Learning and economic development

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Joseph Stiglitz gave today’s Jean-Jacques Laffont lecture at the Toulouse School of Economics’ Tiger forum, talking about his new book, [amazon_link id=”0231152140″ target=”_blank” ]Creating a Learning Society: A New Approach to Growth, Development and Social Progress. [/amazon_link] 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.

[amazon_image id=”B00IHGTW5I” link=”true” target=”_blank” size=”medium” ]Creating a Learning Society: A New Approach to Growth, Development, and Social Progress (Kenneth Arrow Lecture Series)[/amazon_image]

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.

What’s on the in-pile

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It’s rather tall again. Some of these won’t get read until the summer:

The current pile

At the moment I’m on [amazon_link id=”0231160755″ target=”_blank” ]The Best Business Writing of 2013[/amazon_link] from the Columbia Journalism Review – the first two articles are terrific. With a couple of flights coming up (to and from the Tiger Forum at the Toulouse School of Economics, where I’m chairing a discussion on globalization with Hélène Rey, Dani Rodrik and Joe Stiglitz), I should finish it this week.

[amazon_image id=”0231160755″ link=”true” target=”_blank” size=”medium” ]The Best Business Writing 2013 (Columbia Journalism Review Books)[/amazon_image]

 

Economists in fiction

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Yesterday I received an email from Rafael Galvão de Almeida, a graduate student who is doing a research project on economists as fictional protagonists – believe it or not, there is such a sub-genre. Had I read [amazon_link id=”0552159336″ target=”_blank” ]Making Money[/amazon_link] from Terry Pratchett’s Discworld series? he asked, having read my post The Economist as Hero.

No, so I bustled upstairs to the teenage sons’ extensive Terry Pratchett library to retrieve it. Coincidentally, the new catalogue from my publisher, Princeton University Press, arrived with news of a new Marshall Jevons detective story, [amazon_link id=”0691164169″ target=”_blank” ]The Mystery of the Invisible Hand[/amazon_link]. The books in this series aim to bring economic theory to life by the plot – apparently it’s Coase and auction theory in this art market novel. Russ Roberts’ novels [amazon_link id=”0691143358″ target=”_blank” ]The Price of Everything[/amazon_link] and [amazon_link id=”0262681358″ target=”_blank” ]The Invisible Heart[/amazon_link] are an alternative, enjoyable way to imbibe a little economics without even noticing.

Economic fiction

 

Update: here via @MikeBenchCapon is James Andow’s fantastic list of philosophers in fiction – far, far more than the economists: https://www.academia.edu/5590924/Philosophers_in_Fiction

Innovation, competition and public good

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[amazon_link id=”1594203288″ target=”_blank” ]The Idea Factory: Bell Labs and the Great Age of American Innovation[/amazon_link] by Jon Gertner is a fabulously interesting and readable book. It’s a terrific business history about the research and development arm of AT&T during its golden, monopoly era. Scientists and engineers at Bell Labs created some of the defining technologies of modern times, including the transistor, the semiconductor, the laser, fibre optics, Claude Shannon’s information theory, submarine cables, satellites (Telstar), early work on mobile communications, and more.(Francis Spufford’s lovely book [amazon_link id=”0571214975″ target=”_blank” ]Backroom Boys[/amazon_link] has a chapter on the UK’s contribution to mobile communications at the same time.)

“Finding an aspect of modern life that doesn’t incorporate some strand of Bell Labs’ DNA would be difficult,” as Gertner rightly puts it.

[amazon_image id=”1594203288″ link=”true” target=”_blank” size=”medium” ]The Idea Factory: Bell Labs and the Great Age of American Innovation[/amazon_image]

The book is also a thoughtful exploration of how this institution was able to be so consistently innovative for such a long time. The key is the implicit deal between AT&T and the US authorities to permit the company its monopoly of local and, for many years, long-distance calls as long as the fruits of the research were shared with competitors. Thus key technologies such as the transistor were quickly licensed at low cost. It was an excellent system for delivering the public good of innovative ideas. The parent company was a dull but profitable utility. It paid good and steady dividends to shareholders, and to Bell Labs. “The paradox of course was that a parent company so dull, so cautious, so predictable was also in custody of a lab so innovative,” Gertner writes.

An interesting question is therefore how Bell Labs came to be so innovative in the first place. Apart from the steady flow of generous funding from the parent company, its rules seemed to have played a vital role. People were strongly discouraged from closing their doors. Anybody could ask anybody else – no matter how eminent – to help on a problem. The different disciplines were located in close proximity. All work had to be written down in specified notebooks and countersigned, so ideas were attributed, but nobody could claim individual patents. Everyone had to work on their own side-projects, an idea copied by Google. Its director saw the lab as a living organism, with physical proximity essential for the fruitful cross-fertilisation of ideas.

In those pre-competitive times, the value of patents was well understood, and Bell Labs was careful to patent its discoveries, but there was no inhibition in exchanging ideas with the broader scientific community. For example, in the early days of semi-conductor research, visitors from Fairchild Semiconductor in Palo Alto and Texas Instruments in Dallas were frequent visitors to the Bell Lab home in New Jersey. It’s hard to recall a time when commercial entities were so open with each other about their R&D.

