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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Technology old and new

For the usual kind of slightly random reason, I re-read David Edgerton’s excellent book The Shock of the Old this past week (having read it when published in 2006 as he was an interviewee on an Analysis I was presenting [http://news.bbc.co.uk/nol/shared/spl/hi/programmes/analysis/transcripts/27_07_06.txt]). It’s generally aged very well, and is of course a necessary corrective to technology hype. The main argument is that the history of technology tends to be told as a a breathless account of inventors and shiny new inventions, rather than the more representative but complicated story of economic conditions and uneven diffusion and use. So at any moment in time, many overlapping technologies serving the same basic needs will be in use around the world.  What’s more, the same hype gets recycled. For example there’s a quotation from George Orwell in 1944 complaining that people were over-hyping the ‘death of distance’ due to the airplane and radio, when the same claims had been made before 1914!

It is undoubtedly true that different technologies overlap in use, and indeed there’s quite a large economics literature about diffusion and the need for complementary investments before inventions and innovations deliver productivity benefits.  To this extent, Edgerton is railing against an imaginary foe. He is also very sniffy about the concept of ‘weightlessness’, which he misinterprets as a claim about declining employment shares for primary and secondary sectors of the economy. It is not this, but rather a description of the distribution of value added in the economy, and one that has been borne out fully by trends in the past 2 or 3 decades.

The other point that he seems to me to under-play – oddly, given his emphasis on the importance of contest for the use of technologies – is that they are all social. There are countries unable to provide a reliable electricity supply not only because they are low or mid-income but because they do not have the institutions to support the complex supply arrangements: not just sub-Saharan Africa but also California. Or take the book’s example of the Pill, which it argues is an incremental change in contraceptive technologies. Yes and no. Each of the Pill’s characteristics – women in control, reliable, and not requiring a fitting by a doctor – might seem a small shift from condoms, douches, IUDs and diaphragms, but together they did deliver a compelling new method and a radical change in social relations.

Having said all this, The Shock of the Old is a bracing corrective to techno-hype, something certainly still needed.

41HeTZgQv0L._SX324_BO1,204,203,200_(This is the new edition – I have the old one so haven’t read the new intro.)

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Making the impossible happen

I have totally enjoyed One Giant Leap: The impossible mission that flew us to the moon, by Charles FIshman, out now as a paperback. It covers everything about the Apollo mission, from the Cold War context (the shock of Sputnik and Gagarin) and JFK’s political calculations and Congressional debates, to the practicalities of the science, design and manufacturing, to the lasting consequences for global society. The Soviet lead in space stimulated the US space effort, but Kennedy himself was lukewarm about America being first on the Moon. Fishman argues that the assassination of the President ensured the continuation of the mission because it became a memorial to him.

One key long-term consequence is that the mission to get humans on the moon brought about the digital revolution. Fishman makes a totally persuasive case that NASA was such a large-scale and demanding, perfectionist purchaser of integrated circuits that it ensured they became faster, more reliable and cheaper with every passing year. Transistors had only been around for 10 years but were too large and power hungry for the new performance demands of manned space flight. NASA bought most of the chips made in the US during the 1960s. The first ones cost $1000 each, in 1962 they were under $100 each, in 1963 $15 each and $7.68 by 1965.

The other long-term impact was to turn ‘technology’ from something scary and Dr Strangelove-like to do with nuclear weapons and mutually assured destruction into something benign and aspirational, the challenge of conquering space for all humanity, albeit planting US flags on the Moon. “The race to the Moon … invoked the wonders of science, with about as much drama as could be imagined.”

The sections about managing the huge engineering project across multiple suppliers, manufacturing to the essential high standards, obessing over details, making key design decisions are all totally fascinating. MIT’s Instrumentation Lab was writing all the software – itself a new word in the early 1960s – and this threatened to delay the launch beyond Kennedy’s ‘before the decade is out’ deadline, so complex and crucial was the task. “It was the first of a whole new kind of engineering projects,” Fishman writes. There was no prior know-how about how to run these. Indeed, big, complex software engineering projects all too often still go wrong. Humans got to the moon and safely back because of the attention to detail on the part of NASA engineers.

