Below the Tip of the Iceberg: Innovation and the Knowledge-Based Economy as Political Strategy

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For several months the Curmudgeon has been trying to build up his courage. He knows that sooner to later he has to deal with this topic, a topic which he can’t figure out how to get his fingers and his head around. No amount of bourbon seems to help. The topic frankly scares him. Why? Because everybody, but everybody, believes in it and accepts it as God’s word. No one questions this topic; it is the universal solution to all problems of economic development, arguably the current most common strategy proposed by our academics, think tanks and politicians.

The topic? Innovation and the Knowledge Economy.

The topic scares the Curmudgeon unlike no other. Even admitting to being a serial tax abater and a defender (he prefers explainer) of tax abatement is nowhere near as fearful and dangerous as to offer an explanation and a critique of innovation and knowledge-based economics. Actually, he is not particularly concerned with critiquing the concept/strategy. He is simply petrified about attempting to explain it. Innovation and the knowledge economy can be linked to education, invention, entrepreneurship, productivity, job training and professionalism, start ups, small business, process improvement, employment, exporting and applied to virtually any sector—especially alternative and green energy, service delivery, manufacturing, agriculture, communications, internet, computer hardware, information technology, hair cutting, spa massage and teaching. Innovation and the knowledge economy are all over the place—it’s economic development’s equivalent to taking two aspirins.

Despite its pervasiveness in the economic development-related literature, innovation and the knowledge-based economy is a largely asserted without proof, commonsensical, mother and apple pie, almost off the cuff, set of almost religious “beliefs”.Despite its pervasiveness in the economic development-related literature, innovation and the knowledge-based economy is a largely asserted without proof, commonsensical, mother and apple pie, almost off the cuff, set of almost religious “beliefs”. To add to the confusion, there seem to be no common body of knowledge from which the literature refers and so each individual and author, for the most part fills in, or defines, on their own which policy or initiative they wish to pursue. Finally, no one really questions whether innovation and knowledge is central to economic growth—it just is so deal with it!

Accordingly, this is a topic which, like God, seemingly has neither beginning nor end and is omnipotent. Innovation and the knowledge economy embrace almost every program, sector, policy and concept; it seemingly excludes very little (except perhaps tax abatement) and accommodates virtually everything under the sun—or in orbit around it. This concept has innumerable moving parts, and arrives without any instruction manual. The obvious problem with innovation and knowledge-based economics is a buzzword or buzz-policy, used casually with huge imprecision (like “green” and “sustainable”)–as an adjective and linked to virtually any noun. Yet what the heck is it? Can you touch it? Why is innovation and knowledge-based economy the remedy to all things unholy? Why is it a central economic development strategy for the current federal administration and for many states and communities?

The Tip of the Iceberg

What we see and hear in the torrent of articles, policy proposals, press releases and programs is only the tip of the iceberg—beneath the surface lay a substantial body of theory and concept which, almost completely unknown to innovation and knowledge economy proponents and believers alike, constitutes a rival, or at least a plug in (or an “app” for a specialized purpose), to conventional market-based economics.Innovation and the knowledge economy has been condemned to success as a buzzword, a meaningless but commonsensical and often inspiring, if obvious and self-evident, prescription for our current laundry list of problems. Governors love it; President Obama funds it; academics and think tanks trip all over themselves injecting it into every paragraph and policy proposal. It is the cornerstone buzzword of economic development. But innovation and the knowledge-based economy should be more than a policy proposal or campaign platform. Is there more depth and focus underlying this concept?

What we see and hear in the torrent of articles, policy proposals, press releases and programs is only the tip of the iceberg—beneath the surface lay a substantial body of theory and concept which, almost completely unknown to innovation and knowledge economy proponents and believers alike, constitutes a rival, or at least a plug in (or an “app” for a specialized purpose), to conventional market-based economics. Innovation and knowledge-based economic theory departs in several very important ways from conventional Neo-Keynesian and Neo-Classical economic theory which are the cornerstones of current American national economic policy and its finance system. If the differences between innovation and knowledge-based economics and the two Neo’s are irreconcilable, then somebody has a problem—and the Curmudgeon thinks growth economics and the Two Neos can often work in cross-purposes which doesn’t auger well if innovation economics is to be successfully implemented.

