAS supported the federal government’s investment in DARPA with tax dollars. It is the corporations that won’t pay taxes and ship all the jobs overseas to boot. Furthermore, Lazonick said “companies like Apple.” Most of us can understand he was citing Apple as an example of a highly profitable tech company.

      1. Vj

        “……user of the internet already HAS supported the federal government’s investment in DARPA with tax dollars.”
        If this is accurate and a fair representation, I am thinking it is similar in many other cases and industries and products. I think the Govt/ public funding of medical research does hugely contributes to advancements. Why is there such a high vig charged by the companies for the patents/IP on the resultant products or why is there no royalty flow back to the public research institution ? At the least why can the said institution at least not negotiate some form of option stock so they can and indirectly the taxpayer can also participate if there is commercial success based on the foundation provided by the public funding ?

  5. jerry

    How is there no coverage on this website of the 1.1 trillion dollar spending bill being passed that includes wall street deregulation and even more lax campaign finance rules?

    The next two years will be a series of hostage scenarios (extortion basically) with congress threatening to close the government if they don’t get what they want, meanwhile that pathetic weasel in the white house is nowhere to be seen.

    1. MartyH

      Jerry, I suspect Lambert and Yves will get to the Crooknibus Hostage Ransom and Citibank-written funding bill. Hostage scenarios became the way of governing some time ago. Welcome to the Late Looting stage of US economics and politics.

    2. Yves Smith Post author

      1. Please see our Policies section about assignments.

      2. This is a finance and economics site. We generally don’t cover legislative fights because if they are important, they are well covered in the media and our value added is limited to none.

  6. Jim Haygood

    ‘From 2004 to 2013 about 9,000 companies in the Compustat database wasted $6.9 trillion on stock buybacks.’

    Whether these stock buybacks were ‘wasted’ depends on whether the companies had internal reinvestment options that could have returned more. This is a subject of active academic research. The SEC opened the gates to buybacks in 1982, with its Rule 10b-18 safe harbor:

    Lazonick’s open letter to Tim Cook is downright embarrassing:

    ‘How can Apple “return” capital to shareholders if those shareholders never supplied Apple with capital in the first place? The only funds that Apple ever raised on the public stock market was [sic] $97 million (about $274 million in today’s dollars) at its IPO in 1980.’

    Earth to Bill: Apple earned a return on that initial capital, now designated as ‘retained earnings.’ After 34 years of compounding, it dwarfs 1980’s initial capital by orders of magnitude.

    Before firing off an open letter to a CEO, call an economist to help edit it. Oh, wait — Lazonick IS an economist. Tenured, one presumes. ;-)

    1. Ben Johannson

      If you think 100% of Apple’s rate of profit is return on initial capital, you’re more confused than even I had thought.

      1. Jim Haygood

        Retained earnings (RE) = Beginning RE + Net Income – Dividends

        Shareholders’ equity = [Initial] share capital + Retained earnings – treasury shares

        In 1981, and every year since, Apple’s equity was augmented by retained earnings. ‘Returning capital’ is possible because the capital employed has grown by orders of magnitude.

        Apple’s balance sheet shows $87 billion of retained earnings and $23 billion of common stock at par value, an amount which has doubled since 2010 owing to option issuance. Among other things, buybacks help counter the dilution of existing shareholders owing to employee stock options.

        Inflation-adjusted, Apple’s $274 million IPO represents 0.25% of its $112 billion common equity today. But Bill Lazonick seems to think that tiny tranche represents the only source for returning capital … as if ROE (Return on Equity) had been zero for 34 years.

        1. Ben Johannson

          You just did it again, confusing retained earnings with return on capital, as if money is the sole factor of production.

          1. Jim Haygood

            Return on Equity = Net Income/Shareholder’s Equity

            Lazonick’s letter referred to equity capital, that is, shareholders’ equity.

            Apple’s initial $97 million of shareholders’ equity from the IPO has been supplemented with 34 years of retained earnings, so that shareholders’ equity has now grown to $112 billion (representing a geometric annualized growth rate of 33%).

            Lazonick implies that shareholders aren’t entitled to any capital other than that supplied by original buyers of the IPO. In the real world, neither corporations nor analysts pay the slightest attention whether shareholders’ equity came from the IPO, secondary offerings, or retained earnings. That’s why Tim Cook didn’t answer Lazonick’s letter: his flake detector went off.

