What comes after the Knowledge Economy?

Nick O’Donovan’s Pursuing the Knowledge Economy: A Sympathetic History of High-Skill, High-Wage Hubris is an interesting evaluation of the policy consensus of the 1990s and early 2000s concerning the opportunities afforded by digital technology and globalisation for a transition to better jobs in the western economies. My own 1997 book The Weightless World (25 years ago this year!) features as one of several capturing that economic policy zeitgeist, what the book terms (following Peter Hall) a ‘growth regime’ – “a set of economic policy ideas and assumptions that are underwritten politically by a distinctive coalition of supporters.” In other words, a mental model of how the economy can prosper that becomes the policy zeitgeist. (Although I’d challenge the focus of this concept on just firms and governments, as the concept ignores the household and voluntary sector, both large and being affected by digital.)

The book traces the historical evolution of the policy ideas, mainly the centre left (Blair & Brown in the UK, Clinton in the US), and the way the financial crisis torpedoed any optimism about new opportunities to upskill the workforce and create satisfying new jobs. It also politely critiques the knowledge economy analysis in itself, essentially for unfounded optimism about the scope for new technologies to complement rather than substitute for labour and for ignoring the transition costs associated with globalisation. O’Donovan also points out the policy blind spot – until very recently – about increasing market concentration and rent extraction. Just a few people have long pointed to this as a source of economic problems, among them Brett Christophers.

There certainly was plentiful hype – Thomas Friedman’s books leap to mind. I’d defend The Weightless World on the basis that it predicted greater spatial and income inequalities and paid attention to social tensions, and would argue that I was prescient (much too soon…) about gig employment patterns and new digital currencies. But I also overlooked the costs for some people of the reordering of global production, or at least assumed policy would be sensible enough to look after them. At the same time, the Knowledge Economy paradigm did encapsulate some significant changes under way in the structure of the economy. I think O’Donovan somewhat underplays the insights while rightly pointing out the irrational exuberance.

The book ends by linking the failure of the Knowledge Economy growth regime to post-2008 political polarisation, and hoping that the current period of disillusion and volatility will in fact prove an opportunity for a new, better “growth regime” to develop. Let us hope….

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Steering history?

I enjoyed Oded Galor’s The Journey of Humanity: The Origins of Wealth and Inequality. There are of course lots of grand sweep of human history books around – Ian Morris, Walter Scheidel, Jared Diamond, James Scott, even Yuval Noah Harari, not to mention all the accounts of why modern growth came about – David Landes, Joel Mokyr, Deirdre McCloskey. And many more. So I was slightly trepidatious picking up yet another. However, it’s well worth it.

I hadn’t previously been familiar with Galor’s academic work on growth, shame on me, but find it persuasive. There’s a fundamentally simple story – albeit complex and contingent in how it plays out – about interaction between humans (individually and collectively) interacting with technology in a dynamic where change starts slowly and reaches a tipping point beyond which it accelerates. The collective aspect of this incorporates an institutional trade-off between innovation and cohesion: more diverse societies generate more ideas and innovations, but are less cohesive. The dynamic also embeds path dependence: where you can get to depends on where you start and how you got there in the first place. “We are all the product of, and all contend with, the repercussions of events and behaviours that began decades, centuries and even millennia before we were born.” This model underpins the narrative account in The Journey of Humanity.

Like others, Galor sees the early 20th century as an astonishing period of progress: “It is hard to comprehend the leap in the quality of life experienced by people across the globe.” He also highlights the role of radio: “Radio appears to have had a more dramatic impact on lifestyles and culture than any other invention preceding it.” And the BBC is only 100 years old this year – and still, thanks to the World Service, profoundly important in many low-income and/or remote places.

The book is also nicely written with plenty of stories and interesting nuggets of information. The challenge it poses is, of course, how to get from where we are – under the shadow of a long history – to a world where everybody has attained a high standard of living delivering good health, longevity and quality of life and catastrophic climate change and biodiversity loss have been averted. The cogs are turning as they always have, but the vehicle can be steered.

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It’s not easy being green

Or so sang the famous frog.

