Are America’s Cultural Struggles the Result of Risk-Averse Incrementalism?
America is at war with itself — but are racial and political divisions really to blame, or is something deeper fueling our discontent? We’re joined by Dr. John Parmentola, Adjunct Staff Member at the RAND Corporation, to discuss his upcoming book, “Creating Wealth from Worthless Things”, which argues that a risk-averse focus on efficiency & incrementalism has hurt the economy, reduced individual opportunities, and widened the wealth gap underlying today’s social conflicts.
Welcome, John! Right now, there’s a lot of social unrest in America, with increasing social fragmentation along racial & political fault-lines, a rise of interest in socialism, and growing distrust of the financial system. How are diminishing opportunities driving these channels of unrest?
When opportunities are limited for quality jobs and social pathways to make a living, people will seek other ways to fulfill their needs. It’s fundamentally about survival, but it doesn’t always express itself that way — especially when it’s politically expedient to divide people into victim groups because of economic strife and despair.
People in difficult situations are highly susceptible to manipulation, and blaming others for their problems is an easy way to capture votes. However, this political strategy doesn’t solve the serious problem of economic strife and doesn’t help the over 40 million people in this country who would like to get out of poverty.
This problem doesn’t depend on your color, ethnicity, creed, gender, or sexual orientation. We need to provide these people with new social pathways that will enable them to improve their quality of life. Socialism & communism promise to do this and they’re easy to sell because they scapegoat the rich, but history tells us these models fail to fulfill vital human needs.
None of the issues we’re discussing are new — so what’s made 2020 such a “perfect storm” for violence & social unrest? It seems like COVID-19 and the quarantine sparked it — what’s driving it now?
The COVID-19 crisis has amplified the number of people in desperate situations and essentially flattened the economic strata of our country. The pandemic has pushed many people into desperation, and George Floyd was the spark that set everything ablaze. It was a tipping point for many people.
People are upset, and rightfully so — but this situation highlights symptoms of a much deeper problem that shouldn’t be overlooked. The virus will cause jobs to be eliminated because businesses will seize the opportunity to replace workers with technology. Businesses will strive to survive by reducing costs and becoming more efficient — but will workers be able to be retrained and can they adapt to this changing environment? That remains to be seen.
Whether government or private, the financial system is driven today by short-term interests; however, the deeper problem we face is a long-term one. Over the last 40 years, the government has accelerated its borrowing from the future to pay for immediate needs for political reasons.
This strategy cannot create the future, as it is completely focused on today’s problems. As for the private sector, it is primarily driven by quarterly returns to satisfy its stakeholders and investors’ financial interests. The private sector is dominated by efficiency and incremental improvements that are low-risk.
People should be angry about being left behind, but the blame is misplaced. The government has failed to provide them with quality education and investments in human potential to expand the frontiers of knowledge in science, engineering, and mathematics. What is required is a strategy that has the potential to expand human imagination as to what is possible, feasible and practical.
This strategy can create new opportunities for quality jobs, new industries, new products and services, and economic growth. Instead, what we see are empty, quick-fix promises that may sound comforting, but won’t make a substantial difference in the lives of the people and their families. It’s just the same old political dogma.
Would it be accurate to say that when opportunities are reduced for people to make a decent life for themselves and their families, then people on the bottom of the socio-economic pyramid get hurt first? Are these protests a canary in a coal mine, so to speak?
This problem has been building up for some time now. We went from a single earner that could work hard enough to raise a family and realize the American dream to multiple earners with multiple jobs that struggle to accomplish the same thing. The quality of available jobs has declined substantially.
Meanwhile, our education system’s quality has also steadily declined since around 1980, especially in critical areas of the future, such as science, technology, engineering, and mathematics. There are not enough highly qualified teachers to prepare our precious youth for a highly competitive world where China and India are able to outproduce us in terms of graduates. Is it any surprise we’re falling behind in business?
This situation didn’t happen overnight — it’s the result of persistent decay that started nearly 40 years ago, and it has changed our national culture from one capable of risk-taking and bold steps to one of risk avoidance and incrementalism. This isn’t how the U.S. became the world economic and military power after WWII.
