July 2006 Archives

The head of the WTO is trying to lay out an alternative to the total collapse of the Doha Round in an op-ed in the International Herald Tribune - Pascal Lamy: What now, trade ministers?

Even the least ambitious proposals would have cut trade distorting farm subsidies by two to three times the previous round of talks. Export subsidies would have been eliminated. For the first time members would have limited fishery subsidies, which contribute to the depletion of our oceans.

The vast majority of exports from the very poorest countries would have faced no barriers to trade, and practices that had crippled African cotton farmers would have been substantially reformed.

Powerful tariff-cutting formulas that were on the verge of agreement would have opened global markets as never before. And the services negotiations held the promise of new business opportunities in sectors like express delivery, banking, insurance, computer services and communications.

Can this considerable foundation be retained?

This may constitute the so-called Doha-lite agenda that the US has already rejected - partly at the urging of business groups such as the Business Roundtable. But the breakdown of the talks may have shocked negotiators enough to force them to re-think the scope of the agenda. Already the US and Brazil are talking about how to restart the talks, according to the Financial Times.

As Bruce Stokes pointed out last January in "Salvaging the Doha Round":

A limited agreement would have undeniable benefits. U.S. multinational corporations would, at a minimum, lock in their current level of access to developing-country markets. Congress would not have to make deep, politically painful cuts in farm spending. And the WTO—with the rules and dispute-settlement mechanism that are invaluable to day-today commerce—would not be called into question, a potential casualty of a failed Doha Round.

Locking in the services parts of the agreement, as agreed to last December at the Hong Kong ministerial meeting, would be seen by many as a major step forward. As an OECD study puts it:

On some counts, the gains from services liberalisation could exceed gains in the area of goods by a factor of five. Developing countries stand to be amongst the major beneficiaries, not least because of their growing role as exporters of services. Developing countries are particularly successful in sectors such as port and shipping services, audiovisual, construction, and health services. And while developing countries have a clear comparative advantage in labour-intensive services, such as construction, technological advances in the telecommunications and computer industries has enabled them to become highly successful in skill-intensive computer-related activities.

But it may be through the opening up of imports that the greatest welfare gains will be realised –or forgone - from services liberalisation. This is because of the critical effects of services barriers on downstream users. Ongoing OECD analysis finds that if account is taken of services barriers, the effective rate of protection for some agricultural and manufacturing sectors actually turns negative, meaning that services barriers contribute to effective taxation of these industries, further compounding the overall distortions to the economy. Examples of manufacturing industry in developing countries that are effectively taxed by services barriers include motor vehicles in Brazil, chemical products in Romania and mineral products in Thailand.

Of course, opening up services will run into the buzz saw of controversy over offshoring. But, since the US economy is already open to offshore services, opening of other nations to our services may be a win for the US. It is certainly a discussion that needs to be undertaken.

Two examples how things work in the I-Cubed Economy from this morning's Washington Post business section. First is an example of user-based innovation - Lego's Robot Redux:

After years of battling computer games for the attention of kids, Lego is fighting back with hackers, the Web and a robot on its side.

The Danish company has updated its Mindstorms line of buildable, programmable robots -- a product that debuted to much fanfare in 1998 but that the company had let languish to near-extinction.

. . .

In deciding to revamp the aging Mindstorms robot line, Lego turned to its most faithful core of fans: enthusiasts and hackers who had banded together to form their own online support network. In 2004, Lego e-mailed four of its biggest Mindstorms fans across the United States. The team members spent 10 months advising Lego as the Mindstorms Users Panel, discussing their dream lists of what the next kit should and should not be.

The second story is about understanding the power of information in your business - Sagging Times at Furniture Showrooms:

Bill Diffee Jr. had big dreams for the expansion of the Colony House furniture store that his grandfather founded in 1936.

Three and a half years ago, he built a new store in Centreville to cater to Washington's increasingly wealthy and growing suburbs. The store had twice as much room for Colony House's signature high-end traditional furniture as the original location on Lee Highway, just off Route 66 in Arlington. But business never took off.

Two weeks ago, Diffee let go most of the staff and shut down the store.

. . .

"It gets harder and harder for a retailer to differentiate and find that niche that works for them," said Nick McCoy, a senior consultant at Retail Forward Inc.

. . .

But he [Diffee] remains optimistic about the future. The Arlington store is still successful, he said, especially in design consultation.

He has learned a lesson: Bigger isn't always better. Now Diffee is trying to target his customers better. He knows they're still out there.

(emphasis added)

Using information is what makes for success in the I-Cubed Economy -- be it emphasizing your design services (furniture) or enlisting users in the product design process. Catering to specific consumer needs rather than just more of the same is the hallmark of this new economy. And many business (and policymakers) may have to learn that lesson the hard way.

It is called "brand extension" and sometimes it goes a bit too far, as Business Week points out Online Extra: Brand Extensions We Could Do Without - concerning Harley-Davidson's new cake-decorating kit.

Each year, Tipping Sprung publishes, in conjunction with trade publication Brandweek, a survey of Top Brand Extensions. The survey also includes a booby prize category for the worst extension. And in the latest survey, published in December, 2005, Harley-Davidson's cake decorating kit took that honor.

How quickly tides turn; in 2004 (the first year that Tipping Sprung conducted the survey), Harley-Davidson topped the list of best brand extensions for its move into Harley-branded footwear. The company's precipitous slide illustrates how easy it is for even the most established brand to make a mistake. (When asked about sales of its cake-decorating kit and other spin-off products, Harley-Davidson declined to comment on any brand extensions—good or bad.)