  7. flora

    Excellent post.
    “….the shift to open systems made their existing skills apparently obsolete.”

    Keyword: “apparently”. On the surface long experienced experts may not have the latest apps knowledge, but they have the necessary understanding of how to approach computer problems/development in the broadest context, a skill which new and less experienced workers must still learn, usually from old hands. Without a broader context the work tends toward the narrow, without synergy. Cross discipline work happens when an experienced worker says to a younger worker, “that’s interesting what you’re doing there. John and Jane are both doing some work that compliments your’s and if you all put your ideas together you could get an interesting result more powerful than either idea in isolation. Give it a try. See what happens.”

    Younger workers, new workers hired to do one specific task, cannot carry on the tradition of mentoring in the “craft” of IT work, do not have the inter-company workforce connections to know who is working on what, etc.

    Authors: “Rather we argue that, with the rise of the New Economy business model, the main problem is the failure of U.S. high-tech corporations to invest in the “collective and cumulative careers” which you need if you want R&D spending to result in more high-tech knowledge.”

    Spot on!

  8. NOTaREALmerican

    Large organizations become monopolies. Monopolies are bad. Might be a good idea to limit the size of organizations.

    Note to “Progressive”: Governments can be large organizations too.

    1. MyLessThanPrimeBeef

      All the Ultimate goals for progressives are for the People and not necessarily the government.

      When, there are times, you have to choose between the government and the People, you always choose the People.

      1. Roger

        Companies have never paid for R$D. Customers pay for it when they buy the product. The trip to the moon also paid for a lot of tec ideas and capabilities through taxes. But there would have been no space travel wihhout Lockheed, Boeing and many others. Nowadays even more space-travel research is being done by private companies.

        If progressives give me much more “help” I will have to go bankrupt, stop the programs I’ve created to help poor people get jobs and lay off my workers who will then struggle to get medical care, food, clothing and housing for their many children. And they will get no more free education paid for by their employer and no more free retirement programs paid for by their employer. Most of the small business owners I know are hurting. But they all pay their workers first, before they even pay themselves. Ultimately, we know that the existence of our business’s is utterly dependent on the skills and dedication of our workers, and we do our best t instill those skills and foster that dedication.

        1. Yves Smith Post author

          No, that it utterly incorrect. The taxes under discussion are taxes are charged on PROFITS, a concept that somehow eludes you. That means they reduce what is left for the owners as profit share. Companies now have record profit share of GDP, nearly double the level Warren Buffet declared to the maximum that was sustainable on a long-term basis. And since income taxes come out of profits, there is no way they can bankrupt you. Honestly, if your understanding of how taxes interact with your income statement is this poor, maybe you do deserve to go out of business.

  9. David Lentini

    I couldn’t agree more with the authors, having lived through the dot-com boom at ground zero in Silicon Valley. I watch the transformation from real R&D to short term profit seeking first hand. It’s time to make it clear that monies not reinvested are to be taxed at high rates for the public’s benefit.

    I recently watched the movies Executive Suite, released in 1954, which showed how this problem was starting to brew in the 1950s even to the point of a heated debate between a company’s comptroller Frederick March) aruging that the purpose of the company was to generate maximum return on shareholder profits (hi, Yves!) and the young scientist (WIlliam Holden) who argued that profit-seeking is soul sucking. The movie did an excellent job of characterizing the major players in these arguments, including the shameless Streeter, the unctious head of sales, and the burned-out old timers who are eager to cash out.

  10. Alcofribas

    Some remarks to complete WL’s says :