The current dialogue concerning innovation and knowledge-based economics ignores, or stores unseen in its basement, any theory of why innovation and knowledge would actually produce economic growth. The Curmudgeon contends the theory is hidden in the cellar basement of the economics profession—and hence is lost to mankind.The current dialogue concerning innovation and knowledge-based economics ignores, or stores unseen in its basement, any theory of why innovation and knowledge would actually produce economic growth. The Curmudgeon contends the theory is hidden in the cellar basement of the economics profession—and hence is lost to mankind. But hidden or not, that unarticulated theory should be best support for the assertions that innovation and knowledge produce economic growth. This invisible, and little appreciated, cellar level theory has to provide the justification, indeed legitimacy for the visible, oft-visited first level tip of the iceberg.

But, sadly in the Curmudgeon’s opinion, few feel the need to visit the foundation level to understand better the innovation and knowledge approach, concepts and value-system. So without anyone rummaging around the basement level of innovation and knowledge-based economics, the first floor of innovation economics is reduced to being a mere buzzword, a universal adjective, lacking a meaningful central focus and often in cross hairs of the dominant economic policies of the nation.

So it is with mixed feelings that the Curmudgeon will offer two quite separate sets of articles. The first article-set (the present article) centers upon “Innovation America: A Final Report”, by Governor Janet Napolitano/Governor Tim Pawlenty (written by Erika Fitzpatrick) from the National Governors Association (2007)—but will also silently draw from “Crossing the Next Regional Frontier: Information and Analytics Linking Regional Competitiveness to Investment in a Knowledge-based Economy, (2009), Purdue Center for Regional Development and the Indiana Business Research Center; Fareed Zakaria, “Innovate Better”, Time, June 13, 2011; “How Companies Can Stay Ahead of the S-Curve”, Wall Street Journal, June 9, 2011; and the “Summary of President’s Council on Jobs and Competitiveness”, White House, June 13, 2011.

The second article (Click Here) presents a brief, non mathematical summary of the theory underlying innovation economics and the knowledge-based economy. This summary relies on two books: David Warsh, “Knowledge and the Wealth of Nations: A Story of Economic Discovery”, W.W. Norton & Company, 2007 and Elhanan Helpman’s, “The Mystery of Economic Growth”, the Belknap Press of Harvard University, Cambridge,2004. The Curmudgeon urges the reader to delve into this little-known growth economics approach because he believes many proponents of innovation and the knowledge economy need to better understand how and why the innovation and knowledge approach was constructed, and how its principal concepts operate to produce a theoretical economic growth machine. They would also be well served to better appreciate the critiques of the innovation and knowledge-based growth economics and how growth economics interact with the dominant paradigmatic Neo-Classical and Neo-Keynesians economic models. The second article sounds intimidating, but trust the Curmudgeon to reduce the theory to English and to focus on only what the non-economist reader needs to know.

Now, let’s take a gander at “Innovation America”, a keystone 2009 report by the National Governor’s Association.

Innovation America: A Description and Explanation

In 2009, the National Governor’s Association published “Innovation America: A Final Report” as a signature initiative intended to:

…strengthen our nation’s competitive position in the global economy by improving our capacity to innovate. The goal was to give governors the tools they need to [1] improve math and science education, [2] better align post secondary education systems with state economies, and [3] develop regional innovation strategies. (P. i) (Curmudgeon injected the number system for clarification)

Because governors deal with these and other policy realities daily, they are uniquely suited to create a unified vision for innovation in education and the economy. They can use the bully pulpit to advocate for a comprehensive innovation agenda …. And as chief executives, governors can take executive action to implement the state’ innovation agenda…. As leading advocates, governors are agents of change and the driving force for innovation in their states and in the national arena. (P. 4)These three core strategies of Innovation America constituted the proposed agenda of the role of states in leading “the country as it responds to fast-moving changes in the global economy…”(P. i). The report moves further and asserts the special relevance of innovation and knowledge-based economy to states and governors:

As governors, we know that skills and talents must be nurtured to foster growth, and we are in the best position to advocate for and effect changes that spark innovation … Governors have led the way in improving our country’s position in the new knowledge-based world economy by boosting science, technology, engineering and math (STEM) standards in the early grades; making critical investments in postsecondary education; and enacting policies that combine resources, talent, institutions, and infrastructure to create strong regional economic hubs with global competitive potential. (P. iii)

Because governors deal with these and other policy realities daily, they are uniquely suited to create a unified vision for innovation in education and the economy. They can use the bully pulpit to advocate for a comprehensive innovation agenda … And as chief executives, governors can take executive action to implement the state’ innovation agenda … As leading advocates, governors are agents of change and the driving force for innovation in their states and in the national arena. (P. 4)

Innovation America defines innovation “as a process by which new ideas enter the economy and change what is produced, how it is produced, and the way production itself is organized”. (P.1) Indeed, “innovation is a hallmark of a successful economy, and it drives economic growth and the creation of new jobs”. (P. 1).

To the National Governors Association, state-led innovation and knowledge policy plays the critical and central role in restoring America’s lost competitiveness. The Federal role is supportive, but it is the States and the governors who can lead America out of the present day economic morass;

As America works to find its place in today’s global economy-rooted in information technology and driven primarily by ‘knowledge workers’ and entrepreneurs – states must develop and adopt new and better institutions, products, processes, and business models… (P. 2).

A significant justification for the leading role of states, as opposed to the federal government is that states are the key to establishing and supporting regions – and innovation and knowledge transformations are probably best achieved through regions (and clusters) (P.2).

While competition is sometimes viewed as between nations, it is really between high-performing economic regions….States that effectively grasp the magnitude of the country’s competitive challenges and proactively and aggressively respond can lead the way through this morass of uncertainty by adopting a comprehensive innovation agenda that combines human, intellectual, and financial capital in ways that strengthen their relative competitiveness worldwide (P. 2).

This is all great rhetoric, which combined with a charming lack of specifics masks the report’s principal, but unarticulated, fundamental assertion (this assertion is quite compatible with growth economics described in the adjoining article)that government, not the private sector, can create economic growth through programs and policies launched in and by the public sector (the States in this case). Needless to say, the role of government which the NGA Report assets implies and assumes a serious reversal of the traditional role of government vis-à-vis private enterprise.

Government, in this case at the states and regional levels, will initiate, fund and inject change and innovation into our private businesses through revitalized public institutions such as K-12 and higher education, community colleges, public private partnerships (often public university based or state funded) and subsidized interventions into private business decisions and activities (such as skills, exporting, entrepreneurship, marketing and process/production efficiencies).Essentially, the Governor’s report injects state government and public/non-profit institutions into the identification, development and implementation of new private sector technologies, occupational skills, ideas and processes (innovation). These “innovations” will positively transform private production of goods and services (the internal operations of a private business) and result in economic growth. To achieve the growth, government must refocus and enhance occupational skills, target ideas and processes, and identify firms and industries which possess significant capacity to impact future growth (such as information technology, green and sustainable, life sciences, and advanced manufacturing).

Through government effort, America can transform our post industrial economy by refocusing on new skills, ideas, and processes, creating a knowledge-based economy, which will produce high paying, and competitive jobs and competitive firms. This government-led strategy “offer(s) a means-perhaps the only means- by which a high-skill, high-wage economy can successfully compete with high-skill, lower-wage economies without reducing its standard of living”. (P. 1).

Government, as a change-agent, is tasked to lead American private enterprise in a quest for global competitiveness. Government, in this case at the states and regional levels, will initiate, fund and inject change and innovation into our private businesses through revitalized public institutions such as K-12 and higher education, community colleges, public private partnerships (often public university based or state funded) and subsidized interventions into private business decisions and activities (such as skills, exporting, entrepreneurship, marketing and process/production efficiencies).

This is not your mother/father’s traditional and orthodox American version of capitalism and it does not faithfully mirror either Neo-Keynesian or Neo-Classical economic policy. Indeed, is quite likely that Alexander Hamilton, J. S. Mills, Lord, Keynes, not to mention Feldstein, Rubin, Summers, Greenspan, or Bernanke would be discomforted (academic jargon for yell and scream), and require some sedation in regards to government in a leading and transforming role, rather than a supportive one. Perhaps surprisingly having failed to develop an industrial policy, we seem to have stumbled upon an informal national consensus around innovation and knowledge and we seem to be well on the road to implementing an unannounced and unapproved plan for our transformation into a knowledge-based economy? We shall return to this subject later in this article.

