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An economist for our times: innovative enterprise, changing industrial leadership, and the looting of the US business corporation.

An interview with William Lazonick
Un économiste pour notre époque : l’entreprise innovante, l’évolution du leadership industriel et le pillage des entreprises américaines. Un entretien avec William Lazonick.
Un economista para nuestro tiempo: la empresa innovadora, el cambio de liderazgo industrial y el saqueo de la corporación empresarial estadounidense. Entrevista con William Lazonick
William Lazonick, Marie Carpenter et Mustafa Erdem Sakinç

Texte intégral

1Over an academic career that has spanned more than fifty years since he started his PhD at the department of economics at Harvard University, William Lazonick has made pioneering contributions on changing industrial leadership, including:

  • the rise and decline of the British economy;

  • the ascent to industrial leadership of US managerial capitalism;

  • the Japanese challenge;

  • the emergence of China as an industrial power;

  • the decline of the US industrial economy.

2In the process, he has constructed the “Theory of Innovative Enterprise” (TIE) as an approach to analyzing economic change. His most recent work focuses on innovation and competition in R&D-intensive industries and the use of stock buybacks to loot the US business corporation. In his work, he has a particular interest in understanding the relation between corporate strategy and employment relations in influencing the quest for stable and equitable economic growth.

3He has also used TIE to deliver fundamental critiques of the neoclassical theory of the market economy and the ideology that companies should be run to maximize shareholder value.

  • 1 AIRnet is a not-for-profit research organization founded in 2010 by William Lazonick and colleague (...)

4His multiple academic honors include two honorary doctorates, the Schumpeter Prize in 2010, two-time winner of best article in Business History Review in 1983 and 2010, and the HBR-McKinsey Award for outstanding article in Harvard Business Review in 2014. In 2010, he co-founded the Academic-Industry Research Network to engage in real-time analysis of innovation, competition, and economic performance within industries and across nations1.

5His research has guided government policy. Besides his academic publications, he frequently writes media articles directed at government officials, business executives, and informed citizens.

6In a series of interviews conducted at various times between 2019 and 2024, we learn how Lazonick’s career progressed from being a commerce and finance student in the department of political economy in the University of Toronto to becoming a globally recognized expert on the threat of financialization for the innovative firm. The development of Lazonick’s theory of innovative enterprise has been shaped by his graduate work in economic history, the history of economic thinking, and the rise of capitalism as well as his ongoing international comparative research on the dynamics of innovation at national, industrial, and corporate levels. Interactions with non-academic groups such as journalists and policy-makers have expanded the influence of his critique of shareholder value maximization.

1. The education of a critical economist

Revue de la régulation: You have explained (Lazonick, 1991a) how your undergraduate studies as a business student in the University of Toronto in the 1960s and your Master’s program in the London School of Economics gave you some of the tools to challenge economic orthodoxy.

William Lazonick: I did my Bachelor of Commerce degree at the University of Toronto in the department of political economy. I benefited from courses in economic history and history of economic thought. I also took an inordinate number of accounting courses, which were somewhat boring at the time but would prove useful in studying business corporations later in my career.

I went on to do a Master of Science in Economics degree at the London School of Economics in 1968-1969. At LSE, I was exposed to Chicago-school economics and graduated with a sound understanding of the neoclassical view of the world, which I now call “the myth of the market economy”. I was fortunate that Stephen Hymer, the Canadian economist, was a guest lecturer that year. He was challenging Samuelson’s trade theorems and went on to become one of the first economists to use Chandler’s Strategy and Structure (1962) to critique conventional neoclassical economics. During the year in LSE, I also became familiar with Edith Penrose’s The Theory of the Growth of the Firm (1959), although I don’t recall who introduced her work to me.

That year in LSE was transformative for me. The antiwar movement was very active. Because of student demonstrations, LSE was closed for a four-week period. This enforced “vacation” provided opportunities for political discussions and extracurricular reading.

During the spring break, I went skiing in Switzerland and decided to enroll in the doctoral program at the Graduate Institute for International Studies in Geneva. I even got a scholarship from the Swiss government. The economics curriculum copied that of LSE, and I found myself with plenty of time to devote to skiing. Meanwhile, I applied to do a PhD in economics in the US, and in September 1970, I entered Harvard’s economics program.

RR: You have described Harvard in the 1970s as an era where there was still an intellectual space to think critically about economics with colleagues who were open to Marxian and Schumpeterian approaches (Lazonick, 1991a, p. 270). How did this environment influence your PhD work?

WL: At Harvard at that time, they had two years of courses with a general theory exam and some specific requirements that included statistics and economic history. For Alexander Gerschenkron’s economic history course, I wrote a paper, “Karl Marx and enclosures in England”. He gave me an A grade, which meant I presented it in his economic history seminar the following year. The paper’s central point is the importance of separating people from the means of production in agriculture as a precondition of Britain’s late 18th-early 19th century industrial revolution.

I did my PhD thesis on the theory and history of the rise of British capitalism, focusing on the extent to which labor in the factory system could be reduced to the status of a commodity, as Marx hypothesized. My empirical analysis focused mainly on the rise and growth of the British cotton textile industry.

2. Junior-faculty career at Harvard University

RR: After your PhD, you were a junior faculty member at the economics department in Harvard University between 1975 and 1984. How would you describe your intellectual progression during this period?

WL: At Harvard when I was doing my PhD, there were about twenty students and five faculty who identified as radical economists. When Sam Bowles, with whom I had studied income distribution, was denied tenure in 1972, there was a backlash. At the business meeting of the American Economic Association in Toronto that year, I introduced a resolution on behalf of the Union for Radical Political Economics against discrimination in hiring and promoting candidates doing economics outside the mainstream. At a cocktail party after the meeting, J. K. Galbraith, the AEA President that year, told me that he tried to go as far as he could to the left without breaking his ties to the establishment.

James Duesenberry, chairman of the Harvard economics department at the time, was also sympathetic to what radical economists were doing. Kenneth Arrow, a leading neoclassical economist, wanted the department to create two assistant professor positions in Marxian economics; the department gave him one, and that is the job I got in 1975 (Anon., 1975).

It was unusual at the time for Harvard to choose an internal candidate for an assistant professor position but the other people on the shortlist whom Harvard interviewed were unable to convince the tenured faculty of the link between their PhD dissertations and the Marxian economics that they said they would teach. In selecting me, some mainstream tenured faculty viewed my arguments questioning “the commodity status of labor” as interesting and relevant.

Although there were some reactionary tenured faculty members, I would say the majority were more open-minded. When, as they approached Harvard’s retirement age, Albert Hirschman left for the Institute of Advanced Study at Princeton in 1974 and Wassily Leontief for New York University in 1975, each was quoted in the press claiming that there was a “narrowness” in the Harvard economics department (Meislin, 1975). Actually, compared with what came later, the intellectual scope was still fairly broad. Stephen Marglin, for example, had gotten tenure at the age of 29, and then wrote a paper, “What Do Bosses Do?” (1974), which was about how workers are exploited in capitalist enterprises. He was involved with the radical economists but as a tenured faculty member.