. . .

We live in an age of relentless co-branding (consider Motorola's ROKR phone, featuring Apple's iTunes software). We're seeing more and more licensing of celebrity names (such as Sylvester Stallone's High Protein Pudding or Trump Cologne) and the requisite movie tie-ins (like Disney Couture's recently launched, $225 Pirates of the Caribbean skull ring, designed by the movie's on-set makeup artist).

In his 2003 book Brand Failures, Matt Haig offers up some reasons why some of these extensions flop. These include "basic mistakes such as setting the wrong price, choosing the wrong name, and getting too paranoid about the competition," Haig writes. These no-nos can cheapen a luxury brand or make a mass-market label seem inaccessible, alienating a loyal audience, or flooding the market and overexposing a brand.

Another example - taken from Business Week's slideshow on problematic extensions is The Jaguar X-type:

the Ford publicly predicted that the Jaguar X-type would help bump overall Jag sales to 200,000 models a year. But the so-called cheap Jaguar didn't fool consumers, who saw it as a cheap Ford with a Jaguar hood ornament.

A perfect example of how to weaken an intangible asset!

Thanks to the New Economist for directing us to the ongoing debate over bloging and academia. In his posting on "Brad Delong, Daniel Drezner and Mark Thoma on blogging", he excerpts pieces from the latest Chronicle of Higher Education: Can Blogging Derail Your Career?

He didn't excerpt Brad DeLong summary of the role of bloging in academia and the intellectual debate.
Brad DeLong's Semi-Daily Journal: The Invisible College:

A great university has faculty members who do a great many things — teaching undergraduates, teaching graduate students, the many things that are "research," public education, public service, and the turbocharging of the public sphere of information and debate that is a principal reason that governments finance and donors give to universities. Web logs may well be becoming an important part of that last university mission.

Amen. And maybe university administrators will some day understand that the communication of faculty thoughts is their greatest intangible assets. Apparently, they don't yet understand that.

This from the WSJ.com - Tax Report: Patented Tax Strategies May Fail To Shield You From the IRS

It's tough enough to figure out whether a complex tax strategy is right for you -- let alone legal. Now there's something else to worry about: Getting sued by someone who has patented the technique.

It may sound surprising that tax and financial-planning ideas can be patented at all. They can, just like gadgets and other inventions. While the number of tax-related patents is still small, it appears to be growing -- and is attracting attention in Congress, at the Internal Revenue Service and among tax professionals facing increasingly intense competition for wealthy clients. Adding to the interest is a lawsuit filed earlier this year against a Connecticut executive for allegedly using a tax strategy patented by a Florida man in 2003.

IRS officials and some tax lawyers worry taxpayers may be fooled into thinking that a "patented" tax strategy automatically bears the government's seal of approval -- which it doesn't. "Just so there is no misunderstanding today on this point, let me be clear," IRS Commissioner Mark Everson told a congressional panel earlier this month. "The grant of a patent for a tax strategy has absolutely no impact on IRS's determination of the effectiveness or the legitimacy of the strategy."

Lawyers, meanwhile, are questioning whether someone should be allowed to impose what amounts to a toll charge on someone else for using a technique to reduce taxes lawfully

Clearly, the asset base has shifted in the I-Cubed Economy. It used to be that you got a patent to protect a product you wanted to market. More and more, your get a patent not to market the product but to market the idea. While I believe that marketing ideas is an important positive characteristic of the I-Cubed Economy, the granting of monopoly rights to the marketing of ideas must be considered very carefully. The patent system shouldn't prevent people from thinking new ideas. Unfortunately, that appears to be where we are headed.

In June, the National Science Foundation held a workshop on Advancing Measures of Innovation: Knowledge Flows, Business Metrics, and Measurement Strategies:

The workshop was held in the context of the American Competitiveness Initiative, the Science of Science Policy (SoSP) initiative led by NSF and involving other federal agencies, and OECD's decadal "Blue Sky II" effort to develop new and better indicators of science, technology, and innovation.

Presentations from the workshop are now available on their website and I understand that the full papers will be available later as a special issue of The Journal Technology Transfer.

There is a lot of good information and insight in these presentations. I was especially taken with the conclusions of Rajesh Chandy, University of Minnesota presentation on Innovation: Business Metrics:

• Innovation

   – What is it?
      • Not what we typically measure

   – Who does it?
      • Not whom we typically assume

   – How is it done?
      • Not how we implicitly believe

   – Who gains most from it?
      • Not who we often think

Answering those questions and confronting those misunderstandings would be an excellent starting point for crafting a real innovation policy for the US.

Graham Searjeant, Financial Editor for The Times of London, has a slightly different take on the end of the Doha Round - "Doha: doomed before it started":

In particular, apparent concessions on agricultural subsidies, tariffs and quotas always turned out to be less than they seemed, because to give the developing world what it wanted would radically undermine the farming industries of the North, possibly threatening rural life from California to Cracow.

France, the most agricultural of the main EU powers, kept trying to hold back EU concessions, knowing the power of its farmers to bring the country’s life to a stop. The spring riots in France, though unconnected, probably ended any chance of an accord.

Neither President Chirac nor the French government dared provoke the farmers into the even more serious riots that would follow what they saw as a sell-out. Many others were happy to shelter behind the French position.

In other words, Doha failed because nations focused on their agricultural past, not their information future.

