Learning and economic development

Joseph Stiglitz gave today’s Jean-Jacques Laffont lecture at the Toulouse School of Economics’ Tiger forum, talking about his new book, Creating a Learning Society: A New Approach to Growth, Development and Social Progress. The two themes of the lecture were that sustained growth needs a ‘learning society’, and that markets alone can’t create this.

Stiglitz argued that the social changes around 1800 were more important than allocative efficiency or capital accumulation, consisting of the learning how to learn or diffusion of knowledge. The idea that technological change is the most important determinant of growth encompasses the diffusion of knowledge. He linked this to Schumpeter, but the idea is obviously part of endogenous growth theory too.

The lecture focused on developing countries, and the transfer of knowledge and know-how from the developed countries. This, Stiglitz said, was more important than the transfer of resources.

Market failures are pervasive in this arena, he said. Knowledge is a public good. Markets alone do not produce and spread knowledge efficiently and do not promote innovation efficiently. Government interventions are needed. He highlighted intellectual property regimes, arguing that these need to be ‘developmentally orient’ – and also that the WTO’s TRIPS regime is very much not so, imposing costs that are not outweighed by the dynamic benefits of protecting innovations.

He went on to discuss the relationship between globalization and growth, suggesting that growth drives trade as much as trade drives growth (the orthodoxy). Indeed, there is an argument that trade liberalization has reduced growth in the developing world.

The task of government is not picking winners – although he said en passant that governments in general are quite good at doing so, getting a good return on average in research and development – but in identifying externalities. however, the WTO regime has made it hard for governments to engage in industrial policy – in contrast to examples like Korea in the past. An alternative, and one that avoids the ‘picking winners’ argument too, is to reduce the exchange rate. This would tend to give them sustained current account surpluses, with the result that the poorer countries will be lending to the richer countries, but this is worthwhile because of the ‘learning’ benefits.

As soon as we are talking about innovation, he concluded, we’re in the world of ‘second best’ or Schumpeterian rather than neoclassical economics, and especially not in the world of the Washington Consensus when it comes to development. Finally, he argued that governments need to direct innovation away from labour-saving innovations; markets not only under-invest in innovation, but also are inefficient in what kind of innovation they deliver because the social and private costs differ. What is the point of allocating scarce capital and knowledge in order to create more unemployment? he asked.

I must say that the rather superficial summary of the book in the lecture left me with many questions, but it sounds like it offers an intriguing perspective on development. If you take modern growth theory (or Schumpeter) seriously, knowledge is a central issue. And Stiglitz after all is a titan when it comes to understanding the implications of information asymmetries.

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3 thoughts on “Learning and economic development

  1. “It is widely recognized that the assumption that wages are rigid is central to Keynes’ explanation of the persistence of unemployment.” Joseph E. Stiglitz 1984.

    “Efficiency wage theory has, for instance, provided rigorous microfoundations explaining why labor markets may not clear.” — Joseph E. Stiglitz, Adam Smith Lecture, Glasgow, August 2010

    “[T]he Classical Theory has been accustomed to rest the supposedly self-adjusting character of the economic system on an assumed fluidity of money-wages; and, when there is rigidity, to lay on this rigidity the blame of maladjustment…. In its crudest form, this is tantamount to assuming that the reduction in money-wages will leave demand unaffected.… It is from this type of analysis that I fundamentally differ…” John Maynard Keynes 1936.

    email sent May 30, 2014 (no reply yet)

    Dear Professor Stiglitz,

    I am conducting historical research on Alfred Marshall’s conception of the efficiency wage and how it relates to the contemporary sense of the term. In the course of my research, I have come across a claim that you made in 1984 that I wonder if you could clarify. You wrote, in “Theories of Wage Rigidity” (1984): “It is widely recognized that the assumption that wages are rigid is central to Keynes’ explanation of the persistence of unemployment.” In contrast, in chapter 19 of the General Theory, Keynes wrote, “[T]he Classical Theory has been accustomed to rest the supposedly self-adjusting character of the economic system on an assumed fluidity of money-wages; and, when there is rigidity, to lay on this rigidity the blame of maladjustment…. In its crudest form, this is tantamount to assuming that the reduction in money-wages will leave demand unaffected.… It is from this type of analysis that I fundamentally differ…”

    It seems clear from the discussion in chapter 19 as a whole that Keynes rejected the hypothesis that rigid money wages were to blame for persistent unemployment. It would be possible to parse your sentence as ambiguous on the question of whether it was the assumption or the rejection of the assumption that “is central to Keynes’ explanation.” But of course the context of your article and of contemporary efficiency wage theory in general would seem to resolve any ambiguity. Was it your position, in 1984, that Keynes’s explanation relied on the assumption that wage rigidity was to blame for the persistence of unemployment? If it was, is that still your position? If it wasn’t your position — or if your position has changed since then — have you clarified that in any subsequent article? I thank you for any information you can provide on this matter.

    Cheers,

    Tom Walker

  2. I think within every developed political economy there is an undeveloped one. Essentially, it consists of the children of those breadwinners currently engaged in economic activity. If this society of breadwinners should choose to, it might erect an elaborate system of knowledge dissemination that prepares the upcoming generations to take the place of those breadwinners entering retirement. They shouldn’t.

    People live a long time now and so they shouldn’t retire. They need to keep saving so they don’t run out of money before they croak. Dieing penniless in the gutter with people stepping over you is the biggest fear.

    So if the youngins aren’t going to replace you, there is no need for a “diffusion of knowledge”, as Stigletz terms it. However its a good idea to export the concept to the developing world. Undeveloped areas, have a high natural economic growth rate. They just need the knowledge and some working capital. The return on investment is optimal here and the breadwinners should support the development of the undeveloped areas so they can cash in on it.

  3. From the cursory summary it seems to me that most of Stiglitz’ arguments have been expressed by the Chris Freeman, Carlota Perez and others from SPRU in your country for quite some time. Sure it’s good to see support from Stiglitz who carries major intellectual and political clout. Yet has he made any reference to this ‘tradition’ at all?