Sam Bowles and his co-author from the Graduate School of Education, Herb Gintis, subsequently left Harvard to go to UMass Amherst as part of the radical economics group there. They wanted me to join them there around the late 1970s. I decided to remain at Harvard, where in 1979 I was promoted to associate professor (without tenure), with the support of David Landes, who had recently switched from the Harvard history department to economics. That position came to an end in 1984.

3. The theory of innovative enterprise

RR: During this time at the Harvard economics department from the mid-1970s, would you say you were already developing what was to become your theory of innovative enterprise that addresses how an innovative firm transforms high fixed costs into low unit costs?

WL: In reality, I have been working on the theory of innovative enterprise throughout my academic career. To begin, the challenge was to find out if, in the history of economic thought, there were analyses that had been ignored of what is driving economic growth, productivity change, and income distribution. I started by looking at what Marx had to say about the role of the business enterprise in economic development during the Industrial Revolution. Marx makes the distinction between the world of circulation and the world of production – a distinction that remains highly relevant but that is still lost to most economists. By the 1850s and 1860s, when Marx was researching the first volume of Capital (1867/1990), it had become common to depict capitalism as simply a system of market exchange. Labor was no longer tied to the land, and therefore could be freely bought and sold as a commodity on labor markets. However, Marx argued that economists who analyzed capitalism as just a system of market exchange were missing the point that productivity and profits were determined in the sphere of production. For Marx, surplus value (i.e., capitalist profit) comes from intensifying labor, both absolutely by increasing the number of hours in a working day and relatively by extracting more effort per hour worked.

I wanted to understand the relevance of Marxian theory as he analyzed the evolution of British industry in his own time. What did he get right and what did he get wrong and why? Marx’s view was that, over time, workers were going to be more and more dominated by skill-displacing technology. To make this point, he used the example of the self-acting mule, a key textile technology during the 19th century, arguing that its introduction in cotton textile factories reduced labor to “a fragment of a man” and “an appendix to a machine” (Marx, 1867/1990, p. 361).

A couple of things alerted me to the fact that Marx had gotten something wrong. My research on the interaction of the relations and forces of production—i.e., organization and technology—in 19th century British textile factories revealed that by the third quarter of the century, mule spinners (also known as “minders”), as the chief operatives on self-acting mules, had the best-organized and best-financed union in Britain. In fact, capitalist employers remained dependent on the workers’ skills and, through bargained wage lists, shared productivity gains with them. In other words, these key workers cooperated with their employers in creating and extracting value, a foundational insight which I have incorporated into the theory of innovative enterprise.

Why did Marx get it wrong? Marx thought that the power of the mule spinners had been broken in the 1830-1850 period, but that was not the case. It turns out that his source was Andrew Ure, an expert on industrial technology who had written a book entitled The Philosophy of Manufactures (1835). Opposed to unions and regulation, Ure testified to Parliamentary investigations into factory conditions in the 1820s and 1830s. He argued that the introduction of the self-acting mule made the work of spinning much easier. As a result, he claimed, women and children could now do the work without difficulty, sitting happily in factories with time to read books. Ure prophesized that the self-acting mule would “put an end […] to the folly of trades’ unions”, and went on to assert: “This invention confirms the great doctrine {…] that when capital enlists science into her service, the refractory hand of labour will be taught docility” (Ure, 1835, p. 36; quoted in Marx, 1990, p. 290-291).

What both Marx and Ure missed was an understanding of the division of labor in the process of mule spinning, whereby the mule spinner was paid a piece rate and hired younger assistants to whom he paid time rates (a form of inside contracting). I had come across a book on the Lancashire cotton textile industry in the 1930s that described the same division of labor in mule spinning that existed on self-acting mules in the 1830s (Jewkes & Gray, 1935). The bargained wage lists, which were continuously revised well into the 20th century, institutionalized this division of labor.

It turned out that a Harvard University library had all the annual reports of the mule-spinners society. In the British Library in London, I researched a workers’ newspaper, The Cotton Factory Times that came out every week. I used this detailed information in an article (Lazonick, 1979) to argue that Marx had overstated the extent of skill-displacing technological change in the 19th century factory and underestimated the role of key workers in gaining income benefits from the productivity growth that they helped to generate. Marx also assumed that capitalist employers united as a class against the workers; they were actually much more divided by competition. In the 19th century British cotton textile industry, skilled workers were much more united than their employers.

There is no evidence that Marx ever went inside a textile factory or that he knew much about these machines. Engels, who worked in his father’s textile factory in Manchester, did not correct Marx. Engels wrote The Condition of the Working Class in England (1845/1987), which is a great book in social anthropology, documenting the destitution of the working class in Manchester. But, depressed economic conditions made 1844 one of the worst years for factory labor in the 19th century, and the conditions that Engels described had little to do with conditions inside factories when workers were employed. In claiming the inherent misery that workers suffered under capitalism, even in Manchester where the factory system was at the time most advanced, Engels’ book had a major influence on the argument that he made with Marx in The Communist Manifesto (1848/1969) that workers of the world “had nothing to lose but their chains”.

RR: You were also developing your empirical approach to theory-building at this point in your career?

WL: As part of my PhD thesis, I had read broadly about the Industrial Revolution and the history of capitalism, child labor, and the role of the family. I had looked at the enclosure movement and how the British labor movement evolved in the transformation from agriculture to industry. Building on the Marxian perspective, but critiquing some of Marx’s conclusions, I developed a methodological approach which I call the “integration of history and theory”. We learn facts from history and seek to distill them into logic which we call theory. But we also use the resultant theory as a framework for analyzing history as it unfolds, often leading us to modify and elaborate our theoretical perspective. Put more simply, at any point in time, theory sums up what we know and is a guide to researching what we need to know.

In sharp contrast, neoclassical economics encourages its proponents to ignore rather than explore history. The difficulty today in economics is finding people who have “historical experience”, as Schumpeter (1954/1987) called it, by which he meant the integration of history and theory. In Capitalism, Socialism and Democracy (1943/2003), Schumpeter lauds Marx for employing this methodology to understand the process of change. Through innovation, economic actors disrupt a tendency to equilibrium, rather than being stuck in it, thereby transforming the structure of the economy and generating economic growth. Schumpeter portrayed Marx’s methodology as a “chemical mix” of historical analysis and theory building.

RR: How did you transition from Marx to Schumpeter?

WL: In my work up to the publication of my article on the self-acting mule in the Cambridge Journal of Economics in 1979, my focus had been on critically evaluating the usefulness of Marxian theory to understand the rise of Britain to world leadership in the 19th century. At that point, my attention shifted to the debate among economic historians on the reasons for Britain’s economic decline from the late 19th century, especially compared with the development of the United States and Germany.

A group of neoclassical economic historians led by Deirdre McCloskey was critiquing the view that “entrepreneurial failure”, as articulated especially by economic historian David Landes (1969), was the source of British decline. Landes accused British managers of becoming short-sighted in the face of the new global competition. The neoclassicals argued that if the managers who were running the British businesses optimized subject to the technological and market constraints they faced, they were doing the best that was possible and could not be held responsible for British economic decline (McCloskey & Sandberg, 1971).