How are states and governors to accomplish these tasks? What tools are in their toolkits?

  1. Governors are “well positioned to commission and interpret analyses of their state’s assets … form business councils … (to forge) a comprehensive strategy. (P. 4)
  2. Governors can “set standards and develop assessments and accountability for elementary and secondary schools … establish workforce strategies … set tax policies that contribute to regional innovation such as research and development tax credits or tax incentives … provide industry-specific workforce training … (and advance) policy goals through appointments (P.4)
  3. “Smart strategic investments in the human capital, research and development and physical infrastructure can propel innovation” and governors can “use fiscal policies and budget leverage to boost the innovation agenda”. (P.4)
  4. “Governors can use the bully pulpit to talk up the importance of innovation in state and regional economic development”. “Governors … (can) show investors that they care about nurturing these emerging and growing sectors (clusters of innovation)… (P.5)
  5. Convening or “promoting innovation in bringing private sector leaders together with public leaders and even nongovernmental entities … brokering partnerships and networks.”( P.5)
  6. “Governors can ensure that the state employs a streamline regulatory policy … The use of technology such as online filing can simplify the administrative burden of regulations”. P5.
  7. Improving access to seed and venture capital.

From here the report devotes an entire chapter (Chapter 3) to a list of programs and best practices which are found in the various states and which represent models for others to follow. The Curmudgeon didn’t count these programs and benchmarks, but there may be a hundred or so listed. Special emphasis is made for STEM initiatives and it is fair to observe that the overwhelming majority of these program and benchmark suggestions relate to education. It also is fair to observe that many of the programs cited were not originally created to further an innovation and knowledge based economy but rather to address a longstanding disconnect between education, students and private employment.

For the Curmudgeon, at least, this laundry list of programs and activities is at best underwhelming. The reader is invited to peruse for themselves the variety of benchmarks and programs offered by the NGA report.

Do the Governors Seek to Overthrow the American System of Government?

Is growth/innovation economics overthrowing the American Republic? Should the reader throw down our Journal article and rush to twitter the FBI, leave a Facebook message for the Department of Homeland Security that revolution is afoot? – Please hold on a second. Let the Curmudgeon explain.

… that even in these days of political polarization, innovation is applauded and embraced by just about everyone. A stunning 88 percent of Americans polled said they support a nationwide innovation effort. The desirability of innovation is expressed by people of all political persuasions and across all demographic, geographic, and attitudinal subgroups. (P.5)The Curmudgeon believes that no governor, especially the present Secretary of Homeland Security Napolitano (who is a co-author of Innovation America), and few, if any, of the staff that actually wrote this report, were aware that there exists a sub field of economics called innovation economics. There is not the slightest possibility that any governor, staff or any reader who actually read the report recognized the considerable overlap between the economic sub-discipline of innovation economics and the potentially radical implications inherent within Innovation America. There is no conspiracy to set up a state capitalist system and overthrow the Constitution. To return to our opening our opening comments, the level of understanding by innovation and knowledge advocates does not include awareness there exists a deeper theoretical literature of growth which relies upon an explicit and increased role for government over the private economy and the individual firm.

So what’s up? If the National Governors Report, “Innovation America”, is not based upon, or probably even aware of the growth economics approach (they never once cite anybody or use its models to justify their unarticulated assertions), than how the heck did innovation and knowledge economics become their magic bullet for American competitiveness and the reassertion of the state’s role in American federalism? The answer in part is contained in the report itself.

