The U.S. ambassador to Canada, David Jacobson, gave a thoughtful, entertaining talk at the CIGI Signature Lecture series event at the CIGI Campus last week. It was one of those speeches that is enjoyable at the time and, because it makes you think, which you appreciate even more afterwards.
Ambassador Jacobson made the obligatory comments expected of a senior U.S. official – the U.S. has gone through a difficult period, we were told, but the flexibility and dynamism of the U.S. people and economy will prevail, as it has in the past. However, he also used his remarks to reflect on the nature of innovation, arguing that innovation relies in part on social capital, or the accumulated effects of the random interactions between researchers in different fields, and between research and production teams.
The model is Bell Labs, which was the source of so many path-breaking innovations in the past century. Researchers there were required to maintain an open door policy, the better to encourage the exchange of ideas. The goal was to create fertile ground for that most elusive source of innovation – serendipity.
Ambassador Jacobson’s lecture got me thinking: could global supply chains that break down the production of goods to better exploit the global division of labour threaten innovation by separating research from production? This is really quite interesting to an economist (or, perhaps, just this economist).
Ever since the publication of Adam Smith's The Wealth of Nations in 1776, economists have viewed the division of labour as the source of productivity gains and higher incomes – the "wealth of nations." There are limits to the division of labour, however. The gains from teasing out productivity gains depends on the size of the production run: it would make little sense to break down the production of a good into many different specialized components and train workers in highly-specialized tasks, if market demand could be satisfied in a day.
This led Smith to conclude that the division of labour is limited by the extent of the market. This observation underlies the gains from globalization that have been realized over the past several decades as the invention of the shipping container and, yes, the BlackBerry, have greatly expanded the extent of the market and allowed firms to extend global supply chains that were previously constrained by shipping costs and limited information.
But could the fertility of the research environment be reduced by breaking down the production process too finely and separating research and production? If over-extended global supply chains reduce the cross fertilization between research and production, which ambassador Jacobson argued contributed to Bell Labs’ remarkable record of success, there may be a tradeoff between the gains from the division of labour in the production process and the resulting loss of innovation. The division of labour is limited not just by the extent of the market, but by the limits of social capital.
All this leads me to ask: Is it possible that the process of globalization (or "outsourcing") has gone too far? And since innovation has positive externalities through the creation of knowledge, would the U.S. consider policy interventions to pull the process of globalization back?