The weakness of Landes’ argument was that he provided no analysis of why, from the late 19th century, British entrepreneurship failed. To specify the structural conditions that shaped entrepreneurial decisions in late 19th century Britain, I drew on Schumpeter’s insight that innovation, as “the fundamental phenomenon of economic development”, entailed an escape from equilibrium by overcoming technological and market “constraints”. My argument is that foreign competitors transformed the industrial conditions that they faced while British managers continued to accept these preexisting conditions as given constraints on their decision-making. The key focus of historical analysis, therefore, had to be the identification of constraining conditions and the transformation of these conditions in particular industrial contexts. This distinction between the innovating firm and the optimizing firm became fundamental to the theory of innovative enterprise that I was constructing based on my cross-national comparative industrial research.

Both the Marxian and Schumpeterian perspectives helped me to understand the relationship between organizations and markets in the process of economic development. Marx and Schumpeter each exposed how a theory of market exchange obscures the economic activity that drives the development process. Influenced by the work of economic anthropologist Karl Polanyi (1944/1957), I realized that functioning markets are outcomes, not causes, of capitalist development. Markets in products, labor, land, and finance depend on the prior development of productive capabilities, which then to various degrees give people choices of what they want to buy, where they want to work and live, and how they can access the use of other people’s money. An economic perspective that lacks a relevant theory of the firm will be irrelevant to understanding the operation and the performance of the economy.

RR: Is this what you mean when you say that the economics profession chose to define itself as “an ahistorical science” (Lazonick, 1991a, p. 289)?

WL: That statement appears in an article “What happened to the theory of economic development?”, which I wrote for a conference in honor of David Landes at the Rockefeller Center in Bellagio, Italy in 1987. My task was to provide a “radical economic” perspective on the issues with which Landes’ work was concerned. I used the opportunity to consider how the theory of economic development could have been made central to economic analysis by integrating the theoretical perspectives of Marx and Schumpeter with the historical research of Alfred Chandler and David Landes, both of whom were at Harvard’s Research Center in Entrepreneurial History in the 1950s.

I called the last part of the paper “a case of intellectual failure” as a play on words with Landes’ argument that Britain had suffered from “entrepreneurial failure” from the late 19th century (1991a). In the 1970s and 1980s, Harvard University had all the elements, including radical economics, that it needed to make the study of economics relevant to a world of change. Recognizing the dominance of neoclassical irrelevance, I attributed the intellectual failure to a lack of intellectual courage by influential academics who should have known better.

RR: Why did your focus move from economic history to business history in the 1980s?

WL: A publication of mine on industrial organization and technological change won the prize for the best article in Business History Review in 1983 (Lazonick, 1983). I was just completing my contract as associate professor in the Harvard economics department, when Alfred Chandler, the preeminent business historian who was at Harvard Business School (HBS), asked me to join a new business history seminar starting in the fall of 1984. The Harvard-Newcomen Business History Research Fellowship enabled me to become a full-fledged member of what was known as the Harvard Business History Group. I spent two years as a research fellow at HBS but remained centrally involved in its ongoing business history seminar for several years even when I had become a professor of economics at Barnard College of Columbia University. My book Business Organization and the Myth of the Market Economy (1991b) distills the arguments of many papers that I presented at the HBS seminar over the years. In 1990, I was elected president of the Business History Conference, a multi-disciplinary organization that is the leading academic association in the field.

RR: How was your experience at Harvard Business School different from your experience in the Harvard economics department?

WL: In my fourteen years in the Harvard economics department, my focus was on the integration of history and theory in the context of the rise and relative decline of the British economy with the rise of managerial capitalism in the United States as the main comparison. By being in an economics department that was primarily neoclassical and decidedly non-multidisciplinary, I sharpened my critique of the theoretical foundations of economics rooted in the theory of the firm. At the same time, in integrating history and theory, I supported my theoretical critique through my comparative research on the British and US cotton textile industries.

As a result, when I spent two years as a research fellow at Harvard Business School from 1984 to 1986, I was confident of my critique of neoclassical economics as applied to the real world. A bit to my surprise, my argument for a more rigorous and relevant theory of the firm in economic development resonated with a lot of people at Harvard Business School. I also discovered that (at least in the 1980s) HBS was a great intellectual environment for interdisciplinary research. In addition, I came into contact with faculty members, other research fellows, and graduate students who knew a lot about how business corporations actually function, and I was able to integrate this knowledge into my evolving understanding of comparative capitalist development. I extended my comparative framework to the case of Japan, which, since the 1970s, had been surpassing the United States in industries in which it had been a world leader: steel, machine tools, consumer electronics, automobiles, and memory chips.

In 1985, while still on research fellowships at HBS, I was appointed to a tenured professorial position in the economics department of Barnard College of Columbia University. The undergraduate and graduate courses that I taught at Columbia, beginning in 1986, reflected both my fundamental critique of neoclassical economics derived from my years in the Harvard economics department and the multidisciplinary comparative research that I began to carry out while I was at HBS. In fact, from 1986 to 1989, HBS funded my participation in the business history seminar at HBS every Monday in the fall semester. I would then use what I had learned from colleagues at HBS to enrich my courses at Columbia. During these years, my research began to emphasize the importance of “organizational capability” in successful capitalist development, an argument that Chandler made central to his 1990 book Scale and Scope: The Dynamics of Industrial Capitalism.

In 1989-1990, I was a research fellow at the Institute for Advanced Study in Princeton, New Jersey, where I finished my books, Competitive Advantage on the Shop Floor and Business Organization and the Myth of the Market Economy. I also deepened my relationship with Albert Hirschman, who was a professor there. Before my year at the Institute for Advanced Study, I had been living in Montreal, but I subsequently relocated to Cambridge, Massachusetts, commuting to Barnard. In 1991-1992, I was a visiting professor in the Harvard economics department and during this time decided to accept an offer to become a professor at the University of Massachusetts Lowell, to build an interdisciplinary program in regional economic and social development.

Meanwhile, I continued to participate in the business history seminar at HBS, presenting my latest research paper each year. My paper in the fall of 1992 was “Controlling the Market for Corporate Control: The Historical Significance of Managerial Capitalism”, which was then published in Industrial and Corporate Change (Lazonick, 1992a). The paper included a critique of agency theory as propounded by Michael Jensen, who had been lured to HBS from the ultra-conservative University of Rochester to argue that companies should “maximize shareholder value”.

  • 2 This episode is mentioned in a book, by journalist, Duff McDonald (2017b), and also recalled in a (...)

My colleagues in the HBS business history seminar recruited Jensen to be the discussant of my paper “Controlling the Market for Corporate Control”. By the early 1990s, Jensen was the most high-profile professor at HBS, bigger even than Michael Porter. The 100-seat amphitheater in which the seminar was held was overflowing, and there was an anticipation, which materialized, that sparks were going to fly. After I presented my paper, Jensen got up, red-faced, as the discussant, saying “I feel like a turkey in a turkey shoot” (a complaint that I later found out, he had uttered in a debate with Warren Buffett at Columbia University in 1985). Jensen was so irate at being subjected to my critique on his home base that he subsequently had me banned from HBS.2

RR: Why did you choose to move to the University of Massachusetts around this time?