I’ve been dipping into a couple of new how-to books about sustainability. Growth for Good: reshaping capitalism to save humanity from climate catastrophe is by Alessio Terzi, an economist in the European Commission. The book starts with a spirited defence (against degrowthers) of the need for growth, making both the negative case (politically impossible, growth is necessary for job creation) and the positive (what Benjamin Friedman set out in his 2006 book as the moral case for economic growth, and the spirit of Enlightenment discovery). It does an excellent job of pointing out the silences and the inconsistencies in degrowth arguments. After all, we look set to experience degrowth (aka recession) this year and it’s unlikely to be a good experience. And if we’re going to degrow, what do we do about innovation – stop new vaccines? Not all degrowthers are the same but there are certainly some vocal ones who manifest deep ignorance about what is in and out of GDP and what its growth consists in.

The second part of the book is an exploration of what steps can turn the growth we have into the sustainable variety, and sets out a green strategy. It does include the economist’s favourite tool of carbon pricing, but also government strategic regulation and investment, and the role of finance and business.

Which takes me to the second, The Unsustainable Truth: How investing for the future is destroying the planet and what to do about it by David Ko and Richard Busellato. They are investment managers and their peers are one of the target audiences. This is an extended sermon on the need for the investment industry to take the future into account in a broader sense than financial returns. They offer the almost-certainly unpopular thought that funding pensions of the future through their industry is not compatible with sustainability: “We do need to consider a life without our pension investments. This does not mean that we should not invest, but it does prompt us to rething how we support each other as we age, and investments need to arise from that context.”

The book, which is full of anecdotes and lively examples, also urges everyone to try things out that will help with sustainability – car sharing, walking further, spending more time with our neighbours. Businesses too – try out small changes that might make a difference. It’s an appealing case, but it seems to me the self-motivated small changes will never add up to be big enough. Governments are going to need to get involved and make us do things differently, just as they have already with the incentives for recycling waste and the switchover to electric vehicles.

But, as Kermit knew, it’s not easy. Particularly when there’s a government that believes in the magic of the market to solve all problems.

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Endogenising economists

I’m afraid I was underwhelmed by The Power of Creative Destruction by Philippe Aghion & his co-authores Céline Antonin and Simon Bunel. The book falls between the two stools of textbook for econ courses and overview for the general reader. It is based on course notes and has that tone (and charts/tables/referencing of the literature), but all the technical apparatus students would need has been removed. Professor Aghion is of course a terrific economist who has published lots of excellent papers on growth and innovation. However, that too is a downside here, as the book is the Aghion view of the world rather than a broader survey of the economics of innovation and growth.

The oddest aspect of this is his contrast between the Solow neoclassical growth model and the ‘new paradigm’ of Aghion-style Schumpeterian growth. Set aside this claim to novelty, which might cause many other Schumpeterian economists to raise an eyebrow; there is nothing here about the competing workhorse approach of endogenous growth models. Paul Romer makes it to the footnotes, Paul Krugman’s increasing returns models not that far, Ken Arrow too isn’t mentioned. Joseph Stiglitz fares best out of the prominent thinkers about markets, growth and development in the context of increasing returns. The book is more or less an account of Prof Aghion’s own research, and his own papers (excellent as they are) are the most-often cited. So while accepting the importance of creative destruction and new ideas, the absence of much about information and ideas is pretty glaring. There is a chapter about R&D but little about the economic models endogenizing it.

I could quibble about other features too, such as relying on patents to measure innovation, but it’s this missing aspect of the dynamics – the scope for endogenous, self-fulfilling or -averting phenomena – that seems a particularly big gap. The discussion of intellectual property lacks any nuance: it is simply asserted that patent protection is essential. Of course it is, but that isn’t the point of the present policy debate, which is exactly about whether the right balance between patent-protected monopoly and broad access to new ideas has been struck.

41eUnCMDnVL._SX329_BO1,204,203,200_On the other hand, I also read Carlo Rovelli’s Helgoland and warmly recommend it. It sets out his view about quantum phenomena as manifestations of the fact that reality is relational: nothing is experienced, perceived, measured, or understood except in relation to everything else. “Every vision is partial. There is no way of seeing reality that is not dependent on a perspective. …. The actor of this process is not a subject distinct from phenomenal reality, outside it, nor any transcendent point of view; it is a portion of that reality itself.. …. Relations make up our ‘I’, as our society, our cultural, spiritual and political life.”

