Source: TIME

During Tuesday evening’s State of the Union address, President Obama honored the memory of Steve Jobs by underscoring the creative and technological engines that drive America. He also called attention to one of the necessary evils of progress: risk. “We should support … every risk-taker and entrepreneur who aspires to become the next Steve Jobs,” said the president. “After all, innovation is what America has always been about.”

By embracing risks, Steve Jobs inspired his employees, his competition, and most of all his customers, who developed a cultish attachment to his products. So it was appropriate that even as Congress was applauding Jobs’ impact on the business world, the man who arguably knew the Apple founder best – his biographer, Walter Isaacson – was at the 92nd Street Y on Manhattan’s Upper East Side telling a standing-room-only audience of 600 of insights gained during the two years he spent interviewing Jobs.

In this case, the questions were being asked by TIME managing editor Richard Stengel. Isaacson preceded Stengel as head of TIME – and had been Stengel’s boss – so the conversation included moments of nostalgia as well as some frank discussion about managerial styles. As a boss, of course, Jobs was famously prone to extreme bluntness, which was often construed as intentional meanness. Isaacson saw it a little differently. “He intuitively did not have that filter,” he explained, pointing to an example he witnessed first hand. “When the person at Whole Foods is making his smoothie and she’s taking too long, [most people] have a filter that says, ‘Don’t jump on her.’ But Steve was brutally honest.” It’s hard to argue with the approach of the guy who built America’s most successful company, but Isaacson said he wasn’t persuaded to emulate Jobs in that respect. “In life, one of the top one or two rules is Be Nice,” he said. “Maybe I’ll never invent the iPhone, but I’m not going to get mad at colleagues or someone making a smoothie in Whole Foods.”

Could a “nicer” Jobs have been as successful?

“Could he have put that filter in place and said, ‘I’m going to be just as effective as I am now, but I’m also going to bite my tongue and stop myself’?” he wondered. “That is a fundamental question in life.” If he didn’t quite offer an answer, Isaacson did point to the company’s unusually high retention rate, and suggested that, contrary to conventional wisdom, it was Apple’s culture – not its products – that ultimately set it apart. “Creating a great product isn’t the hard part,” Isaacson said. “The hard part is creating a great company that will continue to create a great product that will be at the intersection of creativity and technology.”

Isaacson’s previous biographies had focused on long-dead luminaries: Albert Einstein and Benjamin Franklin. This time, he said, he worried about what Steve Jobs himself would think of the story. But Jobs put those fears to rest early on by asking that Isaacson be “brutally honest.” In fact, Jobs also told Isaacson that he planned to wait six months before reading the book himself – a typical example, said Isaacson, of the profoundly ill CEO’s contagious and courageous optimism.

Corporate bosses are much less powerful than they used to be

EXHAUSTED after a shipwreck, the hero of “Gulliver’s Travels” wakes up on the island of Lilliput to find that he has been tied down by lots of “slender ligatures”. Gulliver is far stronger than his tiny captors; but by working together the Lilliputians subdue the giant.

The bosses who will gather in Davos on January 25th-29th are more like Gulliver than they care to imagine. They may feel big, as they hobnob with politicians and stride from one soirée to another (in sensible shoes, to avoid slipping on the Swiss resort’s icy pavements). And pundits will fret, as they always do, that Davos Men are carving up the world. But when those bosses return to work they will discover that the tiny ligatures that non-Davosites have attached to them bind ever more tightly.

Two decades ago bosses were relatively unbound. American chief executives struck heroic poses on the covers of Forbes and Fortune and appointed pliable cronies to their boards. Europeans such as Percy Barnevik, the boss of ASEA Brown Boveri, a Swedish-Swiss conglomerate, imported the American cult of the CEO to the old continent. But since then a succession of catastrophes—most notably the implosion of Enron in 2001 and the financial crisis in 2007-08—have empowered the critics of over-mighty bosses. In 2010 two legal academics, Marcel Kahan and Edward Rock, published a seminal article on “Embattled CEOs”. Since then they have become ever more embattled.

One sign is that bosses don’t last long these days. Among the world’s 2,500 biggest public companies, the average job tenure for departing CEOs has fallen from 8.1 years in 2000 to 6.6 years today, according to Booz & Company, a consultancy. The fall would have been steeper but for the generosity of China’s state companies. In 2010 CEO turnover worldwide was 11.6%, but in China it was half that. Booz also notes that shareholders give bosses very little time to prove themselves: Léo Apotheker lasted for seven months as the head of SAP (a software firm) and ten months as head of Hewlett-Packard (a computer giant).

Another sign that the Lilliputians are winning is that fewer chief executives now chair their own boards (the corporate equivalent of a schoolboy marking his own exam papers). In Booz’s global sample the proportion of incoming CEOs who doubled as chairmen fell from 48% in 2002 to less than 12% in 2009. Even America is growing wary of imperial bosses: according to the Corporate Library, a pressure group, the proportion of CEOs of S&P 500 firms who mark their own exams fell from 78% in 2002 to 59% in 2010.