    1- The opened technologies of information was a need of users, and as far as they could, firm like IBM managed not to accept portabilty of softwares. Concurrency didn’t exist with slave-to-provided-technology customers and thanks to their non standard, proprietary systems, engineers of IBM knew all about business organization of their customers. Of course, the margins were at the top !
    2- The Apple-OS system, because of its own remarkable performance, technological quality, allowed Apple not to be compatible with the PC world and build a stand alone business model. But even with far less well integrated layers of interface between the user and the binary machine, as machines performances increased and software portability demand merged, the initial advantage disappeared.
    3- That is why Apple’s managers understood how to turn the ‘Apple culture’ into marketing and communication. Jobs was a marketing genius, it is clear. But now, does an iPhone really value its heavy price ? Are others tablets so bad that they cost half the price of an iPad ? Really ?
    4- Knowing that, Apple has not the choice to dream to another technological miracle, but has to preserve imagination inside. The front run to keep technological leader comes always to an end, and Indian or Chinese computing engineers are not bad. One day or another, they will stop to be followers. Perhaps is top management stressed with that, but good searchers become inventors when they aren’t stressed. Passion isn’t stress.
    5- There, the problem becomes macro-economical, isn’t any more a simple micro economical problem of Apple or IBM’s own strategies. As research in all fields of knowledge is more and more needed, that no private firm can afford, the State policy for research becomes each day more and more the relevant criteria to maintain employment and high skills. Fundamental research is as useful as applicated one, but as Flora said, cross discipline work is the key to future.
    6- But if you let private firms the possibility not to pay taxes, of course, they use it ! In USA, one finds convenient to finance firms and universities thanks to financial markets, more than by traditional banking and by State’s budget. That’s a choice, a political one. Is it risky for firms and employees ? WL works show it.
    7- When RD careers aren’t solid enough, the amount spent is not the limitant factor of innovation, but that one. Its the revenge of in depth core of trade on surfacing value of business : know how is as qualtitative as quantitative. When you only consider quantity, of money, of staff engineers, you miss something.
    8- Public education in USA stands at poor level. Universities are out of price for students : this country agree on not to multiplicate the brain sources. Only the richest children can study. Why not using all brains ? It’s a political choice. Never forget that formated people, even with huge personal cultures thanks to their educated parents, always see problems and analyse with the same methods.
    9- Never forget that Wizniak and Fernandez were the real fathers of Apple technology, not Jobs, Mr Cook ! And yes, they used “0” and “1” better than many well payed searchers of IBM. By the way, who invented “0” ?…

    1. Veri1138

      Zero came about through Indian culture and was popularized by Islamic culture. A very long time ago.

  11. theinhibitor

    Wholeheartedly agree with the post.

    I’d like to add that the plethora or software/app startups just illustrate, in a beautifully disgusting way, what America views as ‘innovation’: regurgitation of social networking apps + hype + Silicon Valley money. I dont see any innovation and they sure as hell dont add value. I find this to be a beautiful parallel to what we have become as a nation: a rotting structure painted gold.

    True innovation, unfortunately, requires much more time, patience, knowledge, and capital with a very high risk of no short term returns on investment and is thusly viewed as unnecessary by Wallstreet. Apple is no longer an innovator, simply an ‘upgrader’ along with Microsoft, Sony, Samsung. And why would they innovate? They can simply wait for a university research lab to publish some new invention, buy the patent, and forgo R&D (the idea + brains behind the iPad was all stolen from IIT and other universities).

    Unfortunately, at a university, what real incentive is there at this point? NONE. I work with profs all the time, and any major idea that could be economically viable/profitable is kept secret or not pursued. And they are more worried about getting the ever elusive grants (and will do anything, even lie about data etc). Case in point: the guy who invented the drug Lyrica (larget patent buyout ever) made 1 million from a freakin award, while the university (Northwestern) made 200 million and Pfizer made 6 billion the first year. So what we have is a complete breakdown on all levels fueled by corporate culture, which somehow thinks it is viable to have an economy where the producers, scientists, innovators, manufacturers go unrewarded for their efforts but CEO’s make 1000 x the average employee salary (for attending meetings).

    I have had PLENTY of amazing discoveries an breakthroughs during my PhD, only to be told not to pursue them for the sake of obtaining some grant here or there. Or simply for the fact that the lab didnt want to spend the money (and yes this really depends on your prof). One discovery we made (you’re free to pursue this if you can/want) was about the chemical nature of the fungi cell wall and how it could be used as a superplasticizer by simply drying and grinding the fungi. Here we were, literally telling the University that fungi could be used to make a product in cement that is normally made from lobster shells. Apparently that wasn’t enough. Instead, the prof wanted us to pursue if Ti02 was toxic (basically is what coats M&Ms was toxic – its not, duh). Why? Government grant money.

    Which brings me back to my first point: we are a country of lies, lies that go all the way from ‘peer reviewed’ scientific papers to Wallstreet and back again. Everything has become a racket at this point.

    1. Chris

      I’d like to add that the plethora or software/app startups just illustrate, in a beautifully disgusting way, what America views as ‘innovation’: regurgitation of social networking apps + hype + Silicon Valley money. I dont see any innovation and they sure as hell dont add value. I find this to be a beautiful parallel to what we have become as a nation: a rotting structure painted gold.