This appeals strongly to my intuition and echoes the argument of my forthcoming book, Cogs and Monsters, one of whose key threads is the point that economists can not stand outside the society they seek to analyse. Even the economists are endogenous.

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Growth, stagnation, and degrowth

There’s a new wave of interest in the degrowth idea, recently summed up in the New Yorker by John Cassidy. The degrowthers are mainly inspired by environmental concerns – how can consumption possibly continue to increase without limit without destroying the planet? – and the article also refers to Vaclav Smil’s recent book Growth, which adds to this seeming common sense the intellectual heft of energy physics and logistic curves.

I have no ideological commitment to the view that measured GDP growth will always revert to 1.5-2%, and found much food for thought in Smil. However, there is a misunderstanding in the degrowth movement about what growth implies for physical material and energy use, well explained by Noah Smith in his recent Bloomberg column. My colleague Dimitri Zenghelis also does an excellent job here of debunking degrowth, arguing it is not the best or only way to be green.

Smith refers to another recent book, Fully Grown: Why a Stagnant Economy is a Sign of Success by Dietrich Vollrath, to make the point that we can probably expect slower growth (Smil’s S-curve is flattening out) but this is very different from degrowth or zero growth.

The basic point is that the degrowth argument doesn’t either acknowledge intangible output growth or explain what somehow needs to be taken away from the economy when there is a new innovationto keep growth below zero. On the first point, think about oral rehydration therapy or mini-aspirin – new uses of existing materials which produce improved health outcomes that people are willing to pay for, whose value far exceeds the materials costs (sugar, salt and water; salicylic acid). On the second, if somebody invents a new item everybody wants to purchase – the way smartphones arrived in 2007, say – then what would we stop them buying to keep total growth at zero? And how?

Prof Vollrath’s book, which I read at the proof stage, is tremendous. He portrays the recent slowdown as an inevitability, the result of economic success. Past gains in health, and lower fertility rates due to reduced infant mortality and higher incomes, explain population ageing in the rich economies. Demography is reducing potential growth. We are on the whole also taking more leisure, with a trend decline in hours worked. Purchases of services are taking over from material goods as a share of expenditure, and productivity growth is slower in the service sector (for familiar, Baumol reasons). These two trends go a long way to explaining reduced growth.

The second half of the book explores other potential reasons for the growth slowdown, such as increased market power (see Thomas Phillippon), inequality (Piketty) or too much government tax and regulation – and sets out the data explaining why none has a big enough effect to explain a lot of the trend slowdown. “I see no obvious reason why the growth rate would accelerate in the near future,” Vollrath concludes.

I really enjoyed Fully Grown, which gave me much food for thought. It also is simply excellent on the data sources, growth accounting, and trends. But I don’t think it tells the whole story about innovation either. Vollrath accepts (as Robert Gordon does not) that there are significant technological advances under way; but he sees these as making production more efficient and thus accelerating the shift to services: an ever-smaller part of the economy is becoming super-efficient.

The catch, I think, is in using real GDP per capita as the sole indicator of growth. It is a conceptually flawed measure for an intangible/services economy. Consider a haircut, a service for which there is at least a volume measure (which many services do not have). If the price of haircuts goes up, real GDP as constructed goes down; but if the price is rising because people are substituting from cheap cuts at Big Jim’s Trims round the corner to expensive cuts in Covent Garden, it actually means that they are purchasing a haircut plus a bundle of quality attributes – lovely salon, free cup of tea, head massage, an hour’s talking therapy from a charming hairdresser….. In some four-fifths of the economy, the Price x Quantity = Revenue equation used to construct the growth statistics does not work. Either we should be quality-adjusting many more purchases (and this has its own problems) or there isn’t even a volume measure (what is a unit of management consultancy??)

Anyway, read Vollrath and Smil, devote energy to cherishing the environment. Read our Benett Institute report out in 10 days on how to take a more rounded view of economic progress, including environmental impact, by considering wealth. But ignore the fashionable lure of degrowth.

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