Author Archives: Diane Coyle

What we don’t know about innovation and productivity*

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A few interesting comments on productivity have crossed my path recently. This blog post in The Economist addresses Robert Gordon’s habitual scepticism about technology-driven productivity growth, expressed again in a recent paper (pdf). I agree with the blog’s point about the inadequacy of traditional metrics when it comes to capturing the implementation and experience of innovations, which is what productivity growth consists of.

A few days earlier came Plan I from NESTA and a comment by Mariana Mazzucato about the specific role of public funding and strategic leadership in innovation. The former report usefully captures the wide range of influences that turn innovations into economic growth. The latter focuses on one of those influences, the co-ordination (and funding) role of the state – arguing strongly for the government to back innovation more actively in the UK.

It all sent me back to a great book of essays by Richard Nelson from 1996, [amazon_link id=”0674001729″ target=”_blank” ]The Sources of Economic Growth[/amazon_link]. One of his themes is the need to look at firm-level behaviour and data to analyse innovation and productivity growth. As firms are different, and rivalry between them drives innovation (in an evolutionary framework in his mind), aggregates disguise what’s happening. He also argues that standard marginal analysis is inappropriate outside decisions or outcomes at the margin – one can look at small changes sensibly, but not at big changes of the kind that come from important innovations.

He also adds a cautionary note about concluding either that innovation is solely a private, profit-driven business, or that public intervention is essential. Countries differ in important ways, he argues, and at present we do not understand well enough the innovation system as a whole in any single country, never mind across all of them.

[amazon_image id=”0674001729″ link=”true” target=”_blank” size=”medium” ]The Sources of Economic Growth[/amazon_image]

* The answer is – a lot

Which economic crisis?

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There’s a house on the way to the station whose occupant has been putting out books he or she is obviously trying to get rid of. So far they have been dull legal texts, but at the weekend I pounced on the trophy of [amazon_link id=”0140225021″ target=”_blank” ]The British Economic Crisis: Its Past and Future [/amazon_link] by Keith Smith. This was a 1989 Pelican paperback of a book first published in 1984 and reissued in 1986.

My first thought was, Hah! Call the 1980s an economic crisis! Then I started reading and grew gloomy. The essence of the problem Smith diagnosed was the weakness of manufacturing, and the absence of consistent R&D spending and investment – written against the backdrop of the North Sea Oil-driven rise in the exchange rate, which savaged export and industrial output in the early 80s. He also picks out other contributing problems such as the inadequate education and training of the UK workforce, the over-reliance on financial services and the failings of the welfare state.

His conclusion: “Sustainable improvement in British economic performance can only happen through a thorough-going reconstruction of the ‘supply side’ of the British economy.” In the 1990s we thought the Thatcher governments had tackled the supply side problems through privatisations, labour market reforms, and deregulation. But it would be hard, in the 2010s, to take any more cheerful a view of the country’s economic potential than Prof Smith did 30 years ago.

Depressing.

Which crisis would that be?

 

The power elite revisited

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In [amazon_link id=”0199538751″ target=”_blank” ]Père Goriot[/amazon_link], Balzac wrote: “Le secret des grandes fortunes sans cause apparente est un crime oublié.” Brecht and Weill had their bankers in [amazon_link id=”041377452X” target=”_blank” ]The Threepenny Opera [/amazon_link]start out as street racketeers. C.Wright Mills, author of [amazon_link id=”B000U35R6Y” target=”_blank” ]The Power Elite[/amazon_link], took the same view of the financiers and industrialists he perceived to be controlling the America of his day – the 1950s, Cold War era. His analysis was even darker than Eisenhower’s construction of the military-industrial complex. Mills saw a polity and economy directed towards perpetual war in order to prolong power and profit.

[amazon_image id=”B000U35R6Y” link=”true” target=”_blank” size=”medium” ]The Power Elite.[/amazon_image]

The Power Elite was criticised by other sociologists such as Daniel Bell for its abstraction. Its themes were seen as too big, insufficiently rooted in empirical evidence and institutional analysis. And certainly, the 1950s are remote from our own times in so many ways. Communism and the Cold War seem long, long ago.

Yet Stanley Aronowitz’s intellectual biography, [amazon_link id=”0231135408″ target=”_blank” ]Taking It Big[/amazon_link], does well to remind us of Mills’ work and thought, which was extremely influential on the nascent New Left in the US, and has subsequently been largely forgotten. One reason is that Mills did so much to try to carve out the space for public intellectuals in American culture, albeit not with much lasting success – but at least demonstrating the scope for engagement with a wide public in accessible language.