      I disagree wholeheartedly. Sure, it’s a noisy space but that doesn’t mean there haven’t been innovative products and services brought to market. I think the self driving car is pretty damn impressive. That’s an in-house project funded by Google (there may be gov’t. grants, but mainly shareholders are funding it).

      As far as researchers aren’t making the money – it is quite true. Scientists, engineers, inventors, etc. aren’t reaping the rewards because they aren’t the ones SELLING their work. Plain and simple – risk vs. reward.

      I’m sure the guys that built and designed the software and hardware for Guitar Hero are mad at life – but there was no risk in what they did. If they put their money on the line (millions and millions) and sold it themselves – then you’d be looking at overnight millionaires. But they didn’t. Some company stepped up and took a chance and that winner paid for a bunch of losers and then some.

      1. Ben Johannson

        Capitalist economies don’t reward on the basis of risk, but on ownership of capital. If risk was the determining factor a woman with an income of $30,000 investing $1000 of it would receive a far greater return than a man wirh an income of $1,000,000 investing $10,000.

        1. hunkerdown

          To be fair, touch hasn’t really made its way to the desktop, and Microsoft and others (and the open-source commons which our economist friend seems to hate bitterly for not allowing exclusion and rent-seeking, which made it a rather difficult interview to read) have a good few more iterations to pull off first. Yes, let’s talk about UIs and lock-in. Does Mr. L also enjoy those IBM keypads with the 789 and 123 swapped vis-a-vis the 10-key calculator? Let’s talk about user interface patents and how they keep benefits away from the public. Let’s talk about the ridiculously long term of patents, in relation to the time horizons of the companies that “own” them, and how all this “innovation” (which sounds like “invention” but is really “turd fashion”) drives garage players out of the market.

          Yes, the government and corporations need to do and fund more basic research. They also need to leave it open, not sell it to some rentier to fence off by virtue of having stuck a paper umbrella on it. Ain’t no New Economic Thinking to be found in IP maximalism.

        2. Jeremy Grimm

          I went back and read your excellent post on Douglas Engelbart again. It helped put Apple as an innovator into perspective. It also gave me pause to wonder exactly what innovations have we seen in the last few years? I hope the iPhone isn’t the best innovation on offer. I find myself echoing a comment McMike made to the Engelbart post:

          “Come to think of it, the innovation has comparatively dried up. The internet and GIS were big breakthroughs. What since? Eavesdropping and drones I suppose – big whoop.”

          Rereading the comments to the Engelbart post again I think some of the discussion beginning near the middle of the comments and continued throughout most of the rest of the comments by and to McMike give what to me is a more compelling answer to the origins of the “innovation crisis” than the answers INET has sponsored with Professor Lazonick’s research. The looting of corporations by their executives and the lack of investment in human capital seem like symptoms of the disease, afflicting our economy rather than explanations for the “innovation crisis”, which is yet another symptom.

          Prodigal son, from Mexico, comments near the end:

          “I’m just ruminating over the difference in trajectory of the Spanish Empire vs. the American Empire.

          The Spanish Empire had an economy based pretty much on conquest and plunder and never really developed much of a domestic productive economy.

          The United States, however, had both, at least until the 1970s, when it began taking a wrecking ball to its domestic industrial, productive economy (that part of the economy which lies outside the finance and military/police/criminal justice sectors). Beginning in the 1970s, the US economy has become more and more about finance and conquest and plunder.”
          This comment does not explain the “innovation crisis” but provides a good synopsis of the root cause. The neoliberal free market of everything is a handmaiden serving predation.

      2. different clue

        The self-driving car. . . ah, yes. So if the Secret SpyState doesn’t like you for some reason, they can remotely instruct your self-driving car to drive itself off a bridge or over a cliff or into an oncoming bus.
        All very innovative.

      3. theinhibitor

        Well, I’m not sure how googles driving car is relevant to software startups. And its simply an offshoot of computer vision technology that was first developed for robots to be able to distinguish parts in a factory assembly. Sure, it’s quite innovative, but its one of few and I was specifically speaking to software.

  12. ben

    Great post. It’s sad – so much potential out there for young people but it’s being ruined by wall st.

    Even if a kid does land a good job they are straight on the bread-line because Wall St also financialised education costs and land.