Bosses are still paid handsomely; but this is partly a reaction to rising job insecurity. And in much of the world CEO pay is rising more slowly than it did in the 1990s. In America it may even be declining. Moreover, the Lilliputians are forcing politicians to tie more strings. In 2010 America’s Congress passed a say-on-pay law that gives shareholders a right to hold a (non-binding) vote on pay. David Cameron, Britain’s prime minister, has suggested giving shareholders a binding vote on pay.

The rise of institutional investors (notably mutual funds) has changed the old equation whereby dispersed shareholders confronted concentrated managers. The proportion of stock in America’s publicly listed companies that is held by institutions increased from 19% in 1970 to 50% in 2008. And the scandals of the 2000s have reignited shareholder activism.

To assess the bosses who work for them, shareholders have powerful new tools. For example, outfits such as RiskMetrics offer advice on proxy battles. Shareholders also have powerful new allies. Hedge funds intervene aggressively in corporate decision-making, browbeating such giants as McDonald’s, Time Warner and Deutsche Börse.

At the same time boards of directors have grown more demanding. Gone are the days when a boss could put his golfing buddies on the board. (“A big glob of nothing” was how one observer described boards in the 1960s.) Today the vast majority of board members are outsiders. This has led to a huge improvement in their quality. Korn Ferry, a consultancy, notes that the 95 new directors who won seats on the boards of its sample of America’s 100 biggest companies are remarkably rich in international experience: 21% hold foreign passports and 12% have worked in Brazil, Russia, India or China. It has also increased their willingness to act as stern monitors rather than chummy advisers. In his excellent new book “Winning Investors Over”, Baruch Lev of New York University’s Stern School of Business writes that in this new world “the lonely CEO now often faces a ‘team of rivals’, sometimes adversaries.”

A proposal for modesty

All this is affecting bosses’ behaviour. The latest buzz phrases in the C-suite are “humble leadership”, “servant leadership” and “bottom-up leadership”. But is it actually improving corporate performance? The academic literature suggests that it is. John Core and his colleagues have shown that companies with strong shareholder rights have higher operating profits than those with weak rights. Craig Doidge and his colleagues have shown that companies with stronger boards can raise capital more cheaply.

However, some CEOs are raising objections to the new regime. How can they focus on long-term growth, they ask, if they are constantly second-guessed by a team of rivals? Some are jumping ship for private companies. Anthony Thompson, formerly in charge of Asda’s “George” brand of clothes, left to join Fat Face, a private clothing company, rejoicing that: “I no longer have to slavishly adhere to corporate nonsense and overbearing governance.” Gulliver eventually persuaded his captors to untie him. CEOs will undoubtedly try to do likewise.

Executive pay levels rise because of globalisation, not poor oversight

HARD work builds character, and should be rewarded. But many Britons believe the link between graft and gain has broken down. At the bottom, they see a dependency culture that costs them billions in welfare spending. At the top, pay for executives seems to soar regardless of the fortunes of their businesses.

Even some on the right are rounding on corporate excess. David Cameron, ever alive to the public mood, announced on January 8th that he would reform executive remuneration. His ideas include giving shareholders binding votes on the pay, perks and severance packages handed out by companies. Vince Cable, the Liberal Democrat business secretary and perhaps the most left-wing member of the coalition, is leading the raid on boardrooms.

Ed Miliband, the Labour Party’s increasingly criticised leader, wants to go even further. He argues for putting workers’ representatives on company boards and making corporate pay more transparent. Labour is the party of equality, yet the issue is a bind for him. If he is much more radical than Mr Cameron, he risks reviving his “Red Ed” reputation. If he is not, the government’s efforts will grab all the attention.

The debate over executive pay is likely to heat up over the next few months, fuelled by disclosures of bumper bonuses for bosses. The timing will be particularly embarrassing to public companies and politicians, as median real incomes are forecast to fall sharply as the economic slump continues.

Mind the gap

It is true that in Britain, as in many other rich countries, the rewards of economic growth have not been evenly distributed. Chief executives’ pay grew from an average of £1m ($1.7m) in 1998 to £4.2m in 2010, a far greater increase than the average worker experienced (see chart). Measures of income inequality in Britain are close to their highest level since records began in 1961. At the top of the charts are the bosses of media, pharmaceutical and telecoms firms, such as Vittorio Colao of Vodafone Group . Their pay packages are worth more than £7 million a year on average, according to the Institute for Public Policy Research, a think-tank.

The consequence is widespread anger, of the kind that worries governments. Yet the solution British politicians are putting forward to restrain executive pay—strengthening corporate governance—will probably have little influence on it. This is because soaring remuneration has little to do with weak governance and rather a lot to do with globalisation.

