Rummaging Around the Basement: The Economic Theory behind Innovation and the Knowledge-Based Economy

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In the “other” article of this issue, the Curmudgeon describes and critiques the current economic development policy obsession: innovation, entrepreneur and knowledge-based economics. Looking inside the “Innovation America: A Final Report”, by Governor Janet Napolitano/Governor Tim Pawlenty (written by Erika Fitzpatrick) from the National Governors Association (2007), he attempts an analysis of a major innovation/knowledge-based economy policy proposal. Curmudgeon that he is, he simplistically compares this policy dialogue to wandering around the top floor of a building, oblivious to the reality that the top floor rests and is dependent upon the foundations below. In this case, innovation and knowledge-based economic policy initiatives ought to be based upon some body of knowledge which support its premises and provide it credibility.

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”.So, it would seem that Innovation and knowledge-based policy proposals should be drawn from some theoretical literature or defensible data. To the Curmudgeon the most obvious candidate as the foundation for current innovation policies and proposals is the growth economics approach found in theoretical economist literature. The tentativeness of the Curmudgeon’s supposition results from a failure in most contemporary articles and proposals to cite any theoretical literature or database as the basis for assertions and assumptions. For instance, the NGA report reviewed in the first article simply assumes as common knowledge that innovation/knowledge-based economics is the best, and in fact they assert, the only path to economic competitiveness for the United States. This lack of theoretical support for assumptions and assertions is typical of the innovation literature.

This article, however, seeks to partially remedy this limitation by rummaging around the basement/foundation of the theoretical economic literature and pulling out a couple of boxes which contain the most useful approaches to justify the assumptions and assertions of innovation-knowledge-based economic policy initiatives. The Curmudgeon suspects that most of our readers, even those who strongly support and currently pursue innovation and knowledge-based initiatives and programs, are fairly unfamiliar with growth economics underlying theory/model—not to worry. As our review of the NGA report observes, most economic developers, elected officials, and even academic proponents tend to approach innovation economics as almost commonsensical, needing no real justification from theory or support from an analytical model. So for the rest of this article, we will review the major concepts of the “growth economics” approach which developed in spurts from the mid-1970’s or so to 1995.

Wandering about the theories and models associated with the dismal science of economics is not a task which promises enjoyment; but, the Curmudgeon will do what few economists would do-he will attempt to strip away jargon, equations, and complex terminology and write in something approaching English. This simplification (which comes naturally to the simple-minded Curmudgeon) will no doubt inspire outrage from the economist peanut gallery. We expect outcries of “Oh my God, did he really say that?” Or even better, “He is not precise”. Nevertheless, the Curmudgeon will plod onward, or downward, as he trips over the concepts, ignores the equations, and simplifies the relationships in his basement review of innovation economics. His critique of the theoretical foundation for innovation and knowledge-based policy initiatives, which follows from his description of the theory, will suggest some cautions and caveats that he believes ought to generate some thought from those who travel about on the first floor of innovation and knowledge-based economic initiatives.

Where to begin? First, David Warsh’s, “Knowledge and the Wealth of Nations: A Story of Economic Discovery”, W.W. Norton & Company, New York, 2006 will be our primary source. In addition, as background and as a recommendation to the reader, the review will also rely on Elhanan Helpman’s, “The Mystery of Economic Growth”, The Belknap Press of Harvard University, Cambridge, 2004. There is a reasonably-sized, but highly mathematical and modeling-based literature available and other authors, but Elhanan Helpman, can be suggested for those of us who actually majored (or mastered) in economics. Warsh’s book is, on the other hand, excellent, and at times a readable, non mathematical narrative which describes and explains the evolution of “growth” economics. Warsh outlines the lives and contributions (concepts) of its principal adherents (including Robert Solow, Robert Lucas, but especially Paul Romer and Paul Krugman); and he effectively links them all to Joseph Schumpeter. The critique of growth economics-especially by Gregory Mankiw is also discussed.

The Orthodox Post Keynesian Economic Model

Both the neo-classical and neo Keynesian adhere to the primacy of impersonal, disaggregated “private markets” (driven by the interaction of individual firms). This private market, reflecting a supply and a demand for individual goods and services, creates a price. This is the proverbial “invisible hand”, which allocates the distribution of goods and services produced by the economy. The primary unit of economic activity for both is the firm or the individual consumer and the key variables and concepts, which typically underlie both approaches, are usually more microeconomic factors than macroeconomic. The goal of both is to induce the individual firm or consumer to behave in a manner to achieve the desired ends.To start our journey, we should appreciate the orthodox, conventional, dominant, paradigmatic post Keynesian and neo-classical economic models. This is because “growth economics” (a sub-discipline of economic theory and “their” name for innovation economics) arose in reaction to important limitations in the orthodox neo-classical and post Keynesian economic models.