Searjeant ends up in the same position as I do, looking for better mechanisms:

If it is accepted, however, that the era of the grand, multi-year trade negotiation is over, important gains could still be made. For instance, an agreement was made in Hong Kong to phase out subsidies to agricultural exports. This should happen anyway.

The developed world, in return, can reasonably demand that its trading partners respect intellectual property rights from brand names to computer software, and that they enforce these rights effectively. Step-by-step deals could then be led by the WTO itself without investing all the political capital sunk in a mega trade round.

If Doha does prove to be a failure, all is not lost. Learning from the mistakes can usher in more sensible ways to foster trade and expand the huge benefits that it brings.

More on the trade talks and I-Cubed Economy issues from Intellectual Property Watch » WTO Doha Round Suspended Indefinitely, IP Issues May Be Kept On Table:

The end of the talks means that important developing country issues, such as the relationship between the Convention on Biological Diversity (CBD) and the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) likely will not go forward for the time being. This issue has been seen by some as outside of the mandate of this round of talks.

Biodiversity Patent Disclosure, Geographical Indications Still to be Pushed

A number of developing countries, including Brazil, China and India, have proposed that the TRIPS agreement be changed to make it mandatory to include disclosure the origin of genetic resources in patent applications (IPW, Genetic Resources, 7 June 2006).

Brazilian Foreign Minister Celso Amorim told Intellectual Property Watch that Brazil “will continue to push” the issue although he noted that “all the groups are stuck,” referring to the negotiations in general.

India’s Nath agreed. He told Intellectual Property Watch: “Of course we will continue to push” for disclosure of origin in patent applications, as the CBD issue has been an “important ingredient of this round.”

But he added that India and the other supporters of the CBD issue did not want it to become an “instrument of abuse” through unfair use, saying that it should not be something these countries would have to use to trade off for something else.

The European Union is also determined to keep its demand regarding geographical indications (GIs), referring to products deriving their names from geographic places, alive.

European Commissioner for Agriculture and Rural Development, Mariann Fischer Boel, told Intellectual Property Watch that the GIs are “extremely important” for southern European countries in particular. She said the European Union would therefore keep the issue on the table, meaning not only on the EU agenda, but “on this [the WTO] table as well.”

While this round of talks may have broken down, many of the issues remain at the forefront of interest. What mechanisms emerge to address these issues is uncertain. As the above comments concerning India and the CBD issues indicate, these issues may need to be addressed directly rather than incorporated into some trade-off negotiations.

According to Reuters, the Doha Round of the trade negotiations is over: "Trade power talks collapse":

WTO Director General Pascal Lamy told the G6 late on Sunday he would halt the Doha Development Agenda -- launched in 2001 to ease poverty and boost the global economy -- without a quick end to the deadlock, diplomats said earlier.

But 14 hours of talks yielded no breakthrough on Sunday and ministers were meeting again on Monday not to negotiate but to discuss what the next steps should be, diplomats said.

Frankly this comes as no surprise (see my earlier postings - "Future of trade talks" and "Trade focus shifting to IMF?").

Discussing the next steps, however, is likely to be as messy as the negotiations themselves. The breakdown is essential over the issue of agriculture. Anti-globalization forces will claim victory as well. But agriculture and the perceived backlash against globalization are only part of the problem. As I stated back at the beginning of the Round in 2001 (in After Doha: What The WTO Is Not Talking About, many of the real issues weren't even on the table:

Slightly less than a decade ago, I played a small part in the implementation of the Uruguay Round and the birth of the WTO. As a Senate trade policy staffer, I had fly-on-the-wall view of the pushing and shoving. At the time, I could not help but think that I was witnessing the last major trade round. I may be proven wrong. But, regardless of whether a new round is launched and successfully completed, it will be outdated before it begins. As we engage in the first war of the 21st century, we may be entering into the last trade negotiations of the 20th Century.

This is not to say that the negotiations are unimportant. There are numerous areas, ranging from agricultural subsidies to the dispute settlement process, that need to be addressed. These are, however, the loose ends of trade in the Industrial Age – not the emerging issues of the Information Era.

It remains to be seen if Pascal Lamy and the WTO can move the agenda into the 21st Century. It maybe, as I mused about before, the focus of the discussion needs to move to other venues.

It is axiomatic in some circles that stronger patents are the key to greater innovation (see for example my posting on EU Innovation Scorecard). The counter to that claim might be found in a recent Wall Street Journal story - "How a University's Patents May Limit Stem-Cell Research":

When executives at Carlsbad, Calif.-based Invitrogen Corp. chose to locate their stem-cell research in Asia recently, they blamed the patents. And today, a California watchdog group, the Foundation for Taxpayer and Consumer Rights of Santa Monica, says it will ask the U.S. Patent and Trademark Office to overturn three patents awarded to James A. Thomson, the Wisconsin researcher who first isolated stem cells from human embryos in 1998.

The broadly worded patents, which cover nearly any use of human embryonic stem cells, are held by the Wisconsin Alumni Research Foundation, a nonprofit group that handles the school's intellectual-property estate, managing a $1.5 billion endowment amassed during 80 years of marketing inventions.

John Simpson, an official at the foundation bringing the challenge, says WARF's efforts to enforce its patents are "damaging, impeding the free flow of ideas and creating a problem." Mr. Simpson's group got involved in the dispute earlier this year after Wisconsin officials said they would demand a share of state revenue from California's voter-approved stem-cell initiative.