    We need a big change or we are going to sink.

  13. AdamC

    When the people who brought the world to its knees financially are allowed to keep their millions and freedom is what is wrong.

    It has nothing to do with R&D which is doing fine because every company wants an edge over others,

    As for analysis by the so called experts there is no value there these are only opinions of learned people who are not involved in the world of business neither do they know what make things work and when they are wrong they keep justifying themselves re The Innovator’s Dilemma.

  14. Chris

    Public companies like Apple, Google, Facebook, etc. are owned by public/private institutions – who are then taxed on their investments. Aren’t investors, corporations, along with US taxpayers subsidizing the R&D for DARPA projects? I didn’t think the R&D fell directly on corporations shoulders but was collected further down the line. Besides, you really think Uncle Sam is an intelligent investor?

    1. Ben Johannson

      Given that nearly every modern technology is rooted in government R & D, the question of whether Uncle Sam is intelligent about it doesn’t seem very relevant.

  15. John Jones

    If Tim Cook was to do what was suggested in the last paragraph. Wont he simply be pushed out? Wouldn’t this happen to anyone in the corporate world who tries this?

    1. MRW

      Senior management get bonuses for raising the stock price. That’s easy to accomplish when a company buys back the stock. Why spend money on R&D or new products, and incur that risk? Stock buy-backs are an easier, faster way for senior management to get rich quick. Michael Hudson has been explaining this for years.

  16. Jeremy Grimm

    I agree wholeheartedly with this post about the importance of not casting off employees, particularly older employees, although I should probably recuse myself since I am an older employee soon to be cast off. I like being called an asset, as long as that doesn’t mean a financial asset. I object to being called human capital as I seem to be regarded on the INET website. I am and hope to remain a human being — a person.

    Starting from this initial point of agreement, there are many troubling things in this post, but consider just a couple for now.

    At risk of raising the ire of Apple lovers, I see the iPhone as purely a product innovation. It combines elegant and attractive packaging design with a remarkable ability to sell a product at a price point many times greater than competitors command selling very nearly the same product. Apple has somehow discovered how to appear cool at a time when being cool translates into a multiplier in the marketplace. Let Apple take its place with Chanel — but in the world of innovation per se innovation I must give that award to Xerox PARC, and a host of unnamed researchers and inventors.

    What ties product innovation with research, particularly basic research? For that matter what ties “high-tech innovation in today’s economy” to product innovation? Clearly high-tech innovation is needed to feed product innovation, but product innovations do not automatically follow from having a large base of high-tech innovation.

    I recall an old AT&T saying I heard when I worked at a Lucent facility, for a few years, many years ago: “Bell Labs (meaning the Bell Labs at Murray Hill) could invent eternal life. Unfortunately, AT&T would not be able to market it.” I heard this from former AT&T, and at that time Lucent people, who had tried unsuccessfully to buy an AT&T UNIX computer from AT&T (AT&T made a passing try at selling a Unix based personal computer a few years earlier).

  17. craazyman

    the only innovation in the past 30 years that does anything useful is the internet, and especially Youtube.

    I think Al Gore invented the internet and I don’t know who invented Youtube but they probably is some genius from another star system on vacation on earth & just had a few free minutes.

    What has Apple invented? My iPad mostly sits unused on a tabletop and my iPod, I don’t know the last time I used it. They’re both ridiculous. I don’t know why I bought either one of them. OK,, I appreciate you can have 50 books and Youtube and see them all on your iPad. That’s convenient — if you can figure out how to get the damn thing to work after you’ve navigated all the log in windows. It might get so bad for you that you go to the library with a shopping cart to stock up instead.

    Then somebody asks what the hell you’re doing and you tell them. Then they wonder if you’re insane or just stupid as all hell. Then they start laughing at you. Then you run them over with your shopping cart full of 50 books. Then the pollce come, You tell them it was an accident and the person you ran over, they’ve composed themselves and are now all polite and friendly. Then you start making conversation and find you have a mutual interest in relativity theory. In fact, you pick up a few books in your cart, published in the 1920s, and you show them. They are very impressed. They’re also pretty hot — let’s say they look like somebody you could sleep with. So, you wheel you shopping cart with 50 books, including several on relativity, down the street to a French Bistro for a few glasses of wine with your new friend. The cart is discretely parked outside where you can keep an eye on it. Then the fun starts. That’s innovation! You can’t do that on an iPad.