The other is that for all the abstraction of the analysis of ‘the power elite’, the current crisis reminds us that the idea and reality of the elite is crucial. If only we had not forgotten about it between the 1960s and 2008. Events have reopened people’s eyes to the exercise of power by the wealthy and connected, and authors from Simon Johnson and James Kwak in [amazon_link id=”0307379051″ target=”_blank” ]13 Bankers[/amazon_link] to Ferdinand Mount in [amazon_link id=”1847378005″ target=”_blank” ]The New Few[/amazon_link] have started to analyse this again.

[amazon_link id=”0231135408″ target=”_blank” ]Taking it Big[/amazon_link] is a good introduction to the arc of Mills’ thinking, culminating in his newly-relevant analysis of power. It is also quite well written, something I can’t remember ever saying before about a book by an academic sociologist – Aronowitz has evidently taken Mills’ lead on accessibility. Although the author has a political perspective that I don’t share, I enjoyed reading it.

[amazon_image id=”0231135408″ link=”true” target=”_blank” size=”medium” ]Taking it Big: C. Wright Mills and the Making of Political Intellectuals[/amazon_image]

The Crash, Goldman Sachs, J.K.Galbraith and me

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“The crash blighted the fortunes of many hundreds of thousands of Americans. But among people of prominence, worse havoc was worked on reputations. In such circles, credit for wisdom, foresight, and unhappily also for common honesty, underwent a convulsive shrinkage.”

As in the aftermath of 1929, so in the wake of 2008. This was J.K.Galbraith, in [amazon_link id=”014103825X” target=”_blank” ]The Great Crash 1929[/amazon_link]. He goes on to say that Goldman Sachs recovered its reputation relatively quickly, despite having been issuing dodgy investment trust securities at a rate of more than a quarter of a billion dollars less than a month just before the Crash. “It is difficult not to marvel at the imagination which was implicit in this gargantuan insanity,” Galbraith wrote.

It took economists a while longer to rebuild their reputation, he added. “Harvard economics professors ceased forecasting the future and again donned their accustomed garb of humility.” I had the privilege of meeting Professor Galbraith when I was a PhD student at Harvard in the early 1980s, and I must say that ‘humble’ would not be the first adjective to come to mind to describe him. Still, his book on the 1929 Crash is a great read.

[amazon_image id=”0140136096″ link=”true” target=”_blank” size=”medium” ]The Great Crash 1929 (Penguin Business)[/amazon_image]

Simple is difficult

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I’ve been mulling over the question I posed a few days ago, about how to reconcile Andy Haldane’s superb Jackson Hole paper (The Dog and the Frisbee) arguing the case for simpler financial regulation with Cesar Hidalgo‘s equally persuasive arguments for using the capacity of Big Data to give us much more useful detail. It sent me back to one of my all-time favourite economics books, Thomas Schelling’s [amazon_link id=”0393090094″ target=”_blank” ]Micromotives and Macrobehaviour[/amazon_link], which is all about the aggregation of individual decisions. (Coincidentally, Sebastian Mallaby wrote about the same question in the FT yesterday.)

It hasn’t answered my question, but what struck me this time was how difficult it is to come up with the compelling reasons for individuals to align their behaviour in the common interest. There is the traffic light example, but Chapter 3 gives a few examples of effective rules and norms, and many other examples of problems – free-riding, collective action problems, lemons etc. I conclude that simple is difficult – you have to find the right simple rule for the context and it has to create strong self-interest in abiding by it. Still, Schelling is optimistic. He writes:

“These problems often do have solutions. The solutions depend on some kind of social organization, whether that organization is contrived or spontaneous, permanent or ad hoc, voluntary or disciplined….. What we are dealing with is the frequent divergence between what people are individually motivated to do and what they might like to accomplish together.”

And there are many ways to make the collective bargain stick, he argues. I’m in an optimistic mood this morning, and will go with the argument that between social norms, morals, institutions and even regulations can change, and make a big difference to collective outcomes.

[amazon_image id=”0393090094″ link=”true” target=”_blank” size=”medium” ]Micromotives and Macrobehaviour (Fels Lectures on Public Policy Analysis)[/amazon_image]