Since World War II, conventional American economic theory has largely been a competition between two approaches: the Neo-Keynesian approach and the Neo-Classical approach. We refer to both, or conventional economic orthodoxy as the Two Neos. Today’s neo-classical economists (such as Robert Rubin) believe that capital accumulation (wealth, investment, savings, for instance) primarily drives economic growth; if you want growth one must encourage savings which can then be used to finance new productive assets such as capital equipment and workforce hiring.

Neo-Keynesian economics, however, stress that the demand side drives economic growth. Growth can be induced by government spending, in particular, which in effect artificially increases the supply of wealth and savings by printing money or by deficits. When growth is desired, government spending is increased to stimulate new investment and hiring; when such growth creates inflation, the economy can be slowed by eliminating the stimulus/deficit thereby reducing the supply of money in the economy.

Both the neo-classical and neo Keynesian adhere to the primacy of impersonal, disaggregated “private markets” (driven by the interaction of individual firms). This private market, reflecting a supply and a demand for individual goods and services, creates a price. This is the proverbial “invisible hand”, which allocates the distribution of goods and services produced by the economy. The primary unit of economic activity for both is the firm or the individual consumer and the key variables and concepts, which typically underlie both approaches, are usually more microeconomic factors than macroeconomic. The goal of both is to induce the individual firm or consumer to behave in a manner to achieve the desired ends.

While Keynesians advocate using government more than the neo-classical approach (and hence can appear more macro-oriented), both prefer a government which limits itself to certain types of policies with limited objectives and responsive to specific situations (business cycle, deficits in a recessionary period or government tax policy to encourage savings) rather than a government which is an active player in the private economy. The government ought to “tinker” with the private economy—not bend, fold and spindle it on a regular and long term basis. Government should do its thing—and then leave the markets to their own devices.

According to Warsh, a new generation of economists emerged during the 1970s (and after) who, in many ways, remained either neo-classical or neo Keynesian in their core approach, but were interested in different questions and concerns than their conventional colleagues. There were two questions in particular which prompted them to move in new directions.According to Warsh, a new generation of economists emerged during the 1970s (and after) who, in many ways, remained either neo-classical or neo Keynesian in their core approach, but were interested in different questions and concerns than their conventional colleagues. There were two questions in particular which prompted them to move in new directions. The first question was “growth” (how can economies expand more or less continuously, not in cycles and not ever maturing and declining). To offset the possibility that an initial growth by one firm or nation could be “locked in”, growth economists sought to devise a model and a set of governmental policy prescriptions that, in effect, creates a growth machine which could reduce inequalities not only in the allocation of goods and services within a national economy, but that could also alleviate the obvious late 1970 era disparities between the developed and the developing nations.

An unwillingness to accept convergence or reversion to the mean, as specified by the Two Neos, was unsatisfying to the new generation, in part, because the young rebels also asked a second question. Their research questioned the Two Neo belief in reversion to a mean (or convergence). Growth economists believed that under some conditions, growth by one firm or nation could be maintained indefinitely, condemning all competitors or less developed nations into a more or less permanent inferiority. At its root, growth economists wondered whether the normal long-term end product of the private neo-classical and neo Keynesian markets would in fact result in “a reversion to the mean”.

To address this second question, a late 1970ish whippersnapper, Paul Krugman (yes, the present day, Nobel Prize winning New York Times economic commentator) developed a series of mathematical equations which highlighted the obvious reality that some firms became near monopolies (Microsoft) and maintained their dominance, and some nations (developed nations) having enjoyed a head start in economic growth seemed able to indefinitely “lock in” their dominant lead over the developing nations. Convergence or reversion to the mean might be the exception, and not the rule.

… he (Krugman) had demonstrated how it might be possible not just for a firm but for an entire nation to lock in certain advantages, to lock out competitors. (P. 186).

The principle of geographic differences, of comparative advantage, was no longer the only possible explanation of patterns of international specialization. Sometimes history itself-whatever country got a good start-might be the cause. (P.187).

For Krugman, there existed an imperfect competition which allowed near-monopolies to continue indefinitely and to compete with other near monopolies—monopolistic competition. Further evolution of Krugman’s thought led him to conclude the best, most effective remedy to monopolistic competition (GM competing with Toyota) was an involved government (P.234).