WL: Bill Mass, a colleague with whom I had been working on economic history since the 1970s, was on the faculty of the University of Massachusetts (UMass) Lowell in a department called policy and planning that had been set up by the chancellor, William Hogan, to try to have an impact on regional development. Mass recruited Mike Best and me to join the policy and planning department. Mike, with whom I had an intellectual bond going back to the 1970s, was a professor in the UMass Amherst economics department, working on industrial development. When I went to talk to Bill Hogan about his plans for UMass Lowell, we struck a chord. When Mike decided that he would move to UMass Lowell, I began to think seriously about making that move myself.

The intellectual attraction for me was the opportunity to build an interdisciplinary regional development program that would integrate history and theory while examining the relation between the regional economy and the global economy. Important in this regard were the facts that UMass Lowell’s strength is in engineering and that it is located in Boston’s Route 128 high-tech district.

Hogan knew many of the people who had built the high-tech firms in the area. He would invite them to UMass Lowell to have discussions with faculty members about how the region could remain innovative in global competition while also supporting stable and equitable economic growth. Based on a memo written by Mike Best and me, Hogan allocated a substantial amount of funds to what became known as the “Committee for Industrial Theory and Assessment” (CITA). We used these funds to support faculty members in undertaking projects focused on ways to promote economic and social development in the region. This work carried out between 1993 and 1996, enabled CITA to engage faculty members who had something to offer to this mission. It also resulted in many collaborations among faculty members who probably would not otherwise have been working with one another.

While UMass Lowell is strong in engineering, most of the work of CITA focused on the social conditions for stable and equitable regional economic growth, or what we began to call “sustainable prosperity”. Through this activity, we realized that a new department of regional economic and social development (RESD) should be located in the College of Arts and Sciences, whereas policy and planning was in the College of Management. We were able to get the Massachusetts Board of Higher Education to approve a new master’s degree in the Economic and Social Development of Regions.

Fourteen faculty members who moved from other departments in the University to join RESD came from the disciplines of economics, sociology, political sciences, history, urban planning, and psychology. Launched in 1997, RESD was highly successful in attracting many outstanding students to our master’s program. For a small interdisciplinary department, we were also incredibly good at securing research funding. We were able to provide students with scholarships that enabled them to become involved in our research. Still working with me today are Matt Hopkins, Yin Li, Erdem Sakinç, and Öner Tulum, all of whom went on to do PhDs at various universities after graduating from the RESD master’s program.

4. The international dimension, sectoral studies, indigenous innovation

RR: Your academic connections extended beyond Harvard, Columbia, and UMass Lowell. You had already become quite an “international academic” from the 1980s onwards. How did this happen?

WL: Given the research that I was doing on the British cotton textile industry, I started thinking about the relationship between the long-term impacts on the British economy as an industrial leader relative to the United States. In 1981, I published articles in the Quarterly Journal of Economics (Lazonick, 1981a) and the Journal of Economic History (Lazonick, 1981b), comparing alternative technologies and productivity outcomes within the British cotton textile industry and across Britain and the United States. This work led me to write a working paper on the effects of the interaction of technology and employment on productivity within the firm. From this perspective, I embarked on an ambitious project to analyze firm-level productivity change within an early 19th century Lowell textile mill, which included monthly data on individual employees over more than two decades, collected from company records housed at Harvard Business School. This research resulted in a paper “The ‘Horndal effect’ in early US manufacturing”, co-authored with Tom Brush, in Explorations in Economic History (Lazonick & Brush, 1985).

The “Horndal effect” refers to a Swedish steel mill with an average two-percent annual productivity increase over more than two decades without any technological change. Erik Lundberg, a Swedish economist, referred to the ‘Horndal effect’ in his 1961 book, Profits and Productivity, published in Swedish. Lundberg recognized that it would require empirical research to determine the sources of this “pure productivity” growth. Göran Ohlin reviewed Lundberg’s book in the American Economic Review (Ohlin, 1962), highlighting the case of the Horndal effect. Referencing Ohlin, Kenneth Arrow (1962) cited the Horndal effect as a case of “learning by doing”, as did Paul David (1973), citing some statistics from the Lowell textile mill that Brush and I would later analyze. However, neither Arrow nor David did empirical research to support the claim of learning by doing as a source of productivity growth. Moreover, Harvey Leibenstein (1966), also citing Ohlin’s review, asserted that the Horndal effect was an example of “x-efficiency”, which assumes that, for some reason, a firm has an unutilized source of existing productivity, which is contrary to the “learning by doing” hypothesis. But like Arrow and David, Leibenstein merely cited (third-hand) the phenomenon as an example of a preconceived theory.

I was naturally intrigued to learn what actually happened at Horndal. In the Harvard Business School library, a research assistant found four volumes on the history of Fagersta, a Swedish holding company in the steel industry. Horndal, which by the 1920s had come under the control of Fagersta, had been founded in the 18th century and had invested in new equipment in the late 19th century. In 1982, I applied for and received a grant from the Svenska Handelsbanken Foundation to work with Bo Gustafsson, professor of economic history at Uppsala University, to study the Horndal case.

One of his PhD students, Mats Genberg, did archival research on the Horndal mill for his PhD thesis. Genberg found that almost all the productivity growth over the period from the mid-1930s to the mid-1950s occurred in the years after World War II when younger, less experienced, workers had replaced older and more experienced workers in the mill, freeing management to change the organization of work. That did not prevent Horndal from finally being shut down in 1957. A former Horndal manager who was present at Genberg’s thesis defense said that the Horndal effect should have been called the “Horndal defect”.

Beyond the study of the Horndal effect, what was important for me intellectually was the relationship that developed with Bo Gustafsson throughout the 1980s and 1990s. Uppsala University gave me an honorary PhD in 1991, a nice honor to receive at the age of 45.

RR: From this initial contact in Sweden, you built a network of European researchers over the 1990s with whom you have consistently worked on European projects.

WL: Through my Nordic connections, in 1992 Kristine Bruland invited me to give a talk at the University of Oslo and, through her, I met Keith Smith who was running a think tank, STEP Group (Studies in Technology, Innovation, and Economic Policy), funded by the Norwegian Research Council. For the next decade, I was a research fellow at STEP Group, as was Mary O’Sullivan, who was a graduate student at Harvard and then on the faculty at INSEAD in France. At STEP Group, we wrote a number of papers on corporate governance, innovation, and development and became involved in the Targeted Socio-Economic Research (TSER) programs of the European Commission. TSER projects brought together academics from different European universities and research institutes, enabling me to become well-networked with European researchers on topics central to my own agenda.

I gained an ideal platform for building these networks when, in 1996, I was appointed as a visiting research scholar (later, distinguished research professor) at INSEAD. From this academic base, O’Sullivan and I were able to secure three-year funding from TSER for the project Corporate Governance, Innovation and Economic Performance in the EU (CGEP).3 We partnered with Ulrich Jürgens at Wissenschaftszentrum Berlin (WZB), Martin Fransman at the University of Edinburgh, and Franco Amatori and Andrea Colli at Bocconi University. We recruited Marie Carpenter, who was already at INSEAD, as senior research associate.