Britain’s biggest companies—those in the FTSE 100 index—have gradually transformed from domestically-oriented outfits to truly multinational firms. The skills needed to manage that sort of company are relatively scarce, so those who have them can command higher pay. Unskilled workers in Britain are less distinguishable from those in China or India, and have seen their wages depressed by globalisation as a result.

Yet experience in America suggests that leaving pay to the market does not invariably mean more cream for the fat cats. There, the average pay of bosses has declined by 43% in real terms from its 2000 peak, reckons Steve Kaplan of Chicago Booth business school. The average S&P 500 wage for chief executives is now $10 million. British bosses may simply have been catching up with their American counterparts; the strong upward trend in their pay may not continue.

Moreover, pay increases at the top are widespread. Those running private-equity firms and law firms are paid comparable amounts (as are sports stars). It is hard to pin high pay on shortcomings in the governance of publicly-owned companies.

The government’s aim, to link pay more tightly to performance, is a good one, as is the goal of making pay more transparent. But simple changes would be better than grand reforms. British corporate governance rules are already pretty good, says Carl Rosen of the International Corporate Governance Network, a think-tank. Shareholders have had an advisory vote on pay for ten years and can sack members of pay committees if their advice is not heeded. If there is weakness, says Mr Rosen, it is more likely to lie in the increasingly fragmented and international character of shareholders (who may not care much about who is paid what) than in the powers they have. Giving shareholders a binding veto sounds impressive, but shareholders might be less willing to exercise it than an advisory vote. There is also scant evidence that putting employee representatives on pay committees yields better results.

The idea that pay should be restrained ultimately rests on a flawed logic. Income inequality is best addressed by closing the skills gap in the workforce, not by preventing British firms from competing for the best chief executives.

The Valley’s techies live in a bubble of prosperity. Optimism has its advantages, but some worry the region may lose touch with the rest of the world

Every so often, the best parties come to represent moments in time. Think of Truman Capote’s Black and White Ball in 1966, the celeb-studded Liberty Island launch of Tina Brown’s ill-fated Talk magazine in 1999, and private equity maven Stephen A. Schwarzman’s 60th birthday bash in 2007, which featured Rod Stewart. Sean Parker’s bacchanal for the streaming music service Spotify on Sept. 22 in San Francisco may well join the ranks of these epic affairs.

The Facebook billionaire—portrayed by Justin Timberlake as a swaggering lush in The Social Network—turned an abandoned warehouse in the city’s Potrero District into a couch-filled pleasure palace. Waiters served piles of lobster, sushi, and roast pig, while journalists each were presented their own $300 bottles of DeLeón Tequila. As Mark Zuckerberg, Apple (AAPL) designer Jony Ive, author Danielle Steel, and other guests mingled, acts including Snoop Dogg, Jane’s Addiction, and the Killers—flown in on private jets—performed for the well-lubricated crowd. “All the recording artists here might not have shown up if they knew I was a nerd,” said an exuberant Parker from the stage.

In Silicon Valley, all the Sturm und Drang of 2011 seemed as relevant as the Cricket World Cup. High unemployment? Crippling debt? Not in Silicon Valley, where the fog burns off by noon and it’s an article of faith that talented, hard-working techies can change the world and reap unimaginable wealth in the process. “We live in a bubble, and I don’t mean a tech bubble or a valuation bubble. I mean a bubble as in our own little world,” says Google (GOOG) Chairman Eric Schmidt. “And what a world it is: Companies can’t hire people fast enough. Young people can work hard and make a fortune. Homes hold their value. Occupy Wall Street isn’t really something that comes up in daily discussion, because their issues are not our daily reality.”

It was never clearer than in 2011 that Silicon Valley exists in an alternate reality—a bubble of prosperity. Restaurants are booked, freeways are packed, and companies are flush with cash. The prosperity bubble isn’t just a state of mind: Times are as good as they’ve been in recent memory. The region gets 40 percent of the country’s venture capital haul, up from 31 percent a decade ago, according to the National Venture Capital Assn. And the U.S. Bureau of Labor Statistics recently reported that growth of the area’s job market led the nation, jumping 3.2 percent, triple the national rate. Even real estate, a cesspool of despair in the rest of the country, is humming along. It’s next to impossible to get a table on a weekend night at the Rosewood in Menlo Park, a watering hole for Sand Hill Road’s technology financiers where the olive-oil-poached steelhead goes for $36. The closest we got to “Occupy: Cupertino” was the line outside Apple stores in October for the iPhone 4S.