One of the characteristics of knowledge (as described in the endogenous growth theory - or New Growth Theory) is that it is self-perpetuating: knowledge begets more knowledge. But the process only works if knowledge is shared -- and a balanced patent system is key to that sharing. Which is why we need patent reform legislation -- legislation that is unfortunately stalled. Given it is July of an election year, it is doubtful that anything will come out of this Congress. I can only hope that next year Congress will make patent reform a top priority.

One of the charateristics of the I-Cubed Economy is the fusion of manufacturing and services. Here is a good example from the Wall Street Journal story - "For Now, the Focus Is More on Innovation Than on Budget Cuts" - which highlighted that paragon of the industrial age, John Deere:

Last year, Deere formed two business groups: the intelligent mobile-equipment technology group and the Agri Services group, which is developing and marketing new services to help farmers grow more uniform crops. Last summer, the unit collected data from more than 300,000 acres of cotton fields so farmers knew precisely where to spray fertilizer.

Agri Services also aims to tell food companies and consumers more about what they're buying. If a cereal company learns that certain crops make production easier or result in a better-tasting product, it may pay more for them. "We'll be able to trace exactly what's in the food we're eating, where it was grown and what was done to it at every point in the food-production chain," says Dan McCabe, senior vice president at Agri Services.

Many manufacturing companies have built businesses around servicing their own products. Deere has gone beyond that to build a business around their knowledge-base. In my mind, that is the mark of an I-Cubed Economy company!

Steven Pearlstein's column in this morning's Washington Post "A Sound Marketplace For Recorded Music" is a case study in how to attempt to stifle innovation:

Here in Washington, there is nothing more amusing than watching business interests work themselves up into a righteous frenzy over a threat to their monopoly profits from a new technology or some upstart with a different business model. Invariably, the monopolists (or their first cousins, the oligopolists) try to present themselves as champions of the consumer, or defenders of a level playing field, as if they hadn't become ridiculously rich by sticking it to consumers and enjoying years in which the playing field was tilted to their advantage.

A recent example is the political and legal attack mounted by the music-recording industry against the upstarts of satellite radio.

You'd think an industry that has managed to turn out so much mediocre music for so many years, done so much to lower moral standards and lost so much business to illegal file-sharing would have something better to do than attack some of the few distributors that are actually expanding the market and charging for music. But the prospect that the industry might not extract every last penny out of the new satellite radio services and their customers is simply unacceptable to the Recording Industry Association of America.

. . .

The fundamental problem here is that there really isn't a free and open "market" for recorded music.

It starts with copyrights, which are nothing more than little government-issued monopolies. As a result of the recording industry's lavish political contributions, Congress has extended the copyright for music to absurd lengths of time (70 years after the death of the artist) and absurd situations (singalongs at Boy Scout campfires). This is well beyond what is reasonably required to meet the aim of encouraging artistic creation.

. . .

The copyright laws also effectively set up the record labels as a cartel that can bargain as a group with satellite and Internet radio operators over royalties and other terms. Not surprisingly, the same cartel-like behavior appears to extend to the industry's negotiations with Apple's iTunes and other download services, which seem to strike suspiciously similar deals at suspiciously similar times with all of the major recording studios. It's perhaps no coincidence, then, that the industry has already settled an antitrust suit over price fixing of compact discs and is reported to be the subject of another antitrust probe regarding prices for music downloads.

After a succinct analysis of the problem, Pearlstein's solution is straightforward:

if the goal here is to encourage innovation and competition in the market for recorded music, I can assure you that lawsuits and lobbying battles are a lousy way to go. The better strategy is to prune overgrown copyright protections, deregulate the industry and let the marketplace set prices and decide which companies and technologies and business models survive.

I agree to some extent - but wonder how far he is willing to push the competitive market. Is Pearlstein willing to go as far as the French in forcing Apple to open up the iPod? As far as I can tell, a significant part of the iPod success is due to the proprietary linkage between the gadget (iPod) and the download service (iTunes). Yes, the design is of the iPod is fantastic - but the business model is even better.

What the French propose to do is break that business model as anti-competitive. As one commentator in Wired put it, it may be the case of "How France Is Saving Civilization":

Apple may not qualify as a literal monopoly -- there are lots of ways to get music and buying online accounts for only a small fraction of total music sales. But the sliver it does control it controls almost completely, and it's not out of the question to suggest that this sliver will ultimately become the only way people will buy music in the future.

Whether you agree or disagree with the French action, it highlights the problem of competition (anti-trust) policy in the equation. When is a business model innovation and when is it simply a new monopoly?

Implied, but not stated in Pearlstein's solution is a careful analysis of the linkage between intellectual property and competition (anti-trust) policy. A few years ago, the Federal Trade Commission (FTC) did such an analysis in 2003 - To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy - which we featured in an Athena Alliance congressional luncheon briefing last year. Unfortunately, that report has had little impact, as patent reform legislation is stalled and no one is even considering copyright reform.

As Pearlstein says, it is time to "prune overgrown copyright protections." In fact, it may be past time. Let us see if the fight he describes between satellite radio and the music-recording industry will provoke action.

Thanks to Bruce Nussbaum for his blog posting on the new Dyson School of Design Innovation in the UK. As Nussbaum points out, while the US gets it, the US does not:

There is a huge amount of public policy work going on in Europe in the space of innovation, design and creativity. I fear that in the U.S., we are stuck in a rut of the federal government defining innovation just in terms of technology and pouring more money into engineering, science and math (yes, it's a good thing but only necessary, not nearly sufficient). Washington sponsors the annual National Design Awards contest through the Cooper Hewitt and that is a good thing too (lunch with Laura Bush was today, Monday. This year Nike won, as did MOMA's Paola Antonelli and 2x4, Maria Cornejo, Bill Stumpf and others. But the National Design Awards program could use more focus (do they go for lifetime achievement or to current great projects or to what?). I think the awards are a wonderful thing but what, as a nation, do we want to reward in design?