It was these two new questions (actually there were other issues/questions as well) which orthodox neo classical and Keynesian models did not address or which did not fit into obvious and observable realities of the late 1970s and early 80s. Growth or innovation economics was a proposed solution to the limitations of the orthodox theories; and, on the whole, growth economics was able to operate within, admittedly on the fringes of the dominant conventional neo classical or Keynesian theories.

At its most basic level, however, the new, embryonic growth economics did not abandon the Two Neo orthodoxy. Instead, growth economics offered a “plug in” approach to these conventional theories—an approach which, suiting the needs to a new generation, asked new questions, permitted experimentation with math, equations and sophisticated modeling, all of which could be bent, folded and spindled by the newly available computer using newly developed datasets.Research to address these two basic questions stimulated the two decade evolution of growth economics. At its most basic level, however, the new, embryonic growth economics did not abandon the Two Neo orthodoxy. Instead, growth economics offered a “plug in” approach to these conventional theories—an approach which, suiting the needs to a new generation, asked new questions, permitted experimentation with math, equations and sophisticated modeling, all of which could be bent, folded and spindled by the newly available computer using newly developed datasets. Importantly, advocating for growth economics did not require its proponents to abandon the Two Neos; instead using the new techniques, modeling methodologies and the computer, economic theory could deal with, and explain critical issues and questions pertinent to a late 20th century world while retaining the overall theoretical perspectives contained in the Two Neos.

How to Construct a Timeless Growth Machine!

Originally these two questions were dealt with separately by separate researchers. Only over time (in the late 1980’s and early 1990’s) did they finally come together to form what we today know as growth or innovation economics. At its inception in the 1980’s, and galvanized by an important lecture by Robert Lucas in 1985, several researchers began to focus on how one consciously can grow an economy (i.e. not leave it just to the invisible hand). Which factors and forces could produce an expanding economy (besides the previously agreed upon capital and demand)?

At the fringes of the orthodox theories was a model of growth outlined by Robert Solow. Solow added technology as a critical element of economic growth-but he left it uncertain as to whether technology was a force external to the economy, but whose impact could drive the economic growth (and decline) or was actually a process internal to the economy and the consequence of normal interactions of the private market. To an economist this external/internal distinction if, and how, economists could incorporate the obvious impact of technology into the economy. Could technology (and innovation) be encouraged/inhibited through economic policy to enter into private markets or whether technology more or less, Deus ex machina-like, invaded the economy and transformed it. Growth economists (Romer) embraced the former and would eventually through math and equations prove that history and government policy had considerable effect on the introduction of technology into private markets.

Lucas expanded upon Solow and advanced what he called “human capital” (which was somewhat imprecisely defined at the time but certainly included skills, intellectual capital and technical and scientific “knowledge”—the last being a concept explored by another whippersnapper, Paul Romer).But in one respect, Solow’s orthodox model was disappointing to the growth rebels. Solow maintained much of the Two Neos notion of reversion to the mean; growth had limits for Solow. Economies could grow, but then they matured. “Growth itself was a stage” (P.207). There are no trees growing to the sky with Solow—no growth machine capable of overcoming the adverse lock in effects of monopolistic capitalism or the gap between rich and poor nations.

Returning to the key Lucas 1985 lecture, Lucas expanded upon Solow and advanced what he called “human capital” (which was somewhat imprecisely defined at the time but certainly included skills, intellectual capital and technical and scientific “knowledge”—the last being a concept explored by another whippersnapper, Paul Romer). “Suppose that human capital externalities really do constitute a “powerful unseen force (which) is at work in economic life’” (P.241). Romer, again, incorporated workforce and human capital into growth economics, and thereby offered two new (non-Two Neo) drivers of economic growth: technology and enhanced human capital spillovers. Lucas and Romer suggested that both were integral elements of the private markets similar to capital and demand and both could be shaped and impacted by economic policy.

Returning to the second question concerning monopolistic competition, growth economists, in this case Krugman chiefly, suggested the possibility that the issues caused by monopolistic competition and permanent inequality of nations could be addressed by these two new drivers of economic growth. Knowledge, in particular, if it were available to all could result in technology advances or the relatively speedy integration of existing technology by non-monopolistic competitors and developing nations. Knowledge and technology could break the locks of monopolistic firms and developed nations. Again the question was how best to accelerate the spread and integration of the drivers of economic growth—through “spillovers” arising from the normal activities of the private markets OR through the conscious intervention of public policy.