It’s tempting to view this latest Golden Age with skepticism, a boom as fleeting and disappointing as the one in the late 1990s, before the dot-com crash. But the strengths underlying the Valley’s optimism appear more solid this time around. Google, Facebook, and Twitter each have hundreds of millions of users around the world and, at least in the first two cases, solid revenues. Valley companies that went public this year, such as LinkedIn (LNKD) and Pandora Media (P), have actual profits, and Zynga’s (ZNGA) initial public offering on Dec. 16—though shares fell slightly in early trading—was the exclamation mark at the end of a thunderous sentence. The offering added yet another Valley billionaire to the regional club: founder Mark Pincus, whose net worth now hovers around $1.3 billion. Even blue chips such as Cisco (CSCO) and Intel (INTC), punished by the stock market for missing big market shifts, are notching record revenue. Doomsday isn’t a pending threat here, it’s office art: Photos of mushroom clouds adorn the lobby of fast-rising venture capital firm Andreessen Horowitz. (Bloomberg LP, which owns Bloomberg Businessweek, is an investor in Andreessen Horowitz.)

Turbulence in the rest of the world may actually be helping Silicon Valley, as wealthy Russians and Chinese send their kids to school here and compete to park their riches in the region’s most promising startups. “There’s always the sense that the storms are happening in other people’s worlds,” says Paul Saffo, a futurist and veteran Valley watcher. “Nobody stops buying smartphones just because they are having an insurrection.”

The downside of the prosperity bubble is that Silicon Valley could be falling out of touch with the rest of the world. That danger was well illustrated this year by a startup called Color Labs, which was lavishly funded with $41 million from investors such as Sequoia Capital and Bain Capital even before it even had a product with actual users. That’s enough to fund research into the next wave of clean energy or advanced artificial intelligence. Instead, in March the company released an iPhone application that let users share photos with strangers in close proximity. Upon its introduction, the app met with a wave of scorn—in part because hardly anyone wants to do that, in part because people are fatigued with the Valley’s relentless social networking gimmicks.

Yet an outfit like Color Labs can whiff badly and live to fight another day. The company did not even appear particularly humbled. Among the biggest signs of change at Color over the ensuing eight months were the rotating decorations in the part of its Palo Alto office visible from the sidewalk. At first, patches of AstroTurf lined the floor, creating faux gardens where employees could sit, drink coffee, and ponder. Then the room morphed into a yoga studio where barefoot instructors limbered up dozens of employees at a time. Now it seems to be evolving into a communal work space. The startup hasn’t been completely lax. It introduced an app that lets users broadcast iPhone videos live to their Facebook friends. “Companies like Color are being given a second, third, or fourth shot at the game because it’s a big game,” says Bill Nguyen, Color’s chief executive officer. “The prizes are pretty darn huge. There are fundamental changes happening in information because of Facebook and mobile devices.”

Some in Silicon Valley are alarmed by what they see as the reluctance of the technology establishment to take on big problems. Peter Thiel and Max Levchin, two prominent entrepreneurs who created PayPal (EBAY), have in the past year started retailing the notion that serious innovation has stagnated and that talented technologists should be doing meaningful, even epic, engineering, the way an earlier generation went to the moon. Their book on the topic, The Blueprint, will be out in March. Roger McNamee, a longtime venture capitalist and managing director at private equity firm Elevation Partners, also wonders if Silicon Valley techies have grown insular. “Too many startups make products for people like them, which is predictable but not interesting,” he says.

Still, the Valley’s overwhelming bias toward optimism remains one of its greatest assets. John Seely Brown, former director of the famed Xerox PARC R&D lab, believes we are undergoing what he calls a “Cambrian moment” of technology change that is making it exponentially easier to build companies, rent supercomputers, and get access to sophisticated scientific tools. With those tools at the disposal of entrepreneurs and researchers, he says, the future is blindingly bright. “So it’s stunning to see how cynical everybody else is,” he says. “They are looking at the world through a rearview mirror, trying to preserve the past as opposed to seizing the moment and moving forward with greater imagination.”

Perhaps Silicon Valley has earned those private rock concerts and $300 bottles of tequila. It’s the one place where progress marches forward even amid the utter dysfunction and gridlock of governments in California and Washington, D.C. The challenge for techies in this exceptional, sometimes magical environment will be to eschew narcissism and to peer outside the prosperity bubble and understand with humility how they can help. “If you can’t empathize with others,” John Seely Brown says, “it’s very hard to solve their problems.”

Chinese manufacturers have ­dominated the international ­market for conventional solar ­panels by building bigger ­factories faster. Now they will need to ­innovate to maintain their lead.

Ten years ago, solar panels were made mostly in the United States, Germany, and Japan. Chinese manufacturers made almost none. But by 2006, the Chinese company Suntech Power had the capacity to make over a million silicon-based solar panels a year and was already the world’s third-largest producer. Today Chinese manufacturers make about 50 million solar panels a year—over half the world’s supply in 2010—and include four of the world’s top five solar-panel manufacturers. What makes this particularly impressive is that the industry elsewhere has been doubling in size every two years, and Chinese manufacturers have done even better, doubling their production roughly every year.