Washington doesn't get it on several fronts:

Invention does not automatically equate to innovation and technology and science do not automatically equate to creativity. Europe--meaning Britain, Scandanavia, the Netherlands and Italy in particular, do get design. They get it in terms of education, in terms of effecting social policy, in terms of generating economic growth, jobs and wealth. We really need to work on this in the U.S. It's not just about more money for design. It's about thinking about design thinking.

Needless to say, agree wholeheartedly -- see my piece U.K. Leads; U.S. Lags. But I am hopeful that the trio of Roger Martin, Dean of the Rotman School of Business at the University of Toronto; David Kelly, the Design Engineering Professor at Stanford and founder of the D-School; and Patrick Whitney, the Director of the Institute of Design at the Illinois Institute of Technology can change our perspective.

In that regard, Athena Alliance held a congressional briefing on Innovation and Design last month. The summary and the speaker's presentations (Roger Martin and John W. Leikhim, Director, Corporate Innovation Capability at Procter & Gamble) are now available at our website.

The Dyson School of Design Innovation, in contrast, will focus on function-led, problem-solving design. With a breathtaking six-story building planned for the banks of the river in downtown Bath, the school will include a café, design center, and a library complete with a collection of prototypes. Dyson's hope is that the school will be a prototype for many more to come.

One of the characteristics of the I-Cubed Economy is that concepts we think we understand take on a richer meaning under closer examination. Take for example the concepts of "design" and "brands". We all know what those words mean. Design is cool looks and brands are titles to products. But both of those concepts are much more complex than that.

Design is much more than looks or aesthetics (Virginia Postrel's great insights in to aesthetics aside - see The Substance of Style and her blog The Dynamist). Design is as much about functionality as looks (see my earlier posting). It is a process of problem solving as Professor Roger Martin points out.

The same is true of brands. The power of brand comes from the image it brings to mind - the experience. As a recent Washington Post story on Taking a Tip From Madison Avenue, Towns Buy Into Branding stated:

"You're creating an experience for the customer, to live and be and feel the brand," said Dana Page, program manager of the Zyman Institute of Brand Science at Emory University.

However you label these changes, it is clear that we need more carefully examine our concepts as part of the ongoing economic transformation. Companies (and locations) who think of brands as just titles, without the back up substance will find their brands quickly degenerate into empty slogans. And those who look at design as just “cool” with out functionality will end up with failed products.

Such is the harsh reality of the I-Cubed Economy.

Earlier this week, I posted a comment on how advanced communications and information processing could boost economic arbitrage - The power of information -- faster use of friction.

The power of information extends to other parts of the buyer-seller relationship, as well, as illustrated by a recent Economist story "Chinese consumers are ganging up on their retailers":

On an otherwise quiet Friday afternoon in Guangzhou, a city in southern China, 500 shoppers gather outside a Gome electrical superstore in the downtown district. They arrive en masse at the designated time—June 16th at 4pm—that they had previously agreed online. Several hours later, they emerge clutching boxes, having secured 10-30% discounts on cameras, DVD players and flat-screen televisions. “It was great,” says Fairy Zhang. “We just bought an apartment and this way we can afford nice things for it.” The previous weekend, over 100 locals visited Meizhu Central, a well known furniture outlet, to haggle over the prices of kitchen cabinets and dining-room furniture.

Tuangou, or team buying, aims to drive unprecedented bargains by combining the reach of the internet with the power of the mob. It is spreading through China like wildfire. The practice originated in online chat-rooms but has quickly inspired several specialist websites, such as 51tuangou.com and www.teambuy.com.cn. Zhang Wei, who helped to set up teambuy less than six months ago, says the site has 10,000 registered members. The company plans to expand into Beijing and Shanghai.

Sounds to me like asymmetrical buying power - not "frictionless commerce." If you are part of the mob, based on your access to information (and ability to be at the right place and the right time), you get the discount. Otherwise, even if you know about it, well, tough luck.

Just another example of how the I-Cubed Economy is evolving in unexpected, but traditional ways. As the Economist points out, "team buying turns haggling, a tradition in China, into an art-form."

The more things change . . .

David Wessel's "Capital" column in today's Wall Street Journal is all about that myriad of tax breaks individuals can claim -- "Tons of Tiny Tax Breaks Prove To Be Addictive and… Taxing".

But the real driver of all this is that Congress has turned the tax code into a theme park, with a tax break for every good cause. Each one makes sense: Congress decides it's in the public interest to encourage people to use mass transit. Allowing employers to take money out of workers' checks, shield the money from taxes, and then give workers fare cards instead of pay is a reasonable, cheap approach. Workers are happy: They've saved money. Some probably think employers are giving them an extra benefit. Employers surely don't mind that.

So what's the problem? Add this tax break to the dozens of others that decorate the tax code, and we get higher tax rates than otherwise needed to bring in the same sum. We get a lot of hassle and complexity that chews up time and money. And, I suspect, the government creates tax breaks that are claimed far more often by sophisticated, upper-income taxpayers than by others.