Over the next few years, Romer, Krugman, Lucas and several others would play around and elaborate upon various aspects of these new forces and how they could be applied to answer our previously discussed important questions. For our purposes, however, as the years unfolded, it became clear that innovation economics in some significant ways embraced some very different perspectives and noticeably departed from the Two Neos. Not only had growth economists expanded the forces which could cause growth from two (capital accumulation and demand) to four (technology and human capital), but, they were constructing a model which they intended to be a growth machine, not subject to the reversion to the mean syndrome or even the business cycle

This sustained growth required active intervention of consistently applied government-led public policy. Government was to create a positive environment for technology, change (entrepreneurship) through the diffusion of basic and applied knowledge, which would be essentially available to all. Monopolistic competition could be dealt with through increased regulation. Romer (a son of a three term Governor of Colorado and co-Chair of the Democratic National Committee during the Clinton impeachment era), for instance, unsuccessfully worked with Congress to break up Microsoft. Perhaps, almost by default, as “innovation economics” evolved, it developed a special and reasonably active role for government, especially the national government. Indeed, some growth economists examined the “big pushes” of historical governments (especially Stalin, Mao and Hitler) in support of government’s leadership in injecting change and creating technological and human capital leaps forward into economic growth.

Secondly, and the reader has to keep his economist hat on his head for the next points, growth and innovation economics left the invisible hand in the dust, lost the Two Neos concern with the individual firm and private markets and instead became more concerned with aggregated markets (countries or nations– for instance the American economy). Moving wholesale from the two Neo’s core micro-economic focus (the economics of the firm/consumer) to macro economics (the study of the whole economy, complete economic systems, and not the behavior of firms or individuals), growth economics’ unit of analysis became the national economy—not the private or even local markets.

Not only had growth economists expanded the forces which could cause growth from two (capital accumulation and demand) to four (technology and human capital), but, they were constructing a model which they intended to be a growth machine, not subject to the reversion to the mean syndrome or even the business cycle.Through diffusion of knowledge which more or less leveled the competitive playing field, technology, change, entrepreneurism and innovation (presumably along with capital accumulation and demand creation), along with governmental policy (chiefly regulatory, applied research and educational and skills training) could transform the national economy into a growth machine—capable of an almost indefinite capacity for sustained, long-lasting (non cyclical) growth. In so doing, growth economics answered to its satisfaction the two questions which prompted its original existence.

All of this evolution came more or less came together at a 1988 private economist conference (paid for by Jack Kemp who was at the time running against Bush #1) in Buffalo, New York. At this conference, the principal economists associated with innovation economics presented papers and commenced the codification of what today we call innovation economics. The Curmudgeon is particularly proud of this Buffalo conference because in 1988 he was Erie County’s (including Buffalo) Economic Development Coordinator. Therefore, in the spirit of “shoot anything that flies; take credit for whatever falls”, the Curmudgeon claims responsibility for the founding of growth economics. After all, if it happened on the Curmudgeon’s watch, he did it (although it would have been better had he known the conference was happening and had the vaguest clue as to what growth economics was)!

To explain how growth or innovation economics works, The Curmudgeon must grossly simplify Romer’s treatment of the pivotal concept of rival and non-rivals goods and services. Rival goods and services (a good/service which is consumed with its use/consumption- a pizza for instance) and non rival goods (a good which is available to all potentially and which is not consumed if used by another- a class in economics). As an example of how education is a non rival good consider that if I take a class in economics, my consumption of that class in no way limits the reader’s ability to take a similar class in economics. The Curmudgeon simplifies this complex distinction between rival (goods which are consumed and therefore do not diffuse and non rival which are not consumed and can diffuse) as demonstrating that certain goods/services (education, skills training, technological innovations) as goods which “diffuse knowledge” through the economy, enhancing competitive and entrepreneurial juices, and create new employment in dynamic sectors and firms (the gazelles of the cluster approach).

Technological change and knowledge, skills training and education prompt change, innovation, and productivity enhancements which cause sustained economic growth sufficient to overcome business cycles and the “lock in” effects of monopolistic capitalism (patents, proprietary knowledge or software and research for new applied technologies) and also reduce the gap (or inequality) between rich and poor nations or large and small firms.Romer classifies education, skills training and knowledge (including intellectual capital) as non rival goods which can diffuse from sector to sector, company to company and therefore become the catalyst for innovation and change. Technological change and knowledge, skills training and education prompt change, innovation, and productivity enhancements which cause sustained economic growth sufficient to overcome business cycles and the “lock in” effects of monopolistic capitalism (patents, proprietary knowledge or software and research for new applied technologies) and also reduce the gap (or inequality) between rich and poor nations or large and small firms.