The NGA hired a consultant, Dr. Frank Luntz, to assess Americans’ innovation attitudes and to help the governors “talk innovation”. His research which resulted from several “response dial sessions” (whatever that might be?) and a nationwide public opinion survey, Luntz concluded:

… that even in these days of political polarization [this is 2007 – what would he say today?], innovation is applauded and embraced by just about everyone. A stunning 88 percent of Americans polled said they support a nationwide innovation effort. The desirability of innovation is expressed by people of all political persuasions and across all demographic, geographic, and attitudinal subgroups. (P.5)

And who is best positioned to seize upon this theme and use it to not only advance the innovation agenda, but also presumably their own political position: the governor. “After all, who is better at communicating in a bipartisan way, the value of innovation than the elected chief executive–the person who has been to all corners of the state, met with all the key constituencies, and articulated a vision for governing?” (P.5)

 The message behind “Innovation America” is traditional American optimism and hope personified (the audacity of thinking that we as Americans can be the very best). “Innovation” is what America has always done. We are a nation of entrepreneurs, a nation of changeIn essence, innovation and education (knowledge) consensus in the electorate presents governors with an opportunity to both solve problems and to achieve more personal gubernatorial objectives. Innovation and knowledge are an excellent political/economic strategy to advance the interests of the state and the governor. But if the governors are not aware of growth economics theory, the Curmudgeon suspects neither are the American people. How did they get to form this consensus around growth, competitiveness, knowledge, education, and innovation?

This other part of the answer was brought to my attention by our Assistant Editor, Kevin McAvey. The message behind “Innovation America” is traditional American optimism and hope personified (the audacity of thinking that we as Americans can be the very best). “Innovation” is what America has always done. We are a nation of entrepreneurs, a nation of change and social/economic mobility-often through education. Isn’t it natural that in an era where the nation seems to be in decline (see our January issue concerning the New Normal) and our economy is tattered shreds, with cities and regions in deep and sustained decline, that innovation and education is a call to return to our core and original roots-a reassertion of American exceptionalism?

Innovation America draws from this optimism and history and as several of our quotes suggest, its prescriptions are the natural and historical path and strategy for a high-wage nation to effectively compete with a low-wage nation. As such, innovation and knowledge is the hope for our economic future– a message of optimism with an American phoenix rising from its own ashes.

Not surprisingly, this theme of optimism is reflected in the NGA report. A final section of Chapter 2, entitled “Use Optimistic, Specific, and Action-Oriented Language” (P. 6). In this section, a commentator (Luntz) advises the governors seeking to carry forward the report’s prescriptions to avoid negativism. “Innovation, he argues, is best described not in dire language… but in hopeful terms that encourage citizens to visualize the future … “(P. 6).

Governors do well when they don’t talk about job losses, but do talk about economic development through career improvement, when they don’t talk about competition but do talk about universal opportunity; and when they don’t talk about other countries, but they do talk about preparing Americans for the future. (P. 6)

Innovation America is a bi-partisan political platform, not tied to economic theory, but to a memory of a past heritage. As such Innovation and knowledge economics in many ways is a “back to the future” call to action and its essential substance and specific proposals based ultimately on hope, and history, not economic theory.

What Are We Left with if Innovation is Little More Than a Political Platform?

The most obvious question is to what degree is there a real overlap between the theory of Innovation Economics and the political platform calling for innovation and the construction of a knowledge-based economy? A more troublesome, but subtle, question, however, is whether the unwitting political platform escape or somehow rise above the economic growth theory (its limitations as well as its strengths)-or is it doomed at some point to be captured by them?

Perhaps surprisingly, there is a real and quite substantial overlap between the political platform aspect of innovation and knowledge-based economics and the underlying growth economics theory, or so the Curmudgeon believes. The reader can judge for herself by reading our second article. The two seem to be hand in glove—but both potentially discount or ignore a fundamental reality of America–its Constitution and its structure of governance.

If innovation and the development of a knowledge-based economy are the ultimate salvation, “Innovation America” and the National Governors Association offers to a willing, but desperate, America, can a decentralized, uncoordinated state-led transformation of our overall economic system (implemented through individual competing regions) be sustained and effective?Innovation economics (both in its theoretical and political versions) call for government to assert leadership over the economy– to transform the economy to meet the demands of a post industrial world. It is left to government to determine the specifics and the nature of change and to impart, to create the environment, if not impose these transformation, on the private sector. The Curmudgeon probably is not first to suggest that he does not think the American structure of government, with its authority fractured and dispersed through three layers of federalism, each broken into three competing branches of government-each one checking the others-offers sufficient power and central direction/focus to accomplish the tasks laid out by innovation economics. A unitary, parliamentary system might be capable of such change (and maybe that explains why innovation economics is more prominent and impactful in European economics), but not the American economic theory.