Over 40 years, we’ve reduced our investment in human potential and pushing out the frontiers of knowledge like we did after WWII. Those long-term investments after WWII produced an explosion of discoveries and science-inspired inventions that the world wanted and admired. Every invention we hold dear today came from those investments. We still depend and improve upon all these inventions to this day. They are a consequence of the digital, communications, and biotechnology revolutions that were all inspired by scientific discoveries.
Let’s talk about Summers and Bernanke’s secular stagnation, where savings exceed investment which leads to a chronic lack of demand. This is claimed to be a reason that the GDP growth rate has declined since 1980, and said to be exacerbated by income & wealth inequality. What can you tell me about that?
I’m not an economist, but I’m aware of three contributing trends to the systematic decline in the GDP growth rate since 1980. First, corporate America has been focused on efficiency, which has driven down the costs and prices for goods and services, and lowered the GDP growth rate by reducing the monetary value of all goods and services sold over time.
Another trend is a shift from wealth creation to wealth transfer, which happens as the private sector has been replacing legacy industries with more efficient ones that do the same thing in different ways.
Finally, since 1980 we have seen increasing market competition from countries like Japan, Germany, China, and South Korea that has limited growth. Historically, from 1950 to 1980, the annual GDP growth rate exceeded 5% about 20 times.
During this period, the U.S. produced many unique things the world wanted, and we had little competition. Since 1980, the annual GDP growth rate exceeded 5% only twice. Increasing global competition combined with a focus on efficiency has reduced scarcity of things and lowered prices to negatively impact GDP.
So, if efficiency and competition are stifling growth, the question is how to foster it? The answer is by investing in R&D at the levels after WWII to acquire new knowledge about how the natural world works. The discoveries that come from this investment expand human imagination through education, which inspires the creation of unique products and services for consumption. Fundamentally, the value of unique knowledge is very important to our nation’s economy by allowing the creation of entirely new industries that foster long-term economic growth and the creation of quality jobs.
Now, does decreasing wealth inequality play a role in increasing demand? Sure, but if we took the wealth of the top 20% of U.S. households and redistributed it evenly, it would temporarily increase spending, but that will not sustain long-term economic growth. Corporate wealth-transfer through higher efficiencies won’t stimulate growth, and neither will private wealth-transfer through tax redistribution.
So, I don’t see wealth transfer as a path to solving the problem of opportunity shortage. It would be a short-term fix to disparities in wealth, but the longer-term economic growth issue would still exist. In my view, “we the people”, working through the government, must do what the private sector cannot. We need to overcome short-term risk-averse thinking and invest in basic R&D to expand human imagination to create opportunities for growth. In my judgment, the current path we are on will likely lead us to stagnation and more social strife.
In your upcoming book, “Creating Wealth from Worthless Things,” you explore the creation of wealth through the expansion of human knowledge in contrast to optimizing the efficiency of production processes and incrementally improving products and services. Can you tell me a bit more about the key topics you cover in it?
The cause of economic growth has been an unresolved mystery pursued by leading economists for nearly two hundred and fifty years. Creating Wealth from Worthless Things is groundbreaking in that it identifies the actual cause of economic growth and wealth creation.
The book accomplishes this by describing the history of unexpected discoveries that inspired each of the six extraordinary technological revolutions that shaped the modern world’s creation. These events led to the creation of new industries, enormous numbers of jobs, and unique products and services that improved the entire world’s quality of life.
The discoveries I’m describing came from accumulating rules of how the natural world works, which in themselves had no commercial value — in other words, they were “worthless things”. The vast majority of them were funded through risk-taking by governments and wealthy patrons, and enabled the British Empire to become dominant by 1900 and made the U.S. the world-leading economic and military power after WWII.
Unfortunately, over the last 50 years, our culture has changed from one that was willing to take risks and bold steps to one that now embraces risk aversion and incrementalism. In the book, I explain the social and political forces that have caused this cultural transformation, and how this transition limits our future growth and increases the likelihood that China will replace us as a world leader.
This book concludes with a plan to avoid these potentially grave outcomes and explains the steps required to advance our economic growth. I also describe a new and unexpected technological revolution that will create new opportunities for a prosperous future for all humankind.
Federal R&D spending has been on the decline since the 1960s, hasn’t it? Does that also apply to industries like computing, or is that highly successful market an exception that proves the rule?
The outcome of high-risk R&D is uncertain, which has led the private sector to focus on low-risk development commonly called innovation. This is a process of adapting inventions to an application in the form of marketable products or services. In contrast, R&D, especially research, is about the discovery of new rules of how nature works, which leads to massive breakthroughs but has a high degree of risk.
