Economic View: Why Innovation Is Still Capitalism’s Star

The decisive role of the “spirit of capitalism” is an old concept, going back at least to Max Weber, but it needs refreshing today with new evidence and new thinking. Edmund S. Phelps, a professor of economics at Columbia University and a Nobel laureate, has written an interesting new book on the subject. It’s called “Mass Flourishing: How Grassroots Innovation Created Jobs, Challenge and Change” (Princeton University Press), and it contains a complex new analysis of the importance of an entrepreneurial culture.

Professor Phelps discerns a troubling trend in many countries, however, even the United States. He is worried about corporatism, a political philosophy in which economic activity is controlled by large interest groups or the government. Once corporatism takes hold in a society, he says, people don’t adequately appreciate the contributions and the travails of individuals who create and innovate. An economy with a corporatist culture can copy and even outgrow others for a while, he says, but, in the end, it will always be left behind. Only an entrepreneurial culture can lead.

Is the United States really becoming corporatist? I don’t entirely agree with such a notion. Even so, President Obama has been talking a lot about innovation as a job creator this year, and while some of his intentions may be good, I’m afraid that some of his proposals look a little corporatist, and might suppress individual initiative.

In his State of the Union address in January, for example, the president proposed that the government should create 15 new “innovation institutes,” modeled on a public-private partnership that he helped start in Youngstown, Ohio, that is devoted to developing 3-D printers. There was more in this vein in his administration’s 2014 budget, offered in April. And in a speech on July 30 in Chattanooga, Tenn., Mr. Obama suggested extending the number of innovation institutes to 45, or almost one for every state. The institutes, he said, would be “getting businesses, universities, communities all to work together to develop centers of high-tech industries all throughout the United States.”

Will such measures work? Should the government really be trying to start a 3-D printer center? And why in Youngstown? It is easy to be skeptical of such a plan, especially when it was started in a swing state just before the presidential election. Web sites of the two senators and two representatives introducing bills this month supporting the president’s latest proposals are suggesting, in not-too-subtle terms, that the legislation would bring jobs to their own states.

Successful companies aren’t usually started this way. Professor Phelps, citing a McKinsey study, suggests that in free-market capitalism, “from 10,000 business ideas, 1,000 firms are founded, 100 receive venture capital, 20 go on to raise capital in an initial public offering, and two become market leaders.” It is easy to doubt, as Professor Phelps does, that the odds are favorable for a Youngstown 3-D printer center.

How you view the innovation institutes, and the topic of capitalism and culture, may depend on your own experience. Many people have never seen the hatching of a successful business idea. That makes it hard to judge the subtle changes that may be occurring in the nation’s culture and in its potential for innovation.

My own business experience has certainly helped shape my thinking. Yale, like many other universities, sensibly allows its professors to spend limited time in business, providing the opportunity for faculty members to gain valuable experience outside of the ivory tower and to offer their technical skill to the business world.

In 1991, I started a business with Karl Case, an economics professor at Wellesley College, and Allan Weiss, a former student of mine at Yale. We called it Case Shiller Weiss, Inc., and it was devoted to an innovation we dreamed up. The idea was a new “repeat sale” home price index — which would track the changes in the value of the same houses over time.

At the time, this was an entirely new line of business. And, at first, that posed a problem: we were spectacularly unsuccessful in raising money. We talked to venture capitalists and their committees, to no avail. They just didn’t seem to get our business plan. We must have appeared odd to them — overly academic, perhaps. One remarked that we’d do better proposing a new shopping center.

But we went ahead with our idea anyway. At first, Allan worked without pay. A friend of Professor Case, Chuck Longfield, contributed some money. And in 1995, I took out a home equity line of credit on my house in New Haven so I could personally lend more money to help keep our business afloat. The experience was stressful, especially when adding it to the burdens of my main job, as a professor. I have much to thank my wife, Virginia, for her tolerance of my overwork and my worrying, and for allowing me to put our family savings at risk.

In the end, our business was successful, and I think a big part of it was that we relied on our own ideas and energy and, to a large extent, our own money. In 2002, we sold the business to Fiserv Inc., then licensed Standard & Poor’s to create what are now known as the S&P/Case-Shiller Home Price Indices. In 2006, the Chicago Mercantile Exchange began trading futures on 11 of our indexes. Fiserv sold the index business to CoreLogic early this year.

In short, our business made its mark without any help from the government.

This little real-life experiment convinces me that committees of experts, even at smart venture capital firms, will often not recognize real innovation. I think that America’s business success through the decades has occurred because we have so many people with specialized knowledge who are willing to put their money, time and resources on the line for ideas that can’t be proved to a committee.

