Nicholas Bloom on Management, Productivity, and Scientific Progress

Ed Comment:Ok to file for the factoid that research productivity is falling 5% a year. I’d like to see the calculation behind that. Beyond that, I don’t see much insight. For starters, I think an enormous and increasing share of workers are working in services. Much of the R&D may not be aimed at increasing the productivity and product offerings of services. Perhaps Slack is, or radical transparency, but not research into the number of planets in the universe. From my perspective at luxury vanity that is unlikely to help anyone in any relevant time frame. It’s a shame we fund it. I also worry that the great expansion of research is diverting talent from serving customers, which slows productivity, especially if the research doesn’t find something that increases productivity. I’m especially concerned about cancer research that will save a few productive people, but largely allows highly unproductivity old people (negative contributors) to live a few years longer on average.

COWEN: How much of the measured productivity edge of American multinationals is just tax arbitrage and where profits get assigned to?

BLOOM: I never really thought a huge amount of it was that. My personal view — I guess this is, again, biased by my research — is American firms are particularly just fantastically well managed.I’ve done a lot of work for many years, looking at management practices, trying to collect data in cross-country surveys.To explain what I mean, management practices — the basics are, do you collect information and use it to improve yourself? Think of lean, collecting information all the time, and having improvement processes. Secondly, do you train and promote employees, try to promote the best people, trying to avoid things like promoting family, friends, or long-serving employees? So meritocratic HR systems.I’m not going to say American firms are perfect. They’re definitely not perfect. There are many management scandals. But on average, American firms are much better managed, and they take that with them abroad. There’s this whole literature that has been sometimes called dark matter, or explaining why we seem to have this endless negative balance of trade but positive balance on our investments abroad. American companies seem to make huge profits abroad.One big explanation is they’re just exploiting lots of this intangible capital, which we think of as good management. American multinationals around the world are well managed, and they make a lot of profits where they’re located in the UK and France, in Ghana, in Thailand — wherever they are. That’s helping keep the US economy afloat, that return profits. I don’t see that as being related — transfer pricing and offshore tax manipulation. That is a factor, but I think American firms are primarily driven, actually, by better innovation and better management.

COWEN: But if you assign the blame to government, ideas are a global public good. Isn’t it true that global governmental expenditure on R&D in absolute terms is up, even if it may be down as a percentage of budgets for total R&D? Thus, scientific progress in the United States, which can draw upon governmental support in China, Japan, India, UK, Switzerland, should still be going up. It has to be within private scientific progress that there’s a diversion of effort away from public goods and toward more private goods. Or no?

BLOOM: No, it’s a good question. It’s certainly true, our paper only focused on the US. The puzzle gets much harder if you include global R&D. You see that productivity per researcher or research dollar is falling, in the sense of the rate of progress per dollar we’re spending….The puzzle gets even more extreme if you look globally. Sure, it’s tricky because Europe has become slightly less of a powerhouse, but obviously Asia has completely taken off in the amount of R&D being spent in, say, India, and China has exploded. Has that offset the reduction in US publicly funded R&D, certainly as a share of GDP? It’s not obvious. One reason is, there’s plenty of evidence on knowledge spillovers being localized. There’s a lot of evidence, for example, that you’re more likely to coauthor with your colleagues in your own university or the same firm. I guess the same firm is more obvious, but if that was true, you may think the transmission of ideas from China to the US is less effective than within the US. I also don’t know if the increase in Chinese and Indian R&D by their government sectors is enough to offset the reduction by the US, and whether it’s in the right areas. It may be that a lot of developing countries’ R&D is more, say, defense and national security focused, which I suspect has lower tradeoffs. The nice thing about the US and things like the National Science Foundation and the National Institute for Health is they would put huge amounts of funding on very basic research that had broad value. An MIT researcher goes to the NSF, gets funding for research. They tend to be focused on very basic things that are of interest to broad science, and that has, I suspect, the largest value in.