And do these tax breaks actually accomplish their goals, or just make politicians feel good? Does up to $105 a month in tax-free mass-transit fare cards actually increase use of mass transit? Maybe. The tax break seems to have produced a somewhat bizarre parallel tax break for parking -- up to $205 a month for some reason -- so constituents who don't live near or use transit systems don't feel jilted. Hard to see how that fosters "energy independence."

Joel Slemrod, a University of Michigan tax economist, has a theory about what's behind this: marketing.

Politicians figure you won't bellyache so much about taxes if they quote a high price and then give you discounts -- in the form of deductions, credits and other tax breaks. And they figure 10 little tax breaks make people feel better than one big one. "I probably ignore more of them than I should because I find them to be tremendously intrusive and such a hassle," he says. He probably never used those 50-cents-off coupons at the supermarket either.

The proliferation of tiny tax breaks, each with its own complexity and paperwork, doesn't rank up there on the worry list with persistent poverty, stagnating wages, mounting debt or deadly disease. On the other hand, it ought to be easier to fix.

I suspect the same dynamic is behind all those corporate/business tax breaks as well. For example, as a speaker at a recent Athena Alliance/CELI event [summary coming soon] mentions, there is no evidence that the R&D tax credit actually spurs increased R&D. And increased R&D many not be the sole driver of economic growth. Innovation broadly defined is the driver of economic prosperity -- and our investment tax rate maybe more important in that regard than a targeted R&D tax credit.

But targeted business tax breaks are easier to legislate (some would say, sneak in) than addressing the broader issue of tax reform -- as illustrated by the recent experience of the President's Advisory Panel on Federal Tax Reform.

If you want to understand American industrial policy, you have to look to the tax code. That myriad of tax breaks -- big and little -- that dominate the tax code define how we view our economic structure. Yet no one has done the systematic study of what that vision looks like. I have to assume that it is like through a glass darkly -- fragmented, contradictory and inefficient if not ineffective.

I also suspect that it is geared toward the past, not the future. Just one of the many policy areas that have not caught up with the I-Cubed Economy.

Once again, this morning's BEA trade data showed a widening trade deficit. But our surplus in intangibles trade improved slightly, rising by $90 million to $8 as receipts (exports) for royalties and exports of business services increased faster than imports of business services and payments (imports) for royalties.

The overall trade deficit increased in May by $0.5 billion to $63.8 billion as imports increased faster than exports. This was unlike last month, however, when exports actually declined. As the Wall Street Journal reported:

The May trade deficit was smaller than Wall Street predicted. A Dow Jones Newswires and CNBC survey of 18 economists had forecast a deficit of $65.30 billion. While the increase was smaller than the 2.9% rise that economists had been expecting, it still represented the sixth largest deficit in history.

. . .

The nation's bill for all energy-related petroleum products rose to $27.91 billion from April's $23.40 billion. Imports of capital goods like medicinal equipment increased by $171 million. Purchases of cars and parts made abroad fell by $522 million. Consumer goods imports -- including clothing -- tumbled by $40 million. Imports of foods and beverages decreased by $146 million.

U.S. exports rose by 2.4% to $118.66 billion in May from $115.93 billion in April. Sales increased by $803 million for capital goods, including civilian aircraft. Exports rose by $524 million for consumer goods, like diamonds. Sales of industrial materials such as precious metals were up $766 million. Exports of food and beverages increased by $387 million. Sales of autos and parts fell $120 million.

The deficit in Advanced Technology Products also increased in May by $1.2 billion to $2.9 billion -- again as imports rose faster than exports. The increase was due mainly to increased deficits in information & communications, life sciences and bio-technology. Aerospace showed an increased surplus due to higher exports.

The increase in our intangibles surplus is good news - but not good enough to offset our huge deficit in tangible goods.

Note: we define trade in intangibles as the sum of "royalties and license fees" and "other private services". The BEA/Census Bureau definitions of those categories are as follows:

Royalties and License Fees - Transactions with foreign residents involving intangible assets and proprietary rights, such as the use of patents, techniques, processes, formulas, designs, know-how, trademarks, copyrights, franchises, and manufacturing rights. The term "royalties" generally refers to payments for the utilization of copyrights or trademarks, and the term "license fees" generally refers to payments for the use of patents or industrial processes.

Other Private Services - Transactions with affiliated foreigners, for which no identification by type is available, and of transactions with unaffiliated foreigners. (The term "affiliated" refers to a direct investment relationship, which exists when a U.S. person has ownership or control, directly or indirectly, of 10 percent or more of a foreign business enterprise's voting securities or the equivalent, or when a foreign person has a similar interest in a U.S. enterprise.) Transactions with unaffiliated foreigners consist of education services; financial services (includes commissions and other transactions fees associated with the purchase and sale of securities and noninterest income of banks, and excludes investment income); insurance services; telecommunications services (includes transmission services and value-added services); and business, professional, and technical services. Included in the last group are advertising services; computer and data processing services; database and other information services; research, development, and testing services; management, consulting, and public relations services; legal services; construction, engineering, architectural, and mining services; industrial engineering services; installation, maintenance, and repair of equipment; and other services, including medical services and film and tape rentals.

Bollywood's answer to super strong Superman: a super smart superhero, Krrish.

From the Christian Science Monitor - "India's Superman saves the universe and aces an IQ test":

While Superman is a space alien who flies around wearing spandex tights and a cape, and rescues people as if it's his night job, Krrish is a mere human in a mask and black leather coat à la "The Matrix," who has extraordinary speed and strength, and rescues people out of sheer decency.