Eventually of course the monopoly power for social returns deal broke down – and apart from Bell Labs, the other social aspect of it was AT&T’s use of long distance profits to subsidise local calls. By the time the break up of AT&T into the Baby Bells occurred in 1984, there had been several assaults on the monopoly by various US regulators. (Tim Wu’s [amazon_link id=”1848879865″ target=”_blank” ]The Master Switch[/amazon_link] gives an account of the communication monopoly from a far more sceptical perspective than The Idea Factory.) The Federal judge who finally oversaw the agreement to break up AT&T was not concerned about the vertical integration of AT&T with its research subsidiary or Western Electric, the equipment subsidiary, seeing economic benefit to consumers in the supply chain links, but rather with the horizontal integration. Hence the deal to break off the regional Baby Bells. Competition from MCI on long distance calls was already occurring. But some people anyway saw the end of the monopoly as an inevitable result of the earlier licensing of key technologies. AT&T and Bell Labs had given birth to their own future competitors.

The inevitable question is what kind of innovation system could again deliver such fundamental technological advances? All of the communications technologies have involved vast, vast sums of money and multi-year, multi-person efforts. Mariana Mazzucato has argued that government involvement in innovation is always essential, due to the scale of funding and effort, and the risk involved, giving examples mainly from the computer industry in her book [amazon_link id=”0857282522″ target=”_blank” ]The Entrepreneurial State[/amazon_link]. Governments of course fund university research, as do some foundations, but direct public funding of research and – importantly – development in the commercial sector is rare – often done through the defense budget in the US, previously through nationalised entities in other countries.

Elsewhere, and in the post-privatisation era, it is pretty rare. And today’s information sector monopolists and quasi-monopolists do not seem to have the same sense of public obligation as their Bell Labs predecessors; the profit motive did not drive the creation of transistors and semi-conductors, although it was vital in getting them into new products in the market once they had been invented. Dominant companies in digital businesses with low marginal costs and strong network effects have tremendous market power which it’s hard for competition authorities to address because there are large consumer benefits and because there’s always the hope of disruptive entry by a new and better soon-to-be-dominant company. Perhaps the right public policy approach is to learn a lesson from the history of Bell Labs and look at what public or social benefits these dominant players offer until that disruption happens?

[amazon_image id=”1848879865″ link=”true” target=”_blank” size=”medium” ]The Master Switch: The Rise and Fall of Information Empires[/amazon_image]

Living on the never never

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I’ve been looking through an interesting book by UBS economist Paul Donovan and Julie Hudson, [amazon_link id=”1849714142″ target=”_blank” ]From Red to Green: How the financial credit crunch could bankrupt the environment[/amazon_link]. It starts with the simple point that people were relying on credit in two ways, using both financial and environmental resources for current rather than future consumption. In some cases the credit-financed consumer boom before the crisis accelerated the consumption of environmental resources, and in other cases had positive environmental benefits. More consumption clearly uses more of some materials and more energy; but has also encouraged investment in additional infrastructure (to use water more efficiently, for example) or innovation. In either case it’s important to note that the two are related, when thinking about what the crunch after the crisis implies for financial and environmental sustainability.

[amazon_image id=”1849714142″ link=”true” target=”_blank” size=”medium” ]From Red to Green?: How the Financial Credit Crunch Could Bankrupt the Environment[/amazon_image]

The bulk of the book looks in detail at different issues to explore the interactions between red and green credit. For example, a chapter on food discusses what actions could increase agricultural productivity while protecting biodiversity and soil quality, how the credit crunch is affecting the outlook, and also what changes in behaviour might be desirable . So declining real incomes could lead to reduced consumption of meat and less food waste, but these depend on changed consumer habits and changed practices in the food retailing business. On the other hand, there is less funding for R&D in agriculture and food production – unless the corporate sector concludes that it needs to do more to limit its exposure to supply chain risks like the horse meat scandal. Other chapters look at water, energy, infrastructure, housing, human health, and consumer goods.

The detail is all fascinating, and the book obviously covers a wide territory. It seems to offer a very practical and fruitful approach to turning the crisis to some longer term benefit by getting people to focus on specific actions to reduce the economy’s reliance on financial credit and at the same time economise on natural resource use and preserve natural assets. Ever since writing [amazon_link id=”B00GP1RV0U” target=”_blank” ]The Economics of Enough[/amazon_link] a few years ago I’ve been obsessed with the chronic short-termism of modern economies. So a book about what people can do right now to safeguard future living standards – written by a City economist too – was bound to appeal to me. Any investors who are genuinely interested in long-term returns rather than quarterly results will find it very interesting. However, although the advice in [amazon_link id=”1849714142″ target=”_blank” ]From Red to Green[/amazon_link] is practical and specific, it does highlight how much needs to be done by many people to lengthen the economic time horizon.