The three of us at INSEAD worked on the telecommunications equipment sector (Carpenter et al., 2003). Jürgens collaborated with Yannick Lung and Vincent Frigant at the University of Bordeaux and Giuseppe Volpato at the University of Venice on a paper on the influence of shareholder value ideology on carmakers in Germany, France, and Italy (Jürgens et al., 2002). With additional funding from INSEAD, we employed Philippe Larrue as a research associate, who worked on venture capital in Europe and the video game industry (Larrue et al., 2003). Also involved in our research was Andrea Prencipe, who had recently received his PhD at SPRU in Sussex UK, and he collaborated with me on a study of corporate governance and financial commitment in the development of jet engines at Rolls-Royce (Lazonick & Prencipe, 2005). This range of research provided empirical material that permitted me to elaborate and refine the social conditions of innovative enterprise framework (SCIE), with the theory of innovative enterprise at its core.

I stayed on as a distinguished research professor at INSEAD until August 2007, culminating in a conference, organized by Marie Carpenter, Henrik Glimstedt, Edward March and me, on innovation and competition in the global telecommunications equipment industry. Bringing together academic researchers and industry practitioners, in retrospect, this conference laid the foundation for the creation of the Academic-Industry Research Network (AIRnet) in 2010, a non-profit research organization based in Cambridge Massachusetts, of which I am president.

RR: How did you get involved in studying Asia? How did your interest in Asia help you to shape your framework of the innovative enterprise?

WL: In the first half of the 1980s, my project on the decline of the British economy mainly focused on the replacement of the UK by the US as a global industrial leader in the first half of the 20th century. From the mid-1980s, I studied how Japan was able to outcompete the US in industries in which the US had been the world leader. The results of this cross-national comparative research appeared in three books: Competitive Advantage on the Shop Floor (Lazonick, 1990), Business Organization and the Myth of the Market Economy (Lazonick, 1991b), and Organization and Technology in Capitalist Development (Lazonick, 1992b).

In the first half of the 20th century, Japan had challenged Britain in the cotton textile and machinery industries. Of particular importance to Japan’s success was the development of the Toyoda automatic loom, an innovation that provided organizational learning and financial resources to the emergence of the Toyota Motor Company. I called this phenomenon “indigenous innovation”: the improvement of the technology transferred from abroad that resulted in globally competitive products. In the early 1990s, I collaborated with Professor Kazuo Wada of Tokyo University to study the history of indigenous innovation in Japan, from the perspective of the theory of innovative enterprise.

This research project led me to spend considerable time in Japan during the 1990s, including 1996-1997 when I was a professor in the Faculty of Economics of Tokyo University (when I departed, I was given a lump-sum pension, making me officially a retired Japanese civil servant). In 1999, as members of a team from INSEAD, O’Sullivan and I gave a speech to Keizei Doyuki (Japanese Association of Corporate Executives), warning of the dangers of importing “maximizing shareholder value” ideology from the US to Japan.

Over the course of the 1990s, it became clear that China was rapidly emerging as a global competitor of the US, Japan, and other advanced nations. Fortunately, in 1990, I had hired Qiwen Lu, a PhD student in the Harvard sociology department as a research assistant to study the indigenous innovation process. He had been among the first cohort of people in China who went back to get a higher education degree after the Cultural Revolution, and he had been an assistant professor at Peking University, where he had worked with some high-tech companies.

Funded by the UMass Center for Industrial Competitiveness, which I then co-headed, Qiwen did field work in China, which subsequently became the core of his 1996 PhD dissertation. He was appointed assistant professor in Asian studies at INSEAD but sadly passed away in 1999 just after completing the writing of his book, China’s Leap into the Information Age, (Lu, 2000) published by Oxford University Press (see also Lazonick, 2004). This book, which pioneered in analyzing the process of indigenous innovation, applied the theory of innovative enterprise to the study of four Chinese companies in the computer electronics industry.

During the 1990s, Qiwen Lu had been in touch with Feng Lu, who was completing his Columbia University PhD dissertation on the reform of Chinese state-owned enterprises. Feng Lu subsequently became a faculty member at Tsinghua University, where, with his student Kaidong Feng, he ran a project on the limits imposed on indigenous innovation by the Chinese policy of “trading market for technology” in the automobile industry. In 2004, Feng Lu, by that time professor of political economy at Peking University, met with officials at the Chinese Ministry of Science and Technology (MOST) to discuss his report carried out with Kaidong Feng, “The Policy Choice to Develop Our State’s Automobile Industry with Indigenous Intellectual Property Rights” (see Lu & Feng, 2005 for a published version). This report was influential in making “indigenous innovation” central to MOST’s Medium and Long Term Plan (Feng, 2020, p. 2-3). For the last decade, I have been collaborating with Kaidong Feng, now a professor at Peking University, and Yin Li, my former RESD student who is now a professor at Fudan University, on a project on indigenous innovation and economic development in China (Feng et al., 2022; Lazonick & Li, 2023).

In 2009, I published a book, Sustainable Prosperity in the New Economy? Business Organization and High-Tech Employment in the United States, funded and published by The Upjohn Institute for Employment Research. This book was awarded the 2010 International Schumpeter Prize. In it, I distinguish between the “Old Economy Business Model” (OEBM), characterized by vertical integration and career with one company, and the “New Economy Business Model” (NEBM), characterized by global value chains and interfirm (often transnational) labor mobility. In historical retrospect, I argue that Japanese companies outcompeted their US counterparts by perfecting OEBM, particularly by organizational integration of companies’ managers and engineers with workers on the shop-floor. In contrast, China developed its industry from the 1980s through its involvement in global value chains and cross-national labor mobility in the era of NEBM. My book also focused on the rise of the ICT industries in India, South Korea, and Malaysia within the context of US-centered NEBM.

RR: Since 2010 you have been running a research organization called The Academic Industry Research Network (AIRnet). Why did you start it, how does it operate, and what kind of work has been done?

WL: As I mentioned before, the original idea for AIRnet came from the conference on innovation and competition in the global communication technology industry that I organized with Marie Carpenter, Henrik Glimstedt (Stockholm School of Economics) and Ed March, a former Lucent engineering manager, at INSEAD in Fontainebleau in August 2007. Of the 20 speakers at the conference, half came from academia and half from industry. We encouraged academic-industry collaboration in researching and writing papers on the key companies in the communication technology industry. For example, I collaborated with March, who had spent most of his career at Bell Labs and Lucent Technologies, in writing a paper which was eventually published as “The rise and demise of Lucent Technologies” (2011). As another example, Glimstedt co-wrote a paper on Sony-Ericsson with the chief technology officer of the company (Glimstedt & Lindoff, 2007). From this conference, it became clear to the organizers that our future research on companies and industries, rooted in the social conditions of innovative enterprise (SCIE) framework, could be advanced with the interaction of academic scholars and industry practitioners.

The impetus to transform this idea into AIRnet occurred in 2010, when at UMass Lowell a new chancellor who was a politician without any intellectual credentials made the decision to destroy RESD, the graduate department that under Chancellor Bill Hogan, I had helped to create 13 years earlier. To do so, the new chancellor propagated falsehoods about RESD, apparently motivated by the desire to show that every decision that had been made by the prior chancellor, Hogan, had resulted in the misallocation of the University’s resources. In fact, in terms of external funding, publications, teaching (including undergraduates) and global visibility, RESD had been a great success.