This dominance isn’t due to cheap labor in Chinese factories: making solar cells requires such expensive equipment and materials that labor contributes just a small fraction of the overall cost. Nor is it because the Chinese companies have introduced cells that last longer or produce more power: by and large, they make the same type of silicon-based solar panels as many of their competitors around the world, using the same equipment. They have succeeded in large part because it’s faster and cheaper for them to build factories, thanks to inexpensive, efficient construction crews and China’s streamlined permitting process. The new factories have the latest, most efficient equipment, which helps cut costs. So do the efficiencies that come with size. As a result, Chinese manufacturers have been able to undercut other makers of silicon solar panels and dash the hopes of many upstarts hoping to introduce novel technology.

But the solar market is rapidly evolving, and technological innovations are becoming increasingly essential. Though demand for solar power continues to grow around the world, the market is flooded with photovoltaic panels: worldwide production capacity more than doubled from 2009 to 2010 and continued to increase in 2011. The overcapacity was so great that last fall, Chinese manufacturers had trouble selling solar panels for more than it cost to make them. In such a market, the way to differentiate your product—and charge enough to stay afloat—is to make it better than your competitors’.

For solar manufacturers today, that means inventing cells that are more efficient at converting light to electricity. As the price of solar panels has fallen, installation costs have come to account for a greater percentage of solar power’s cost. Customers want panels that are more powerful, so that they can install fewer of them. From now on, the best way for Chinese manufacturers to lower the cost per watt of solar power may not be by lowering manufacturing costs but, instead, by increasing the number of watts each panel generates. “The game is now changing,” says Mark Pinto, executive vice president of energy and environment solutions at Applied Materials in Santa Clara, California, the world’s largest supplier of solar manufacturing equipment. “Before, it was all about scale. Now it is about conversion efficiency while keeping the cost down.”

This might sound like bad news for Chinese manufacturers that have focused on scaling up standard technology. But their experience in building conventional solar panels could help them implement new designs that significantly boost the performance of silicon solar cells. Over the years, these manufacturers have lowered costs in part by developing better ways to manufacture the cells. That’s given them an understanding of what works and what doesn’t on the factory floor. They also have the capital and the engineers to help them translate newer technologies into mass production. They might not have initially set out to commercialize those technologies, but now, having mastered the market for conventional solar panels, they’re poised to do just that.

KEEPING PACE

In 2010, when the U.S. secretary of energy, Steven Chu, gave a speech to the National Press Club laying out his case that the United States was falling behind in advanced manufacturing, Suntech Power was his Exhibit A. He had toured its factory, and he was impressed by what he’d seen. “It’s a high-tech, automated factory,” he said. “It’s not succeeding because of cheap labor.” Not only that, he noted, but Suntech had developed a type of solar cell with world-record efficiencies.

Chu’s assessment might have surprised some observers, but Suntech’s record-setting solar cells are impressive. The technology that goes into them takes advantage of changes in both design and manufacturing technique. The conductive metal lines that collect electric charge from the silicon aren’t created with screen-printing methods, as is standard. Instead, Suntech uses a proprietary process to deposit much thinner, more closely spaced lines that are more efficient at extracting electricity from the cells. The changes have allowed the company to reach efficiency levels and cost reductions that an industry road map released in 2011 had set as targets for 2020. “When you put all those things together, we are not only doing better than what people are doing now,” says Stuart Wenham, the chief technology officer at Suntech. “We are also doing better than what they think they could be doing in 10 years.”

So far, Suntech has made relatively few solar panels based on the new technology. Instead, it has focused its resources on tweaking manufacturing processes to decrease the cost of making conventional silicon solar panels. But that could soon change. This year Suntech has started to increase production of the new cells, and now it can make enough of them annually to generate 500 megawatts of power—roughly 2.5 million solar panels. That achievement owes much to the company’s success as a producer of the conventional products.

The technology behind the new cells was developed in the 1990s at the University of New South Wales, Australia, but the techniques used in the lab were too expensive for commercial production. It was a “horribly sophisticated process” including photolithography, vacuum deposition of “quite exotic metals,” and “all sorts of chemical processes,” says Wenham, who is also head of the photovoltaics research program at UNSW and was formerly a professor of Suntech’s CEO and founder, Zhengrong Shi. According to Wenham, the technology remained a lab curiosity for decades until Suntech’s researchers figured out how to adapt it to an assembly line. “They came up with a simple, low-cost way to replace all of that while achieving the same results,” he says. The new technology could increase the power output of a standard-sized solar panel from 205 watts to 220 watts or more—and the cells costs less to produce than conventional ones.