There are other differences. India's "Superman" breaks out into song - several times. And befitting a country that now defines itself as a rising information economy, Krrish's superhero gifts are first noticed in school, including in a grueling IQ test in which the first-grader Krishna explains to a panel of adults the principles of accounting.

Hum ... super smart?

Or maybe I've reading too much into this?

This story today - Montreal man uses Internet to trade from paper clip to home - illustrates the power of faster communications:

Canadian Kyle MacDonald, 26, started with a simple online offer on July 12, 2005 to trade the paper clip, which sat on his desk next to his computer, for something a little bigger and better.

Fourteen online trades later, he becomes this week the proud owner of an unfurnished two-storey house on Main Street in the tiny agricultural town of Kipling in the province of Saskatchewan.

As MacDonald admits, the process is nothing new:

The idea was based on a child's game called 'Bigger and Better'," he said in a telephone interview. "You start with something small and trade around the neighborhood, knocking on doors. I think I may be the first to try it online."

What is new is the acceleration of the process because of advanced communications. As I mentioned in my last posting, advances in both transportation and communications are important to accelerating commerce. But this is not the "frictionless" commerce that everyone likes to tout. In fact, this is a classic example of arbitrage - where value is added (or in this case extracted) by playing on the asymmetries of consumer desires (and information). What advanced communications was able to do was magnify those small asymmetries quickly into a large total.

Information and value asymmetries will continue to exist in the I-Cubed Economy. Frictionless commerce is a chimera (in fact, if it wasn’t for economic friction, there would be no innovation). And now that Mr. MacDonald has show that it can be done, I expect more and more people to try the same strategy. Which opens up a whole new market for on-line trading companies, such as e-Bay?

Advances in communications is one of the key features of the I-Cubed Economy. We hear of the so-called "death of distance" and how improved communications are changing the lives of millions for the better. For example, the Economist likes to continually point out the benefits of mobile phones to the poor - as it did in this example from May 2005, "Calling across the divide":

Wedged between stalls of dried fish and mounds of plastic goods, a red shipping container is loaded with Coca-Cola bottles. The local distributor for Soweto market, located in a tatty corner of Zambia's capital city, Lusaka, sells all its stock every few days. A full load costs 10m kwacha (about $2,000). In cash, this amount can be hard to get hold of, takes ages to count and—being ten times the average annual wage—is tempting to thieves. So Coca-Cola now tells its 300 Zambian distributors to pay for deliveries not in cash, but by sending text messages from their mobile phones. The process takes about 30 seconds, and the driver issues a receipt. Faraway computers record the movement of money and stock. Coca-Cola is not alone. Around the corner from the market, a small dry-cleaning firm lets customers pay for laundry using their phones. So do Zambian petrol stations, and dozens of bigger shops and restaurants.

This is just one example of the many innovative ways in which mobile phones are being used in the poorest parts of the world. Anecdotal evidence for mobile phones' ability to boost economic activity is abundant: they enable fishermen or farmers to check prices at different markets before selling produce, make it easier for people to look for jobs, and prevent wasted journeys. Mobile phones reduce transaction costs, broaden trade networks and substitute for costly physical transport. They are of particular value when other means of communication (such as roads, post or fixed-line phones) are poor or non-existent.

The most recent story along these lines was on the front page in this morning's Washington Post - "In War-Torn Congo, Going Wireless to Reach Home":

Until not long ago, if Zadhe Iyombe wanted to talk to his mother, he had to make the eight-day boat trip up the Congo River to the jungle town where he was raised. In a country with almost no roads, mail or telephone system and a grisly guerrilla war raging, making that exhausting and dangerous trip was about the only way he could find out if his 59-year-old mother was still alive.

Then he got a cellphone.

Now he talks to his mother every day. And once a week, with a simple new feature in African cellphones, he uses a text message to transfer five minutes of airtime to her phone to make sure she can always call him.

. . .

As surely as the light bulb and the automobile before them, the cellphone and text messaging are radically changing the way people live in the developing world. In widespread use for about five years in much of Africa, technology long taken for granted by the world's rich has made life easier, safer and more prosperous for the world's poor.

For the first time, millions of Africans are able to communicate easily with people who are beyond shouting distance. Farmers and fishermen, for example, use text messaging to check market prices, eliminating middlemen and increasing profits -- and preventing long trips to the market on days it is canceled.

But communications is only part of the answer. The story of farmers checking on market prices (used a case study over and over again) is an example. Knowing the price is important; it gives the farmer market power in his negotiations with the buyer. But it is useless information if that farmer has no way to get this crop to market. This is where improved transportation comes in.

According to a new study by the Asian Development Bank (When Do Rural Roads Benefit the Poor and How?), "better rural roads are a necessary but not sufficient condition for graduating from poverty."

The poor and very poor assign high priority to basic access. It reduces their vulnerability, and they consider it a matter of dignity to be able to communicate with the outside world and engage in social activities outside the village. This is confirmed by evidence from PRAs [participatory rural assessments] in the project and control sites. In the absence of improved opportunities to use roads, the poor rely on the primary network of paths, tracks, culverts, and basic access routes in the immediate village vicinity. Theirs is a walking world, and improvements to this primary village network of tracks, etc. that reduce the burden of basic household and productive tasks are likely to have a significant poverty reduction impact by reducing their time and energy impoverishment. In this context, the increased availability of intermediate modes of transport with larger carrying capacity to collect water, firewood, etc. is likely to have a greater initial impact on their well-being. They need to first accumulate surpluses even periodically to be able to seize new opportunities that motorized transportation may bring.