At the time of RESD’s destruction, I had just secured a major grant from the Ford Foundation, where an extremely insightful Brazilian economist, Leonardo Burlamaqui, was spending a few years as a program officer. The Ford Foundation project, Financial Institutions for Innovation and Development, ran for five years through UMass Lowell, with conferences at the Ford Foundation headquarters in New York as well as in Rio de Janeiro, Beijing, Kyoto, and Berlin. Through collaboration with scholars around the world, the project displayed the power of the SCIE framework for comparative political economy analysis of the role of finance in innovation and development.

Another very important international collaboration, which had begun in the 1999-2002 EU CGEP project at INSEAD, was with Ulrich Jürgens (WZB). With Inge Lippert and Tony Huzzard, Jürgens and I produced a book Corporate Governance, Employee Voice and Work Organisation (Lippert et al., 2014).

One problem, however, was that, with RESD destroyed, there were no longer excellent graduate students coming to UMass Lowell to work with me as had been the case in the past. I decided that I should push forward my research agenda outside the UMass system, and with the help of Öner Tulum, one of my former RESD students, I established AIRnet as a 501(c)(3) nonprofit research organization, based in Cambridge, Massachusetts. Three other former RESD graduate students, Matt Hopkins, Yin Li, and Erdem Sakinç, also became involved in AIRnet’s research, as did Marie Carpenter, Henrik Glimstedt, and Ed March, with whom I had organized the 2007 INSEAD conference.

Another co-founder of AIRnet was the late Tea Petrin, a professor of economics at the University of Ljubljana and former Slovenian Minister of Economic Affairs. From 2010 to 2017, I was a visiting professor at Ljubljana, teaching a graduate course on the theory of innovative enterprise, and I received an honorary doctorate there in 2016. From the industry side, other AIRnet co-founders are Jim Elliot, former head of strategy at Nypro, and Martyn Roetter, a communication industry consultant. Subsequently, Ken Jacobson, an industrial journalist, and Christopher Mackin, a consultant to worker-owned companies, became involved with AIRnet.

Fortunately, just as AIRnet was established, the Institute for New Economic Thinking (INET) emerged as a think-tank which sought to make the economics discipline relevant to the real world. From AIRnet’s inception to the present, INET, with Robert Johnson as president and Tom Ferguson as research director, has provided funding for AIRnet’s research. More recently, AIRnet has also received substantial support from the Canadian Institute for Advanced Research (CIFAR), at which I am a fellow in the Innovation, Equity & the Future of Prosperity program. In addition, most of the scholars who are AIRnet fellows have some funding from their academic positions to help support our collaborative work.

In conjunction with their involvement with AIRnet, over the last decade, four RESD Master’s graduates, Sakinç, Li, Tulum, and Hopkins have secured their PhDs at different universities in Europe and the US. In addition, a few people who have contacted us with an interest in our research have become AIRnet associates. Over its first 15 years, AIRnet has facilitated significant collaborative work that has addressed innovation, financialization, and global competition in a range of industries. This research has made use of the SCIE analytical framework, often from a comparative political economy perspective.

The most visible impact of AIRnet has been in the critique of the shareholder value-driven corporate practice of stock buybacks. This focus of our work had its origins in a much-cited article, “Maximizing Shareholder Value. A New Ideology for Corporate Governance” (Lazonick & O’Sullivan, 2000). In the recovery from the Internet crash of 2001-2002, I tracked stock buybacks by US corporations in the S&P 500 Index as they quadrupled from a per-company average of $300 million in 2003 to $1.2 billion in 2007. In articles published in Financial Times in 2008 (Lazonick, 2008) and BusinessWeek in 2009 (Lazonick, 2009), I exposed a vulnerability of the US corporate economy that played out in the financial crisis of 2008-2009.

In 2014, as the United States struggled to recover from the financial crisis, I published “Profits Without Prosperity. Stock Buybacks Manipulate the Market and Leave Most Americans Worse Off” (Lazonick, 2014a) in Harvard Business Review. It won the HBR-McKinsey Award for the outstanding article in HBR in 2014. The consequent visibility of my research on buybacks was instrumental in the promulgation of the “Reward Work Act”,4 first introduced in US Congress in 2018 by Senator Tammy Baldwin of Wisconsin, and was influential in the crafting of the “Accountable Capitalism Act”,5 put forward in 2018 by Senator Elizabeth Warren of Massachusetts. The article also became a favorite of Joe Biden when he was Vice-President of the United States (Biden, 2016).

There is no doubt that stock buybacks have been a major force in driving extreme income inequality in the United States. In research with Hopkins, we have shown how the design of stock-based pay of US corporate executives incentivizes them to use buybacks to manipulate their own companies’ stock prices. My 2020 book, Predatory Value Extraction, co-authored with Jang-Sup Shin, analyzes the deleterious impacts of stock buybacks on the US economy (Lazonick & Shin, 2020). I extend this analysis and its policy implications in my 2023 book, Investing in Innovation. Confronting Predatory Value Extraction in the U.S. Corporation (Lazonick, 2023a), in which I also emphasize the importance of researching corporate financialization through studies of particular companies and particular industries.

My work on the pharmaceutical industry began with research with Sakinç and Tulum on the biotechnology startup boom in the decades before the 2008-2009 financial crisis and the resurgence of biopharma startups after 2010 (Lazonick et al., 2007; Lazonick & Sakinç, 2010; Lazonick & Tulum, 2011; Sakinç & Tulum, 2012). We identified the phenomenon of the product-less initial public offering (PLIPO), which enabled research entities to raise substantial sums on the highly speculative NASDAQ stock market in the face of uncertainty whether any commercial medicine would ever be forthcoming. While the sector has ultimately generated many successful drugs, vast sums have been extracted by financial interests even when no FDA-approved medicines have been produced.

Subsequent work on US-based Big Pharma with Hopkins, Jacobson, Sakinç, and Tulum (2017) exposed these corporations’ often fallacious claim that they require high drug prices to fund innovation. We mobilized the data to show that most of these companies have used high drug prices to increase cash dividends and stock buybacks to boost the yields on their publicly listed shares. AIRnet also pioneered in demonstrating that the stock-based pay of senior executives incentivized them to do these distributions to shareholders at the expense of medical innovation. Recently in collaboration with Antonio Andreoni (SOAS University of London), with funding from the Gatsby Foundation, Tulum and I have written a book on UK-based Big Pharma, finding that, over the past decade, AstraZeneca and GSK have moved from financialization to innovation, to remain independent UK-based corporations in global competition (Tulum et al., 2023).

When the SARS-CoV-2 pandemic arrived in 2020, AIRnet in collaboration with INET began an in-depth investigation of the mRNA technology platform and the types of government agencies, civil-society organizations, and business corporations that could develop, manufacture, and deliver Covid-19 vaccines. A CIFAR project in collaboration with Andrew Schrank (Brown University) on the Covid-19 vaccines included studies by Tulum and me comparing Moderna and BioNTech, Andrés Cárdenas (AIRnet) on the Cuban vaccines, and Hsu Huang (Brown University) on the Chinese and Russian vaccines. This research represents an important component of a conference that AIRnet co-organized with Christine Oughton (SOAS University of London), “Resolving Global Vaccine Inequity: Innovation, Capabilities and Governance”, funded by The British Academy and held at SOAS in April 2024.