Since 1965, U.S. federal R&D funding as a percentage of G.D.P. has declined by 65%. During this period, private sector R&D increased by a factor of about 3 compared to federal R&D; however, unlike federal R&D, private sector R&D is primarily low-risk D to support existing product lines and services. What has been lost in this significant decline of federal R&D is opportunities for creating new pathways to economic growth.
To appreciate this, imagine that the rules of chemical reactions and the discovery of the 98 fundamental elements of the periodic table never happened. Would the worldwide chemical industry today be generating $5 trillion per year and impacting the numerous industries that depend on it? I do not think so.
In regard to computing, except for the pursuit of quantum computing, the private sector has been squeezing out as much performance as they can out of well-understood materials and designs, but like other technologies and industries, they are reaching fundamental performance limitations.
Computing innovation continues with new approaches like A.I. and Machine Learning, which exploit familiar technology for new applications, but physics will eventually limit these as well unless something unexpected comes along.
It sounds like you’re saying that slowing high-risk R&D and a focus on efficiency are hurting long-term growth and the availability of jobs. Do you view these trends as “putting the squeeze” on opportunities in America and fueling the social unrest that we’re seeing in the news?
Increasing efficiency and incremental improvements in things can produce valuable short-term results — the question is how long we can run our society on a model of incremental improvement, especially when increasing efficiency typically results in the net loss of jobs.
Historically, the incremental improvement of technology based on current knowledge and available materials always has a finite lifetime. Performance eventually runs out of headroom, and incremental improvements eventually become too small and costly to pass onto consumers.
Many major technologies produced by the commercial sector and defense industry are reaching performance limits in such areas as transportation, computing, communications, energy production and storage, and defense technologies. Unless they overcome formidable performance barriers, we are headed toward stagnation in technology performance.
However, rather than focus on discovering unique materials and new knowledge to overcome performance barriers, companies in today’s risk-averse world have dedicated themselves to process improvement to increase efficiency. This involves incremental improvements in logistics or fulfillment and business processes. That’s not a revolution, it’s a path to stagnation, and one that eliminates jobs and removes social opportunities for people to achieve success in life.
Ultimately, the question of R&D spending leads us back to the topic of creating quality jobs and social pathways for people to realize the American dream, and it leads us to a future with reduced social tension between the “haves’” and the “have nots.” New knowledge inspires new inventions, industries, and jobs — and the more of it there is, the less tension and strife there will be.
About Our Guest
Dr. John Parmentola has built a highly distinguished career over four decades as a scientist, teacher, entrepreneur, inventor, innovator, a pioneer in founding new research fields, an international human rights activist, and a leader of complex research and development organizations with broad experience in the private sector, academia and high-level positions within the federal government and defense community.
He received the 2007 Presidential Rank Award for Meritorious Executive from President George W. Bush for my service to the Department of the Army. Dr. Parmentola was also an Air Force Intelligence Agency nominee for the 1996 R. V. Jones Award of the Central Intelligence Agency for his work in arms control verification, and a recipient of the Outstanding Civilian Service Award and the Superior Civilian Service Award for his many contributions to the U.S. Army. He is an Honorary Member of the U.S. Army STs, a Fellow of the American Association for the Advancement of Science, and a recipient of the U.S. Army 10 Greatest Inventions Award, the Alfred Raymond Prize, and the Sigma Xi Research Award. He has presented more than 500 speeches and published numerous scientific papers and articles on science and technology policy. He is also the author of an authoritative book on space defense.
Dr. Parmentola is currently a consultant to The RAND Corporation, where he works on defense, energy, and science and technology assessment, strategy, and planning issues for government agencies, both domestic and foreign. He also works on a volunteer basis for the National Academy of Sciences.
Before this role, Dr. Parmentola has served as a Senior Vice President at General Atomics, the Director for Research and Laboratory Management for the U.S. Army, Chief Scientist at the U.S. Department of Energy, Chief of Advanced Systems & Operations at the Defense Threat Reduction Agency.
Dr. Parmentola has a Ph.D. in Physics from M.I.T. and has served on the faculty of M.I.T., West Virginia University, and as a Fellow at the John F. Kennedy School of Government. Learn more about him on his website at: https://johnparmentola.com/