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Thurow cites need for long-term perspective on R&D

List the industries that are growing rapidly: biotechnology, microelectronics, telecommunications, the industry that does not yet have a name but is at the intersection of computers, telecommunications, television and media arts. They have two common denominators. They are man-made brain power industries. They all could be located anywhere on the face of the globe.

More than 100 years ago, economists developed the "theory of comparative advantage" to explain industrial location. Then, the possession of natural resources and the amount of capital per worker seemed to determine location decisions.

Historically the theory explained what needed to be explained. Cotton was grown in the American South because the climate and soil were right. It was made into cloth in New England because that was where the water power existed. New York was the economic center of the country since it had the best natural harbor on the East Coast and had both the location and the money to build the Erie Canal, which made it the preferred route for moving products in and out of the Midwest. Steel was made in Pittsburgh since doing so minimized transportation costs given the rivers and lakes and the iron and coal ore deposits. Given its location, Chicago had to be the transportation capital. Texas was oil.

But none of the industries that are now growing rapidly requires natural resources. If they were needed they could be bought on world markets and cheaply transported to wherever needed.

Capital-labor ratios have become equally irrelevant. With the development of a global capital market, everyone now effective borrows in New York, London and Tokyo. There are still rich countries and poor countries when it comes to consumption standards of living, but financing industrial investments doesn't depend upon where they will be built.

The whole distinction between capital and labor has vanished. Human capital is created in exactly the same investment process that creates physical capital. Labor, if one means unskilled and uneducated workers, simply isn't needed.

While these new man-made brain power industries are privately owned, much of the investment necessary to make them into operating realities in public investment.

Private industry will made R&D investments that are expected to pay off within five to seven years but it won't make the 20 to 30-year R&D investments that are necessary to create entirely new industries such as biotechnology. No hard-nosed capitalist would ever invest in the more than 20 years of education it takes to create a PhD. The payoffs are just too far into the future.

Yet just such investments are central in determining the winners in an era of man-made brain power industries.

Where will growing high-wage industries be located in an era of such industries? The answer simply depends upon who mobilizes the resources to do the necessary research and development to create these industries and who develops the top-to-bottom shill base to staff these industries.

In the United States, both R&D investments (public and private) and investments in education are now declining. The reasons are numerous. With the end of the Cold War, military R&D is falling. On the civilian side of the budget, pensions and health care fore the elderly are squeezing everything else out.

In the private sector, long-term R&D investments are being cut as firms merge and downsize. The monopolistic companies that used to do long-term R&D, such as AT&T or IBM, have seen their industries become competitive. To compete they have withdrawn from basic research.

Capturing the man-made brain power industries of the future demands the same size, intensity and kinds of commitments that were necessary for the man-on-the-moon program, but it just isn't there.

What Washington should be debating is not the size of government but the proportion of output being devoted to investment in both the public and private sectors. Within government budgets, there are consumption activities that need to be cut (health care spending is certainly one) and R&D and educational investments that need to be expanded.

The same is true in the private sector. Health care should also be cut in the private sector and skill training and R&D should also be accelerated.

That famous bottom line is simple. If Americans want a good economic future with jobs at high wages, they are simply going to have to be willing to invest in those things that are necessary to generate that success in the era ahead. If they don't, they wont.

(This editorial originally appeared in the Business Section of The Boston Globe on September 12 and is reprinted here with the author's permission.)

A version of this article appeared in MIT Tech Talk on September 20, 1995.

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