THAT experience may also help explain why I think the new crowdfunding initiative, started by the Jobs Act that the president signed last year, is an exciting step forward. It’s all about finding and mobilizing people who really understand specific, hard-to-prove ideas for important investments.

At the same time, other of my experiences incline me to think that government-appointed committees of experts can help set the stage for an entrepreneurial culture, under certain limited circumstances.

Long before I started any commercial ventures of my own, I received some federal government support — in the form of National Science Foundation research grants, awarded to me decades ago as a young professor. They allowed me to do research, and though it was not directly related to my later business endeavors, the process developed my expertise and reinforced a sense of entrepreneurial opportunity.

These grants were awarded competitively, based on the quality of the proposals, and gave me experience with a system focused on creating opportunities for those who try hard. Later, from 1983 to 1985, I evaluated others’ proposals when I served on the foundation’s panel for economics. Observing the process from the government side convinced me that the foundation really works. Maybe it’s because the panelists are chosen from successful scientists, who serve anonymously out of public spirit.

In any case, as Professor Phelps has argued, direct government involvement in capitalism is a delicate thing. The system’s success depends on subtle cultural factors — and these require careful nurturing.

Robert J. Shiller is Sterling Professor of Economics at Yale.

Corner Office: Pedro Baranda of Otis Elevator, on the Push for Innovation

Q. What was your first management role?

A. I studied a lot in my 20s — a six-year program in Spain, and then a Ph.D. here in the United States. So my first management role was when I was about 30. I was a research engineer and I had to hire two people.

Q. And was it an easy transition for you?

A. I probably made quite a few mistakes and learned from them. The main mistake I tended to make — and probably still do sometimes — is that because I’m an engineer, I like to get into the details of things. So I got some feedback about it early on, such as, “Let me do my job.”

That was an important lesson, because if you want to develop leaders and not followers, one of the key things you have to learn to do is delegate. One of my bosses once told me: “You’ve got to delegate because there are only three possible outcomes. You tell them what your expectations are, and if their solution is better than yours, that’s fantastic. If the solution is the same as yours would be, then it’s fantastic, too, because at least you didn’t have to do it. And if it’s not as good as you expected, you can always take the time to teach them why and what to do differently. That way, you will have learned about the person and the person will have learned from you.”

That lesson about delegation is fundamental if you want to develop leaders and not followers. I heard an expression from one of my business professors — that talent flow is the best predictor of future cash flows — and that has stayed with me.

Q. What is some other feedback you’ve heard over the years about your management style?

A. When you do 360’s with your team, you learn that the perception people have about your skills might be different from yours. When I took over a role in Portugal, my big concern was whether I knew the business well enough. When I had the 360, the feedback was just the opposite. They said: “You understand the business pretty well. What you’ve got to do is not intimidate people at meetings, to be more open to things that may not be right, and listen.” That was a big lesson — you have to learn to be tolerant of failure, because if you are intolerant of failure, your company will retrench and not be innovative. You have to encourage people to take calculated risks. If you punish people who take risks and don’t succeed, they will never take a risk again.

Q. How do you foster innovation?

A. The spark of innovation can be difficult to manage. We have a more structured process, even though some people might think processes are kind of a straitjacket for innovation. But in our case, they’re for guiding the thought process. We decide where to focus on innovation, and we call them our innovation thrusts, which are based on what we’re hearing from customers, architects, consultants, general contractors — everyone in our industry.

We want to know what is going to be important for their business five to 10 years out. Sometimes they don’t know, but you can sense what’s going to be important for them. At any given time we have five or six innovation thrusts. Once you have those, then you structure the process around those themes, and you guide the sparks in areas where they would have a big impact.

Then we do two things. We bring together teams of people from around the world, because I believe that diversity is fundamental in the thought process. I really appreciate the importance of diversity as a catalyst for creation and innovation. It matters not just in product development and technology — I think it happens in many other aspects of the enterprise. But for innovation, it’s fundamental.

We also have an internal Web page where people can post their ideas about innovations. We have 62,000 employees, and they can vote on the ideas — thumb up or thumb down — or build on them. It also helps you to see people who have this innovative spirit. Those are the people we want to invite to meetings to develop ideas.

Q. How do you hire? What qualities are you looking for?

A. First, does the person smile? Is there a positive feeling when you talk to somebody, or are they an energy drain? That’s important. Then you try to find out the raw material and the competencies. There are techniques to try to find out their competencies, but I think it’s become like an arms race, with interviewees knowing the tools you use to learn their competencies, and they prepare for them. So I think you have to just let the conversation flow.