Individual parts of the technology were quickly successful. Suntech introduced these into its standard manufacturing lines, with an eye to keeping just ahead of its competitors in terms of cost and efficiency. Scaling up the complete process, however, was a challenge. A pilot manufacturing line was up and running in 2009, but the company had to develop and implement new equipment to get yields and production rates to the point that the process was economical. Here Suntech’s position as a market leader with experience in developing new manufacturing equipment proved critical. Not only did the company have the expertise it needed to improve the process; it also had the funds to keep working on the technology for years without its bringing in significant revenue.

Suntech isn’t the only Chinese solar manufacturer to identify promising new technology and find ways to produce it at a large scale. Last September, Yingli Green Energy, based in Baoding, announced that a partnership with a Dutch research center, ECN, had yielded solar panels that could convert 17.6 percent of the energy in sunlight into electricity; the average is just over 14 percent. “ECN made the technology available to anyone in the world who wanted it,” ­Wenham says. “Yet it’s only been Yingli that’s taken that technology and worked out how to make it in large-scale production, at low cost.”

MATERIAL ADVANTAGE

Even now that Chinese solar manufacturers are shifting focus from production to innovation, there may be limits to what they can do with their chosen material, crystalline silicon. This material is attractive because the industry knows how to work with it, thanks in part to decades of research in silicon microchips. But compared with some other semiconductors, it’s lousy at absorbing sunlight. Some alternatives, like gallium arsenide, can be made into films of material that can generate as much electricity as a typical silicon cell but are just a hundredth as thick, potentially reducing material costs. Such thin films can also be flexible: they could be rolled up, reducing packaging and shipping costs, and they could be built into roofing shingles to reduce installation costs.

Yet despite their potential advantages, it has been difficult for thin-film solar cells to compete with the ever decreasing costs and improving efficiency of crystalline silicon ones. One company, Arizona-based First Solar, has succeeded in developing low-cost manufacturing techniques for thin-film solar panels, but these methods use a material—cadmium telluride—that results in panels less efficient than silicon ones. Other companies have tried to compete with silicon by using higher-efficiency thin-film panels of copper indium gallium selenide. Some of them, however, have had to declare bankruptcy and close their factories after failing to lower manufacturing costs fast enough.

Despite these struggles, Wenham believes that thin-film technology will eventually challenge conventional solar panels. If that’s true, Chinese makers of crystalline silicon solar cells may not dominate the market forever. But the strategy of first scaling up conventional technology and then introducing innovative designs to keep lowering the cost per watt of solar power has put them in a good position to maintain their lead for years. In the meantime, some, like Suntech, are working to produce thin-film panels of their own. When thin films do replace crystalline silicon, it could be Chinese manufacturers that make them.

Information technology is reducing the need for certain jobs faster than new ones are being created.

Things Reviewed:

Race Against the Machine: How the Digital Revolution ?Is Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment and the Economy

Erik Brynjolfsson and Andrew McAfee

October 2011

“The Growth of Low Skill Service Jobs and the Polarization of the U.S. Labor Market”

David Autor and David Dorn

June 2011

The United States faces a protracted unemployment crisis: 6.3 million fewer Americans have jobs than was true at the end of 2007. And yet the country’s economic output is higher today than it was before the financial crisis. Where did the jobs go? Several factors, including outsourcing, help explain the state of the labor market, but fast-advancing, IT-driven automation might be playing the biggest role.

Since the beginning of the Industrial Revolution, people have feared that new technologies would permanently erode employment. Over and over again, these dislocations of labor have been temporary: technologies that made some jobs obsolete eventually led to new kinds of work, raising productivity and prosperity with no overall negative effect on employment.

There’s nothing to suggest that this dynamic no longer operates, but new research is showing that advances in workplace automation are being deployed at a faster pace than ever, making it more difficult for workers to adapt and wreaking havoc on the middle class: the clerks, accountants, and production-line workers whose tasks can increasingly be mastered by software and robots. “Do I think we will have permanently high unemployment as a consequence of technology? No,” says Peter Diamond, the MIT economist who won a 2010 Nobel Prize for his work on market imperfections, including those that affect employment. “What’s different now is that the nature of jobs going away has changed. Communication and computer abilities mean that the type of jobs affected have moved up the income distribution.”

Erik Brynjolfsson and Andrew McAfee study information-­supercharged workplaces and the innovations and productivity advances they continually create. Now they have turned their sights to how these IT-driven improvements affect employment. In their new book, ­Brynjolfsson, director of the Center for Digital Business at MIT’s Sloan School of Management, and McAfee, its principal research scientist, see a paradox in the first decade of the 2000s. Even before the economic downturn caused U.S. unemployment to rise from 4.4 percent in May 2007 to 10.1 percent in October 2009, a disturbing trend was visible. From 2000 to 2007, GDP and productivity rose faster than they had in any decade since the 1960s, but employment growth was comparatively tepid.