In spring 2020, as the pandemic unfolded, Hopkins and I explored the origins of the ventilator fiasco in an INET working paper, “How Maximizing Shareholder Value Minimized the Strategic National Stockpile” (Lazonick & Hopkins, 2020a). A financialized corporation that withheld contracted ventilators from the US government was Netherlands-based Philips, with its medical equipment subsidiary, Respironics, headquartered in the Pittsburgh area. Hopkins subsequently gained the cooperation of Gerald McGinnis who had founded Respironics in 1971 and ran it as a highly innovative enterprise until it was sold to Philips in 2008. The study of the growth of Respironics as the epitome of an innovative enterprise and its subsequent virtual destruction in the hands of Philips is told in Hopkins’ SOAS PhD dissertation, completed in 2024.

Building on European collaborations that began under the European Commission TSER projects in the late 1990s and early 2000s as well as the 2007 INSEAD conference and my 2009 book, Sustainable Prosperity in the New Economy? (Lazonick, 2009), much of the research of AIRnet has focused on the information and communication technology (ICT) industries. In 2013, I published a paper on Apple, co-authored with Tulum and Mariana Mazzucato (Lazonick et al., 2013), in which we asked what the world’s richest company would do with all its money. I followed up with articles on Apple on the websites of the Harvard Business Review (Lazonick, 2014b, 2014c) and the Institute for New Economic Thinking (Lazonick, 2018), as the company engaged in the largest looting of the corporate treasury in business history. Between October 2012 and December 2023, Apple expended $651 billion on stock buybacks (90 % of net income) in addition to $148 billion paid as dividends (21 % of net income).

Besides fueling extreme inequality, Apple’s buybacks came at the cost of investment in semiconductor fabrication that could have taken place in the United States. From 2007, after US-based Intel declined a contract to produce high-end chips for the iPhone, Apple turned first to Samsung Electronics and then to Taiwan Semiconductor Manufacturing Company for these critical components, helping these enterprises to become world leaders in chip fabrication. When, during the pandemic, chip shortages became a crisis, Hopkins and I wrote papers and articles on how Intel, which had done massive buybacks in the previous 25 years, lost its way as a world leader in semiconductor fabs (see, for example, Lazonick & Hopkins, 2021).

A similar story about the US failure to invest in critical technologies is told in research done with Carpenter on Cisco Systems which in the 1990s, during the Internet revolution, had emerged as the global leader in enterprise networking equipment. As the company entered the 21st century, it was well-positioned to extend its dominance to the more sophisticated service provider equipment sector. But as Carpenter and I document in an INET working paper (Carpenter & Lazonick, 2023), Cisco instead started using all its profits to prop up its stock price. From October 2001 through January 2024, Cisco spent $163 billion on stock buybacks (90 % of net income) on top of $63 billion on dividends (36 % of net income). Meanwhile, China’s Huawei, which has an employee-ownership structure and is not listed on the stock market, invested in innovation to become the world’s dominant service provider equipment vendor, a path that financialized Cisco eschewed.

A tragic case of the impact of financialization on corporate performance is Boeing, which in competition with Airbus has been a global leader in the manufacturing of large aircraft. Building on Sakinç’s PhD research comparing the two companies, in May 2019 we published an article on how “maximizing shareholder value” manifested by massive stock buybacks in effect caused two Boeing 737 Max planes to crash (Lazonick & Sakinç, 2019). Based on its order book for this plane going forward for up to nine years, from January 2013 through the first week of March 2019—the week before the second 737 Max crash—Boeing did $43 billion in buybacks (118 % of net income) and paid out $16 billion in dividends (43 % of net income), while the company’s senior executives—incentivized by tens of millions of dollars in stock-based pay—ignored, and possibly concealed, internal warnings that the design of the plane was fundamentally unsafe.

Since the inception of AIRnet, Hopkins (who had written his RESD master’s thesis on the evolution of wind power) and I have been concerned with transitions to clean technology. In 2011, we wrote an article on the demise of Solyndra, a solar power company that had been backed by the US government, showing that the deeper problem was the lack of financial commitment by its venture capitalists when they realized that the company could not get quickly to an IPO (Lazonick & Hopkins, 2011). In a 2016 book, China as an Innovation Nation that I co-edited, Hopkins and Li (by this time at Fudan University) co-authored an article on how the United States lost out to China in the solar power industry (Hopkins & Li, 2016). More recently, with funding from INET, Hopkins and I have been working on the transitions to electric vehicles in China and the United States. In December 2023, we published an article, “How GM’s $10-billion buyback may ICE its EV transition” (Hopkins & Lazonick, 2023). A forthcoming paper will explain the role of corporate financialization in the failure of US industrial corporations to innovate in rechargeable EV batteries.

In China as an Innovation Nation, my co-editors, Yu Zhou (Vassar College) and Yifei Sun (University of California Northridge), and I commissioned studies on a range of industries, both governmental and nongovernmental. Li and I, in collaboration with Kaidong Feng (Peking University), have been engaged in a longstanding project, building on my work in the 1990s with the late Qiwen Lu on indigenous innovation in China, Li and I have written a paper, “China’s Development Path. Government, Business, and Globalization in an Innovating Economy” (Li & Lazonick, 2022). Among other things, we emphasize the importance of government control of infrastructure industries in conjunction with non-government control of industrial activities that require technology transfer from abroad combined with rapid technological change.

Back in the USA, with AIRnet funding from INET, Phil Moss (University of Massachusetts), Josh Weitz (Brown University) and I have produced an upcoming book, African American Employment in the Era of Shareholder Primacy (Lazonick et al., 2024). We document the importance of the interaction of the Civil Rights Act of 1964, which created the Equal Opportunity Commission, and strong demand for blue-collar labor in the United States before the impact of globalization, in permitting African Americans to secure well-paid, unionized, semi-skilled, blue-collar jobs in mass production industries such as automobiles and consumer electronics, putting this minority group in the 1960s and 1970s on a path of upward social and economic mobility to the middle class. In the 1980s and 1990s, however, through processes that we summarize as rationalization, marketization, globalization, and financialization, African American upward socioeconomic mobility went into reverse. Ultimately, the vulnerability of African American blue-collar jobs extended to white blue-collar workers as well, with disastrous political and socio-economic consequences.

A scholar who has been drawn to the theory of innovative enterprise is Lenore Palladino (UMass Amherst), whose work on various dimensions of corporate governance, innovation, and financialization has had a valuable impact on US policy discussions (see Palladino & Lazonick, 2022). In 2023, Palladino ran a project, funded by the Hewlett Foundation and in collaboration with AIRnet, on developing a graduate curriculum in the political economy of the corporation, building on the theory of innovative enterprise. Among the economists involved in this project is Will Milberg (New School for Social Research), with whom over the past two decades I have had many fruitful discussions about how to make use of our research on the corporate economy to educate the next generation of economists. At the Chicago-based Institute for Work and Economy, of which I am a board member, I have admired the efforts of Peter Creticos and his team to try to implement sound ideas that can contribute to stable and equitable employment through local policy initiatives.