  18. different clue

    I remember some time in the past that Lambert Strether noted just how crapified Google and others have made Searching become. If that is so, and if there is a group of people who would appreciate good quality searches if they could find them, one wonders if these deeply knowledgeable older workers could somehow be organized and paid-for to develop a Search Engine that would do what Lambert Strether and others such would like it to do. Such a company could call itself and its product . . .

    1. MRW

      If you use a Mac, DEVONagent Pro performs searches that Google/Bing/DuckDuckGo/Etc’s algorithms couldn’t touch in a century. Has a steep learning curve, imo–entirely related to how you set up Boolean search terms accurately in search sets–however, you can set up a deep search of all the databases in the world that can take eight hours to complete. It can search non-indexed databases by drilling down through the indexed databases that reference them. That’s one of the choices (Deep Search). You let it run while you sleep. Google Scholar doesn’t come close.

      Google changed its algorithm in February 2011. IMO, it reflects the marketing cynicism of a bunch of a 20-something engineers intent on increasing their Christmas bonuses: how to capture and create expansive user profiles through search history, then funnel them surreptitiously, and monetize the results.

      Even DEVONagent Pro’s Fast Search (can’t remember how many levels of search there are) produces results that Google couldn’t find unless you knew specifically what you were looking for, and even then, it’s doubtful. Google’s SEO argument for the algorithm change at the time was specious and contemptible; I share Yves’s derision and frustration about it.

  19. RK Sharma

    Americans still don’t understand what is happening to them, I request all to read this book

    The rise of South Indians: Invisible dimension in decline of jobs for Americans in US economy

  20. Sam Kanu

    This analysis IMO misses the boat by focusing purely on an abstraction called a “company”.

    Despite what our supreme court (aka the Koch arm of government) says, companies don’t exist on their own – they are really container for the agenda of individuals.

    What we see here is the breakdown in the morality of American society, with shareholding class ever-willing to squeeze almost everyone else (non-executive employees & debtors and government) to the bone – and beyond – in order to to maximise its take.

    At the same time, the executive class, which had previously been more dominated by a spirit of responsibility and trusteeship towards non-executive employees and local and greater national community, also jettisoned it’s morals. That class now see’s its job as impoverishing everyone else, including government even, in order to maximise the cash take of the owner class – in return for a cut of the take.

    It’s a disgusting collapse of morality in America’s middle and upper classes that is the core problem here. Let’s ask questions about THAT instead and stop wasting time on “corporations” – which are purely a firewall for naked HUMAN greed.

  21. Washunate

    It’s kind of sad seeing a clearly intelligent and thoughtful person appear so confused.

    Apple wasn’t the instigator of our horrific IP world. And they didn’t create legal personhood. If anything, they’re the poster boy victim of an IP decision. But they didn’t just play the victim card. They went on and accepted the rules of game and said okay, we can compete in this world. Maybe the author is just upset Apple didn’t go bankrupt and close up shop in the 1990s? Maybe we’d be better off with Blackberries and Windows Everywhere? Maybe Apple should more openly cooperate with the surveillance state? Apple has been a black sheep of pundits and Wall Street analysts for decades precisely because they have focused on long-term investment to make their own users happy.

    Apple is one of the few major companies where if you don’t like their products, you can simply ignore them. To complain about Apple is to complain about capitalism itself.

    Which of course is a legitimate complaint. But what does ending stock buy backs and employing older workers have to do with anything? Older Americans are far wealthier than younger ones, and buybacks are just a way of returning retained earnings to shareholders. Apple sets the standard for R&D efficiency. The author wants to say it’s a bad thing that Apple gets so much out of its dollars?

    As far as killing Americas high-tech future, that’s just absurd sensationalism. Apple has empowered that future, not hindered it.

    1. Sam Kanu

      “…Maybe Apple should more openly cooperate with the surveillance state? ..”

      Complete denial if you understand where Apple HQ is based and you think they are not complying to the letter with ALL laws that you happen know about, PLUS the ones that you don’t and won’t ever know about.

      Nobody wants them to go bankrupt. But they should have put something back in the pot by hiring American tech people until there were none left – and then going into American schools and cultivating the next generation. As opposed to decamping to a sweatshop hellhole, and all the while colluding with American tech companies to keep down the salaries of tech workers.

      If you are looking for a “victim” story, Apple isn’t it.

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