Brynjolfsson and McAfee posit that more work was being done by, or with help from, machines. For example, Amazon.com reduced the need for retail staffers; computerized kiosks in hotels and airports replaced clerks; voice-recognition and speech systems replaced customer support staff and operators; and businesses of all kinds took advantage of tools such as enterprise resource planning software. “A classically trained economist would say: ‘This just means there’s a big adjustment taking place until we find the new equilibrium—the new stuff for people to do,’?” says McAfee.

We’ve certainly made such adjustments before. But whereas agricultural advances played out over a century and electrification and factory automation rolled out over decades, the power of some information technologies is essentially doubling every two years or so as a consequence of Moore’s Law. It took some time for IT to fully replace the paper-driven workflows in cubicles, management suites, and retail stores. (In the 1980s and early 1990s productivity grew slowly, and then it took off after 1996; some economists explained that IT was finally being used effectively.) But now, Brynjolfsson and McAfee argue, the efficiencies and automation opportunities made possible by IT are advancing too fast for the labor market to keep up.

More evidence that technology has reduced the number of good jobs can be found in a working paper by David Autor, an economist at MIT, and David Dorn, an economist at the Center for Monetary and Financial Studies in Madrid. They too point to the crucial years of 2000–2005. Job growth happened mainly at the ends of the spectrum: in lower-paying positions, in areas such as personal care, cleaning services, and security, and in higher-end professional positions for technicians, managers, and the like. For laborers, administrative assistants, production workers, and sales representatives, the job market didn’t grow as fast—or even shrank. Subsequent research showed that things got worse after 2007. During the recession, nearly all the nation’s job losses were in those middle categories—the positions easiest to replace, fully or in part, by technology.

Brynjolfsson says the trends are “troubling.” And they are global; some of the jobs that IT threatens, for example, are at electronics factories in China and transcription services in India. “This is not about replacing all work, but rather about tectonic shifts that have left millions much worse off and others much better off,” he says. While he doesn’t believe the problem is permanent, that’s of little solace to the millions out of work now, and they may not be paid at their old rates even when they do find new jobs. “Over the longer term, they will develop new skills, or entrepreneurs will figure out ways of making use of their skills, or wages will drop, or all three of those things will happen,” he says. “But in the short run, your old set of skills that created a lot of value are not useful anymore.”

This means there’s a risk, unless the economy generates new high-quality jobs, that the people in the middle will face the prospect of menial jobs—whose wages will actually decline as more people compete for them. “Theory says the labor market will ‘clear.’ There are always things for people to do,” Autor says. “But it doesn’t say at what price.” And even as it gets crowded and potentially even less rewarding at the bottom, employees at the top are getting paid more, thanks to the multiplier effects of technology. Some 60 percent of the income growth in the United States between 2002 and 2007 went to the top 1 percent of Americans—the bulk of whom are executives whose companies are getting richer by using IT to become more efficient, Brynjolfsson and McAfee point out.

Dramatic shifts have happened before. In 1800, 90 percent of Americans were employed in agriculture. The figure was down to 41 percent by 1900 and stands at 2 percent today. People work, instead, in new industries that were unimaginable in the early 19th century. Such a transformation could happen again. Today’s information technologies, even as they may do short-term harm to some kinds of employees, are clearly a boon to entrepreneurs, who now have cheaper and more powerful tools at their disposal than at any other time in history. As jobs are lost, Brynjolfsson says, “we will be running an experiment on the economy to see if entrepreneurs invent new ways to be productive equally quickly.” As examples, he points to eBay and Amazon Marketplace, which together allow hundreds of thousands of people to make their living hawking items to customers around the world.

The problem, he says, is that not enough people are sufficiently educated or technologically savvy to exploit such rapid advances and develop as-yet-unimagined entrepreneurial niches. He and McAfee conclude their book by arguing that the same technologies now making industry far more productive should be applied to updating and improving the educational system. (In one promising example they cite, 58,000 people went online to take an artificial-intelligence class offered by Stanford University.)

IT-based entrepreneurship isn’t the only potential technological driver of new jobs. Revitalizing manufacturing (see “Can We Build Tomorrow’s Breakthroughs?”) could also help. But automation has made manufacturing far less labor intensive, so even a manufacturing revival is not likely to mean a great many new jobs on balance. Likewise, anyone whose hopes are pinned on “green jobs” may be disappointed. Though jobs will be created in the switch to cleaner energy sources, jobs tied to traditional energy will be lost in the same process. Many economists are not certain what the net effect will be. And in any case, these days manufacturing and energy account for small slices of the U.S. economy, which is now driven much more by the service sector. That’s why fast-advancing information technologies, with their pervasive reach and their potential to create new services and satisfy new niche markets, may be a better bet for job creation—though the tumult IT is causing in the labor market isn’t necessarily going to resolve itself quickly.

Peter Diamond says that one of the most important things the government can do for employment is to take care of basics, like infrastructure and education. “As long as we have so many idle resources, this is the time when it’s advantageous—and socially less expensive—to engage in public investment,” he says. Eventually, he believes, the economy will adapt and things will work out, once again. “Jobs have been changing and moving around—within the country, out of the country—for a very long time,” he says. “There will be other kinds of jobs that still require people.”