Given the extent of our high-quality, and in many cases pioneering research output, a major challenge for AIRnet is the widespread dissemination of our results. We have published many opinion pieces in media outlets such as The American Prospect, Atlantic, Barron’s, BusinessWeek, Financial Times, Guardian, Huffington Post, Le Monde, MarketWatch, New York Times, and Washington Post. In addition, we regularly discuss our work with journalists all around the world who seek to make use of our research. Among people affiliated with AIRnet, we are particularly grateful to Lynn Parramore (INET) and Les Leopold (The Labor Institute) for making our ideas accessible to the informed public.

5. The future of economics

RR: What advice do you have for students who want to understand the operation and performance of the economy?

WL: If we want to understand the operation and performance of the economy, we have to study how value is created in the form of high-quality, low-cost goods and services and how that value is distributed among participants in the value-creation process. Rooted in the theory of innovative enterprise, my work seeks to reveal the relation between value creation and value extraction that actually exists in the economy.

What is missing in mainstream, economics is a theory of how an economy generates productivity, which is a more traditional term for value creation. Worse than that, as I have shown in recent papers, the neoclassical theory of the firm in perfect competition, which PhD economists have been teaching to millions upon millions of students since the late 1940s, makes the (obviously absurd) argument that the most unproductive firm is the foundation of the most efficient economy (Lazonick, 2016; 2022; 2023b). When economists draw an upward-sloping supply curve and claim that it is the typical relation between cost and output in industry, they reveal that they know nothing about the firm-level sources of productivity growth in an advanced economy.

The theory of innovative enterprise begins to fill this intellectual lacuna by focusing on the centrality of organizational learning to the development of higher-quality products and scale economies to transform the high fixed costs of product development into low unit costs. But, of course, the innovative enterprise does not operate and perform in a social vacuum, and hence the need to embed its analysis in the social conditions of innovative enterprise framework. In recent years, I have employed the concept of “the investment triad” to think about how society invests in productive capabilities. In the investment triad, household units, government agencies, and business corporations invest in productive capabilities through interactive processes. Household units, government agencies, and business corporations are all organizations, and it is within and across these organizations that social conditions determine the relation between value creation and value extraction, underpinning observed economic growth and income distribution in the macroeconomy.

The TIE approach to understanding the operation and performance of the economy stands in stark contrast to the neoclassical focus on market coordination of economic activity. Given its overwhelming dominance in the training of PhD economists and the teaching of economics, the neoclassical theory of the market economy poses an almost impenetrable intellectual barrier to analyzing and understanding the organizational foundations of economic development. Steeped in the fallacy that the unproductive firm is the foundation of the most efficient economy, neoclassical economics assumes that an advanced economy is a market economy in which millions of household decisions concerning the allocation of the economy’s resources are aggregated into prices for inputs to and outputs from production processes. Any impediments to this process of market aggregation are deemed to be “market imperfections”, and, among neoclassical economists with a liberal social outlook, any undesirable social outcomes from the process are deemed to be “market failures”.

Markets are of utmost importance to our economy and society; they can allow us as individuals to choose the work we do, by whom we are employed, where we live, and what we consume. Insofar as we, as individuals, have market choices, however, it is because the economy is wealthy, and it is wealthy because of investments in productive capabilities by business corporations, supported by investments in human capabilities and physical infrastructure by government agencies and investments in the labor force and livable homes by many tens of millions of household units. Organizations, not markets, drive economic growth. The investment triad of business corporations, government agencies, and household units must work in concert to develop and utilize a nation’s productive capabilities.

If market processes cannot explain investment in productive capabilities, then the theory of the market economy cannot explain the wealth of nations. Economists who want to devise public policies to shape the processes and influence the outcomes of investment in productive capabilities need to construct an economic theory of “organizational success”. As such, TIE is a critical foundation of economic analysis.

Building on the insight that the growth of the firm depends on investments in organizational learning, TIE focuses on the social conditions that determine who controls the firm’s investment strategy, how the firm integrates the skills and efforts of large numbers of employees into organizational-learning processes, and what sources of finance the firm mobilizes to sustain the innovation process until it can generate competitive products. The growth of the firm through innovation—the generation of higher-quality, lower-cost products than previously existed—provides the microeconomic foundation for macroeconomic growth.

That growth can become a foundation for sustainable prosperity when, over time, the corporation shares with employees the gains from innovation, which in a given accounting period manifest themselves as profit, in the form of secure employment, higher wages, superior benefits, promotion opportunities, and satisfying work. Indeed, the history of modern capitalism shows that when a nation’s major business corporations share the gains of innovation with employees, a substantial portion of the population experiences upward socioeconomic mobility that results in a strong and growing middle class.

The prosperity is sustainable because the innovative enterprise rewards employees whose skills and efforts have contributed to the productivity from which higher wages and benefits can be paid. If managed properly, moreover, the ongoing integration of these employees into collective and cumulative learning processes can renew the innovative capabilities, embodied in its labor force, with which the enterprise can compete on product markets. And the process of progressive value creation (the opposite of predatory value extraction) creates opportunities for members of the labor force to remain productively employed and justly remunerated over the course of their careers.

So, what is my advice to students of the economy? Beware the misconceived market mentality of neoclassical economics. If you want to do rigorous and relevant economics, study the theory of innovative enterprise. If you need intellectual support, please contact me with a view, potentially, of your involvement in the activities of the Academic-Industry Research Network (AIRnet). On issues related to the operation and performance of the economy, AIRnet is a collective and cumulative learning organization.

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1 AIRnet is a not-for-profit research organization founded in 2010 by William Lazonick and colleagues that is devoted to the proposition that a sound understanding of the role of the business corporation in the economy requires collaboration between academic scholars and industry experts (

2 This episode is mentioned in a book, by journalist, Duff McDonald (2017b), and also recalled in a Newsweek article (McDonald, 2017a).

3 URL: (accessed on 2024, June 10).

4 URL: (accessed on 2024, June 10).

5 URL: (accessed on 2024, June 10).

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William Lazonick, Marie Carpenter et Mustafa Erdem Sakinç, « An economist for our times: innovative enterprise, changing industrial leadership, and the looting of the US business corporation. »Revue de la régulation [En ligne], 36 | 1er semestre|Spring 2024, mis en ligne le 01 juillet 2024, consulté le 20 juillet 2024. URL : ; DOI :

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William Lazonick

President, Academic-Industry Research Network.

Marie Carpenter

Université Paris-Saclay, Univ Evry – IMT-BS, LITEM, 91025, Évry-Courcouronnes, France,

Mustafa Erdem Sakinç

Université Sorbonne Paris Nord, CEPN - Crises et Transitions, 99 Av. Jean Baptiste Clément, 93430, Villetaneuse,

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Le texte seul est utilisable sous licence CC BY-NC-ND 4.0. Les autres éléments (illustrations, fichiers annexes importés) sont « Tous droits réservés », sauf mention contraire.

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