Q. And what if you had only enough time to ask someone a few questions?

A. I would probably ask them what they like about what they do, just to get a general sense of whether they are capable of loving what they do. And then the difficult question I ask when people are looking to change jobs is, “Why do you want to change if you like it so much?” We want people who want to have a longer-term career with us, and we want people who like what they do. And so if they like what they do, then why are they looking to move somewhere else?

Q. What advice would you give a graduating class of college students?

A. I think you have to try to follow your passion with some flexibility to adapt to reality and enjoy every bit. Life is short. So the one thing I always insist on is making sure that you like what you do.

And I always recommend that you focus on what you have in hand today. If you’re thinking too much about what your next job is going to be, you will not do your current job well, and then the next job will never come because companies tend to be meritocratic.

So I always tell people, first, focus on what you do today. Make sure you like what you do, because if you don’t, you’re not going to succeed. You cannot always do what you like, but you can get to like what you do. So it’s good to follow your passion, but then you have to make an effort to adapt yourself, to make sure that you love what you do.

Disruptions: New Motto for Silicon Valley: First Security, Then Innovation

The Twitter account of The Associated Press was among many recently hacked.

At Facebook’s headquarters in Palo Alto, Calif., are stark white posters with bright red statements like “Done is better than perfect” and “Move fast and break things.”

These disruptive philosophies embody the spirit not just of Facebook but of Silicon Valley. Yet today, when technology companies have become the prime targets of rogue governments and hackers, the ideologies that drive these companies to provoke could end up disrupting these companies.

Conversely, the signs sitting in security research firms across the country warn, “Carelessness causes security incidents.”

Although technology companies say they take security seriously, protecting their customers seems to come second to announcing new products. Take Twitter, where people’s accounts are frequently hacked. In the last few months alone, this has happened to Burger King, BBC, NPR, The Associated Press and a slew of celebrities and users. In that time, Twitter has proudly announced updates to features on its mobile and desktop apps, introduced a music Web site and redesigned its company blog. But it still hasn’t released two-factor authentication, a security tool used by the rest of the industry to deter hackers.

Although Twitter declined to comment, I’m sure most of the people on the site who have seen their accounts pilfered over the last several years would rather have two-factor authentication than a shiny new Twitter blog.

One solution is a bill crawling through Congress over the last two years, the Cyber Intelligence Sharing and Protection Act, known as Cispa. The bill would make it easy for tech companies to share information about computer security threats with government agencies, helping fortify against cyberattacks.

But privacy groups say that Cispa is not a solution to the problem, and that instead it hands the highly sensitive personal data we want protected to the government.

“It has to be the obligation of these tech companies to build in security from the very beginning before we start moving into solutions about bringing the government into the private sector,” said Leslie Harris, president and chief executive of the Center for Democracy and Technology, a Washington-based advocacy group financed by a broad coalition of technology and telecommunication companies. “You want to see these very innovative companies step up and become the leaders in security solutions first.”

Cispa’s creators and defenders see it differently. They argue that companies are not simply fortifying against a child in his bedroom who is trying to get into their servers for fun. Today’s hackers hail from foreign governments like those in China, Syria and Estonia, and are adept at getting what they want.

Representative Mike Rogers, Republican of Michigan and the chairman of the House Intelligence Committee, who was one of the authors of Cispa, recently said that “our government, our industries and your personal information will be subjected to hundreds of thousands of attempts at hacking” in a single day. “We are in a stealthy cyber war in America. And we’re losing.”

He thinks the government can solve that problem.

Kelsey Knight, director of communications for Mr. Rogers, said in a phone interview that Cispa could stop “90 percent of the current security breaches” that happen today. “Then, in reverse, these companies would be able to share their threat of information and code back to the government and that will add to the list of zeros and ones that we can keep defending against together.”

Ms. Knight noted that start-ups cannot defend themselves against today’s advanced attacks because the cost can be hundreds of thousands of dollars. She said Cispa and other government groups can help.

One thing is clear: today’s tactics are not working.

During the State of the Union address this year, President Obama cited the need to protect “national security” and “privacy” while defending against cyber attacks. The president has also been meeting with chief executives to discuss ways to combat the threat of computer warfare and corporate espionage.

Cispa, now in the Senate, could take months, if not years, if it is to emerge at all from Congress. Until then, advocacy groups believe it falls to the start-ups to put more effort into security.

“The ‘move fast and break things’ philosophy is not a philosophy that has necessarily been good for our privacy,” Ms. Harris said. “I certainly believe that government and companies should be working together, but information sharing is just a very small part of the cyber security puzzle. It’s companies investing the resources to strengthen their own security first.”

Maybe it’s time for companies in Silicon Valley to replace those posters with ones that say, “Move slowly and protect your users.”

E-mail: bilton@nytimes.com