The Apollo project was made all the harder by the fact that the onboard computer had to fit within one cubic foot, and its memory contained just 589,824 0s or 1s. So its software was – literally – woven by hand. MIT and NASA HQ had tapes and punch cards. On the spacecraft itself, the programs required to get to the Moon, land the Lunar Module, take off again, dock in space with the Command Module, and return to Earth, there was no room for these bulky items. The punch cards were taken to an old textile factory in Waltham, Massachussetts, where women who had woven fabric, or manfactured watches, in previous jobs now wove software into ‘core rope memory’ at special looms. Their old skills made them the only kind of workers with the know-how to weave computer memory. When the women struck for a while in the mid-1960s, everything their supervisors and managers produced until the strike was over, had to be scrapped.

This is the kind of detail that made me love the book. But the wonder of the Apollo Mission is also part of the enjoyment. I have a vague memory of watching Neil Armstrong, sitting in my PJs along with my older siblings; our family had got our first TV for the occasion. I ended One Giant Leap feeling vaguely optimistic as we approach the end of a dreadful year. Human societies can do impossible, wonderful things, with a combination of political vision and support, and engineers.

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The invention of taste

I’ve greatly enjoyed reading Arts and Minds, a history of the Royal Society of Arts (RSA) by Anton Howes. Established in 1754, the Royal Society for the Encouragement of Arts, Manufactures and Commerce, was one of the products of the Enlightenment, the “Baconian Project’ of accumulating and testing knowledge that might one day be useful. The book tells its story from the beginning in a London coffee house to its activities today (although I must admit to finding the earlier chapters more interesting than the recent history – perhaps because as a member for some years I’m more or less aware of it.)

The idea from the start was to encourage the development of practical innovations, rather than seek ‘pure’ scientific knowledge like the Royal Society – this division also reflected a social divide, with the humbler artisans uncomfortable in the more aristocratic circles of the latter. Awarding prizes for what you might term everyday innovations, including things with social but not necessarily market value. As Howes notes, the Society’s ‘premiums’ have sometimes been unfavourably contrasted with patents as being ineffective compared to intellectual property rights: “The Society of Arts was never supposed to compete with the patent system nor even to promote inventions. It was supposed to encourage things that would not otherwise have been done.”

Over the decades, the interests of the Society changed, with the arts sometimes to the fore, and at other times industrial design or agricultural improvement. There was a patriotic flavour to this: part of the aim was to ensure Britain stayed ahead of the French, whose superior design skills were recognised early on.”Britain of course had many eminent artists and scientists- some of the best in the world – but it needed to diffuse science and design more widely throughout its population. French manufacturers of all kinds seemed to have superior taste; many of their working classes were provided with scientific training.” The Society played a key role in the 1851 Great Exhibition, showcasing the inventive triumphs of the world but particularly of Britain, but also aiming to educated the British public to have more sophisticated tastes in the items being purchased. The outcrop of Prince Albert-inspired and encouraged museums in South Kensington were by-products. The Society has long played a significant role in technical education, as well as encouraging designers through prizes and competitions.

I ended up concluding that the RSA is a very British institution in some ways – formed with strong central values and aims yet highly adaptable to changing needs, cherishing both tradition and innovation, an essential piece of the establishment jigsaw and yet often under-appreciated by “the elite”. The book is clearly a labour of love, and is packed with interesting bits of information: today’s nugget, highlighted on Twitter by the author, is that the rotation of modern sculptures on the 4th ’empty’ plinth in Trafalgar Square is due to Prue Leith, better known now as a judge on the Great British Bake-Off but previously an effective campaigner via the RSA for healthier and better eating in Britain. I’m an RSA Felloe (=member) too, so am fond of the organisation, but anybody interested in the process of invention, diffusion and changing tastes will greatly enjoy reading this.

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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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