David Talbot is TR’s chief correspondent.

Why large firms are often more inventive than small ones

SOME people say it is neither big nor clever to drink. Viz, a British comic, settled that debate with a letter from a reader who said: “I drink 15 pints a day, I’m 6 foot 3 inches tall and a professor of theoretical physics.” However, another question about size and cleverness has yet to be resolved. Are big companies the best catalysts of innovation, or are small ones better?

Joseph Schumpeter, after whom this column is named, argued both sides of the case. In 1909 he said that small companies were more inventive. In 1942 he reversed himself. Big firms have more incentive to invest in new products, he decided, because they can sell them to more people and reap greater rewards more quickly. In a competitive market, inventions are quickly imitated, so a small inventor’s investment often fails to pay off.

These days the second Schumpeter is out of fashion: people assume that little start-ups are creative and big firms are slow and bureaucratic. But that is a gross oversimplification, says Michael Mandel of the Progressive Policy Institute, a think-tank. In a new report on “scale and innovation”, he concludes that today’s economy favours big companies over small ones. Big is back, as this newspaper has argued. And big is clever, for three reasons.

First, says Mr Mandel, economic growth is increasingly driven by big ecosystems such as the ones that cluster around Apple’s iPhone or Google’s Android operating system. These ecosystems need to be managed by a core company that has the scale and skills to provide technological leadership.

Second, globalisation puts more of a premium on size than ever before. To capture the fruits of innovation it is no longer enough to be a big company by American standards. You need to be able to stand up to emerging-world giants, many of which are backed by something even bigger: the state.

Third, many of the most important challenges for innovators involve vast systems, such as education and health care, or giant problems, such as global warming. To make a serious change to a complex system, you usually have to be big.

If true, this argument has profound implications for policymakers (though Mr Mandel does not spell them out). Western governments are obsessed with promoting small businesses and fostering creative ecosystems. But if large companies are the key to innovation, why not concentrate instead on creating national champions? Anti-trust regulators have strained every muscle to thwart the creation of monopolies (for example, by preventing AT&T, a telecoms firm, from taking over the American arm of T-Mobile). But if one behemoth is likely to be more innovative than two smaller companies, why not allow the merger to take place?

What should we make of Mr Mandel’s argument? He is right that the old “small is innovative” argument is looking dated. Several of the champions of the new economy are firms that were once hailed as plucky little start-ups but have long since grown huge, such as Apple, Google and Facebook. (In August Apple was the world’s largest listed company by market capitalisation.) American firms with 5,000 or more people spend more than twice as much per worker on research and development as those with 100-500. The likes of Google and Facebook reap colossal rewards from being market-makers rather than market-takers.

Big companies have a big advantage in recruiting today’s most valuable resource: talent. (Graduates have debts, and many prefer the certainty of a salary to the lottery of stock in a start-up.) Large firms are getting better at avoiding bureaucratic stagnation: they are flattening their hierarchies and opening themselves up to ideas from elsewhere. Procter & Gamble, a consumer-goods giant, gets most of its ideas from outside its walls. Sir George Buckley, the boss of 3M, a big firm with a 109-year history of innovation, argues that companies like his can combine the virtues of creativity and scale. 3M likes to conduct lots of small experiments, just like a start-up. But it can also mix technologies from a wide range of areas and, if an idea catches fire, summon up vast resources to feed the flames.

However, there are two objections to Mr Mandel’s argument. The first is that, although big companies often excel at incremental innovation (ie, adding more bells and whistles to existing products), they are less comfortable with disruptive innovation—the kind that changes the rules of the game. The big companies that the original Schumpeter celebrated often buried new ideas that threatened established business lines, as AT&T did with automatic dialling. Mr Mandel says it will take big companies to solve America’s most pressing problems in health care and education. But sometimes the best ideas start small, spread widely and then transform entire systems. Facebook began as a way for students at a single university to keep in touch. Now it has 800m users.

The second is that what matters is not so much whether companies are big or small, but whether they grow. Progress tends to come from high-growth companies. The best ones can take a good idea and use it to transform themselves from embryos into giants in a few years, as Amazon and Google have. Such high-growth firms create a lot of jobs: in America just 1% of companies generate roughly 40% of new jobs.

Let small firms grow big

Politicians should certainly stop demonising big firms and sentimentalising small ones: an economy needs both. But they should not allow their new-found appreciation of big companies to degenerate into a taste for picking national champions. Such firms typically gobble subsidies and crowd out smaller, more creative firms. Nor should they start tolerating monopolies. The key to promoting innovation (and productivity in general) lies in allowing vigorous new companies to grow big, and inefficient old ones to die. On that, Schumpeter never changed his mind.