Throughout history, advances in transportation have sparked economic growth and increased prosperity - starting with the invention of the wheel. Roman roads and safe passage (pirate-free) on the Mediterranean fueled the economy of the Empire. The development of the rounded merchant sailing ship, the cog, greatly expanded Medieval commerce. The container ship changed the manufacturing calculus, forever some claim (see "The world in a box" in The Economist). And the development of overnight air freight and rapid package delivery services have made much of the e-commerce revolution possible.

The same will continue to be true in this new information age. While the movement of bits (information) is increasingly important, the movement of atoms (people and goods) is still critical. Cyberspace has not yet displaced real space and virtual reality is not the same as reality.

Let us keep this in mind as we craft policy for the I-Cubed Economy (and in the development of transportation-poor nations such as the Congo). Otherwise, we may find ourselves neglecting an important element of our economic infrastructure.

Last week, I posted a comment on how innovation in low and medium tech companies relies on absorbing, rather than generating, new knowledge. Absorption is just as important for countries as for companies. The 2005 Industrial Development Report from the United Nations Industrial Development Organization (UNIDO) Capability Building for Catching-up highlights this problem with respect to the ability of low- and middle-income economies to catch-up with the more developed economies.

The report stresses the key feature of the I-Cubed Economy:

In modern societies development and economic welfare rest on the permanent creation and destruction of knowledge. Rapid acquisition of new knowledge is fundamental to successful economic performance.

Owing to the cumulative nature of learning, differences in the rate of accumulation of technological capabilities have an inherent tendency to translate into gaps in economic prosperity across countries. Narrowing these gaps has required sustained catch-up efforts of various kinds. Pivotal among these efforts has been the swift accumulation of technological capabilities. Contrary to views once popular among economists, domestic knowledge generation has been a requisite of catching-up. Tapping into the global pool of knowledge and building domestic knowledge systems go hand in hand.

Collective learning, both within single organisations and at more aggregated levels, is a vital feature of domestic competence building. Indeed, the effectiveness with which a firm is able to participate in and benefit from the generation of technologies is largely given by factors that lie outside the scope of the individual enterprise. The institutional environment within which a firm operates determines its incentives and opportunities and thus affects the scope of the capabilities it needs to master. The intervening factors include incentives to innovation, conditions of access to various kinds of inputs (including finance, skills and knowledge) and to relevant markets and regulatory requirements. Behind many of these factors lie the capabilities of a multiplicity of organisations, including input suppliers, educational and training institutions, research organisations, financial institutions, regulatory agencies and specialised service providers. Clearly then, both the quality of firms’ technological capabilities and the scope for acquiring new capabilities can only be properly understood by considering the context within which both are shaped. The process of competence building is hence not only cumulative at an individual level but also systemic in character.

The importance of these institutions is based on the nature of technical knowledge:

Questions arise as to why dissemination is difficult, why advances in scientific knowledge do not lead immediately to new technological applications, and why the effectiveness of both processes varies significantly across sectors. Two fundamental explanations have been put forth. The first one is that the output of scientific research is not information that can be used at trivially low costs in the production and implementation of new technology. Scientific activity relies on a complex enabling infrastructure. Second, the mastery of tacit knowledge affects the efficacy of technology dissemination processes across firms or countries. (e.g. standards and technical regulations, generic drugs and semiconductors).

The capabilities required for exploiting various forms of codified knowledge reside only partly within any given firm. A distinctive feature of an innovation system is the presence of multiple, interacting actors and institutions, whereby firms’ capabilities are enhanced by access to those of other actors in the system. The extent to which developing country firms can access and use available sources of codified knowledge depends on the diversity of the collective skills and capabilities they can rely upon in order to introduce locally innovative technologies.

This absorption ability is just as important in the so-called developed nations. [I say so-called because the use of the term “developed” is misleading as it implies an end state - rather than a relative position. Viewing a country such as the US as “developed” implies that the process of economic evolution and growth (a.k.a. development) is finished. That is a mind set that only begs for trouble.]

Even nations at the cutting edge of technology and innovation need to be able to gather and absorb knowledge and information from elsewhere. The not-invented-here syndrome is as deadly for a nation as it is for a firm.

Unfortunately, too much of America’s current policy falls victim to this way of thinking. From a security policy that makes it difficult for foreigners to enter the US (the most effective form of knowledge transfer) to a technology policy predicated on just outspending everyone else, we fail to recognize the contribution and importance of the information and knowledge from around the globe.

This is an attitude that companies decidedly don’t share with our policymakers. As the US seems to becoming more isolated, companies are rapidly becoming more global in their search for knowledge and information.

Part of our current competitiveness push is correct when it comes to increasing our absorption capacity. We need a workforce trained in at least the basics of math and science if we are to have the capability to utilize formal knowledge from what ever source (as the UNIDO report points out).

But there is so much more we need to do.

The starting point may be to recognize the fundamental nature of knowledge: it is more powerful if it is shared. As Thomas Jefferson said:

He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me. That ideas should freely spread from one to another over the globe, for the moral and mutual instruction of man, and improvement of his condition, seems to have been peculiarly and benevolently designed by nature, when she made them, like fire, expansible over all space, without lessening their density in any point, and like the air in which we breathe, move, and have our physical being, incapable of confinement or exclusive appropriation.

That saying applies to nations and well as individuals. The more we learn to learn from others, the stronger we will become – as an economy and as a nation.