BLOOM: The big picture — just to make sure everyone’s on the same page — is, if you look in the US, productivity growth... In fact, I could go back a lot further. It’s interesting — you go much further, and you think of European and North American history. In the UK that has better data, there was very, very little productivity growth until the Industrial Revolution. Literally, from the time the Romans left in whatever, roughly 100 AD, until 1750, technological progress was very slow. Sure, the British were more advanced at that point, but not dramatically. The estimates were like 0.1 percent a year, so very low. Then the Industrial Revolution starts, and it starts to speed up and speed up and speed up. And technological progress, in terms of productivity growth, peaks in the 1950s at something like 3 to 4 percent a year, and then it’s been falling ever since. Then you ask that rate of fall — it’s 5 percent, roughly. It would have fallen if we held inputs constant. The one thing that’s been offsetting that fall in the rate of progress is we’ve put more and more resources into it. Again, if you think of the US, the number of research universities has exploded, the number of firms having research labs. Thomas Edison, for example, was the first lab about 100 years ago, but post-World War II, most large American companies have been pushing huge amounts of cash into R&D. But despite all of that increase in inputs, actually, productivity growth has been slowing over the last 50 years. That’s the sense in which it’s harder and harder to find new ideas. We’re putting more inputs into labs, but actually productivity growth is falling.

COWEN: Let’s say paperwork for researchers is increasing, bureaucratization is increasing. How do we get that to be negative 5 percent a year as an effect? Is it that we’re throwing kryptonite at our top people? Your productivity is not declining 5 percent a year, or is it? COVID aside.

BLOOM: COVID aside. Yeah, it’s hard to tell your own productivity. Oddly enough, I always feel like, “Ah, you know, the stuff that I did before was better research ideas.” And then something comes along. I’d say personally, it’s very stochastic. I find it very hard to predict it. Increasingly, it comes from working with basically great, and often younger, coauthors. Why is it happening at the aggregate level? I think there are three reasons going on. One is actually come back to Ben Jones, who had an important paper, which is called, I believe, “ Renaissance Man.” This came out 15 years ago or something. The idea was,it takes longer and longer for us to train. Just in economics — when I first started in economics, it was standard to do a four-year PhD. It’s now a six-year PhD, plus many of the PhD students have done a pre-doc, so they’ve done an extra two years. We’re taking three or four years longer just to get to the research frontier. There’s so much more knowledge before us, it just takes longer to train up. That’s one story. A second story I’ve heard is, research is getting more complicated. I remember I sat down with a former CEO of SRI, Stanford Research Institute, which is a big research lab out here that’s done many things. For example, Siri came out of SRI. He said, “Increasingly it’s interdisciplinary teams now.” It used to be you’d have one or two scientists could come up with great ideas. Now, you’re having to combine a couple. I can’t remember if he said for Siri, but he said there are three or four different research groups in SRI that were being pulled together to do that. That of course makes it more expensive. And when you think of biogenetics, combining biology and genetics, or bioengineering, there’s many more cross-field areas. Then finally, as you say, I suspect regulation costs, various other factors are making it harder to undertake research. A lot of that’s probably good. I’d have to look at individual regulations. Health and safety, for example, is probably a good idea, but in the same way, that is almost certainly making it more expensive to run labs. In fact, COVID is a huge pushback. I was talking just before the shutdown to a good friend of mine, and she said she has a big lab that has a number of animals and longer-running experiments going on. In fact, the shutdown has been extremely expensive. When we reopen with social distancing, of course, the costs are going to go up again. These are all factors pushing on your point of regulation. It’s just expensive running research.

COWEN: If I understand your estimates correctly, efficacy per researcher, as you measure it, is falling by about 5 percent a year. That seems phenomenally high. What’s the mechanism that could account for such a rapid decline?

Phenomenon Tyler Cowen interview with Nick Bloom

Steve Comment: Note Bloom’s calculation for research productivity is“…Research productivity is the ratio of idea output, measured as TFP growth, to the effective number of researchers.See Notes to Figure 1 and the online Appendix. Both research productivity and research effort are normalized to the value of 1 in the 1930s….”See attached paper