William Lazonick - How Government Helps, and Wall Street Hurts, the Innovative Enterprise

About the Interview

Innovation drives economic growth and welfare, and the industrial corporation drives innovation, says William Lazonick. But just how do corporations innovate? The key idea is commitment. People with knowledge of and experience in particular industries commit to a business model that ventures into unknown territory. The main problem is that modern financiers are not prepared to support commitment, and the modern executive pushes for stock buy-backs -- that is how Wall Street undermines innovation. Understanding how organization drives innovation -- this is new economic thinking.

About William Lazonick

William Lazonick is a professor at the University of Massachusetts Lowell where he directs the Center for Industrial Competitiveness, and co-founder and president of The Academic-Industry Research Network (theAIRnet). Full profile



My first take from this, with which I would agree, is that almost all economists would benefit from a year or two in business school!

On the substance of his argument for commitment, I would suggest there are two related themes. The first is access to capital. Financial best practices have a bias toward short-term efficiency and risk aversion. Thus, facing the risk-taking enterprise, financial intermediaries would prefer to manage risk in terms with collateralized credit. Banks are most eager to lend to businesses who don't need it.

Equity capital plays in a different arena, where the problem is corporate governance and defending stakeholder interests to mitigate the agency problem.

The solutions should focus on broadening the access to capital, rather than concentrating it in TBTF financial institutions, and reforming corporate governance so committed equity stakeholders are not faced with a take-it-or-leave-it choice on management strategy. Right now, shareholders' best option is to sell.

I'm not sure how more government involvement helps any of this, except to facilitate these kinds of private market reforms.


Is it fair to say that in essence this research suggests that a savings culture is an optimisation culture, and therefore an economic development culture, whereas a culture of credit creation and consumption is one of false growth?

Isn't it clear that one problem of modern companies is that the owners don't care about the operations of what they own?

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