The American Constitution may however be a two-edged sword. If innovation and the development of a knowledge-based economy are the ultimate salvation, “Innovation America” and the National Governors Association offers to a willing, but desperate, America, can a decentralized, uncoordinated state-led transformation of our overall economic system (implemented through individual competing regions) be sustained and effective?

Can Innovation and Knowledge economics compete against the mainstream, limited government, Neo-Classical economics which presently seems to be asserting itself? Clearly, the Neo-Keynesians would be more comfortable with the thrust of growth economics, but the latest debt ceiling crisis suggest that Neo-Keynesians have an uphill struggle in the next couple of years. The NGA report relies upon bipartisanship but, the Curmudgeon can see in his all too foggy vision that competition between our political ideologies is likely to be intense in the next 18 months or so. For instance, nowhere in the presidential platform of Governor Pawlenty (the Co-Chair of Innovation America) does one discover support for Innovation America’s specific proposals–indeed nowhere in Innovation America is he directly quoted. Is there a Red and a Blue Innovation America? If ultimately Innovation America becomes a Blue State economic development strategy than political polarization may inevitably reach deep into its implementation and destroy its ultimate success and effectiveness.

Finally, innovation and knowledge-based economic development initiatives perhaps have two built in weaknesses: (1) the belief that skills and knowledge can be effectively transferred to most workers through education, and (2) an emphasis on growth through productivity. These two weaknesses can become intertwined creating an almost insoluble mess. Innovation America posits that each and every American can participate more or less fully in a knowledge-based economy. Through education chiefly, each American can be forged into a competent, willing and motivated knowledge-based worker and viable participant in the knowledge-based economy. As the reader might suspect, the Curmudgeon is incurably skeptical, human nature being what it is.

Innovation and the knowledge-based economy require transforming us all (winners and losers in the unemployment lottery) into productive sectors and occupations. This is easier said than done and when combined with an economic growth achieved largely through productivity innovation, which results in a constant storm of “creative destruction” in our firms and local economies, the structural unemployment which follows may assume such proportions that any education program would be overwhelmed and/or unaffordable.

But most of all, the Curmudgeon, having been on the outskirts of politics, believes innovation and the knowledge-based economy will succumb to the vicissitudes of political campaigns and gubernatorial and mayoral politics. The laundry list of programs cited by Innovation America does not impress him. They are small, individually interesting, but absolutely uncoordinated programs, each highly dependent upon a state’s budget process.

Bill Clinton recently observed in a presentation that the total of all American-based Life Sciences public program initiatives was approximately $300 million dollars. He compared that $300 million to the $3 BILLION dollars spent on life sciences by the island-city-nation of Singapore.” Innovation America” is cheap penny politics compared to what is really needed to transform the American economy and the American worker – assuming we can forge a consensus to do so.Need I say more! But equally important they are fiscally so small, even in aggregate, that they are little more than nudges at the margin of the American economy. Bill Clinton recently observed in a presentation that the total of all American-based Life Sciences public program initiatives was approximately $300 million dollars. He compared that $300 million to the $3 BILLION dollars spent on life sciences by the island-city-nation of Singapore.” Innovation America” is cheap penny politics compared to what is really needed to transform the American economy and the American worker–assuming we can forge a consensus to do so.

Instead, regretfully, we may be left with a residue of Innovation America which the Curmudgeon, in his earlier days, labeled “Rhetorical Programs”. Rhetorical programs are initiatives whose ultimate real purpose was to allow elected officials to talk and to differentiate themselves from their competition. Rhetorical programs come with ambitious goals, inspiring hope and appealing to core constituencies and affluent campaign contributors. The individual initiatives are usually billed as the first steps toward serious change and a commitment for further serious change, but which are funded at levels sufficient only to draw reporters and media to write articles, headlines, blogs or TV commentaries. And they disappear with the next Administration–only to be resuscitated by the new Administration in another form, with new people and still newer press releases and media reports.

The Curmudgeon thinks we are already at this point.

 

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