Since knowledge, skills-training, and education fall into the province of government policy, government therefore should foster an environment in which education and knowledge are diffused throughout society and the economy. This diffusion of knowledge when combined with a governmental regulatory environment that supports diffusion by inhibiting the lock in effects of monopoly capitalism, leads to the conclusion that government can actually create, or at least significantly encourage, innovation and technological change. The agents of innovation and technological change are entrepreneurs and again government can ensure access to knowledge and skills to entrepreneurs and provide a policy and economic environment that ensures that diffusion, through entrepreneurship, is a gift that keeps on giving.

Suppose there are N workers in total, with skill levels h, ranging from 0 to infinity. Let there be N (h) workers with skill level h, so that N= J (subset 0) N (h) dh. Suppose a worker with skill h devotes a fraction of u (h) of his non-leisure time to current production and the remaining I-u (h) to human capital accumulation. Then the effective workforce in production-the analogue to N(t) in equation (2A)- is the sum N (to the sixth power) = J(subset 0) u(h)N(h)hdh of the skill weighted manhours devoted to current production… (P.242)For those of us somewhat familiar with Schumpeter, in growth economics government becomes the leader and chief promoter of his “creative destruction” from which economic progress emerges.

Notice also that as growth economics unfolds, government (which is the “tail” of the Two Neos) begins to wag the “dog” (the private economy).

The inversion of the tail-dog relationship which is a cornerstone of the Two Neos (remember mainstream economic theory) invites us to return to this article’s original launching platform—why growth economics developed and how it would relate to the mainstream Two Neo approaches. The reality is that, however, interesting and creative, growth economics for the most part did not penetrate into the Two Neos or the great mass of economists in the economic profession. The reason for the relative isolation of growth economics can, in the Curmudgeon’s opinion, be explained by observing that the articles of Romer, Krugman, Lucas et al are not written in English, are not for the most part in narrative form, and, instead, are pages of elaborately developed, complex equations, based on very sophisticated and extremely advanced non convex (lost already?) Dixit-Stiglitz model.

Quoting Warsh, “the literature of economics played a relatively small part in Romer’s thought. He was reading not Chamberlain and Schumpeter, but Rockafellar, the mathematician, whose book Convex Analysis under-girt (is that a word?) the present day field (i.e. growth economics).” P. 219.

Consider the below as a typical commentary by Lucas:

Suppose there are N workers in total, with skill levels h, ranging from 0 to infinity. Let there be N (h) workers with skill level h, so that N= J (subset 0) N (h) dh. Suppose a worker with skill h devotes a fraction of u(h) of his non-leisure time to current production and the remaining I-u(h) to human capital accumulation. Then the effective workforce in production-the analogue to N(t) in equation (2A)- is the sum N (to the sixth power) = J(subset 0) u(h)N(h)hdh of the skill weighted manhours devoted to current production… (P.242)

Now the reader understands how skills diffuse!

The articles associated with innovation economics confused even the typical economist PhD and demonstrates why growth/innovation economics did not diffuse easily throughout the economics profession, leaving the approach somewhere out in the left field of economics. To most economists, the math and modeling based growth economics did not seem to challenge the Two Neos, but instead were either plug ins or playgrounds available to any economist who could decipher the equations to expand research beyond the customary parameters of the Two Neos.

So What Does All This Gibberish Leave Us With?

First, let us summarize the key takeaways/implications suggested by growth/innovation economics. For this the Curmudgeon paraphrases Elhanan Helpman in his wonderful (and short) The Mystery of Economic Growth (see xiii-xi). For him, growth economics is organized around following themes:

  1. The accumulation of physical and human capital is important (the Two Neos), but it explains only part of the variation across countries in income per capita and its rate of growth.
  2. Technological and institutional factors (universities and schools) also affect the rate of accumulation of capital, AND THEY ARE IN SOME SENSE MORE FUNDAMENTAL.
  3. Productivity is at least as important as accumulation of capital and since productivity is driven by knowledge and innovation and is its chief byproduct.
  4. Growth rates of different countries are interdependent because knowledge flows across national borders, and therefore foreign trade and investment positively affect the incentives to innovate, to imitate, and to use new technologies.
  5. Economic and political institutions positively affect the incentives to accumulate and to innovate, and they also affect the ability of countries to accommodate change.

The ultimate takeaway from growth/innovation economics is a prescription for future public policy:

This then, is the message of the new growth economics.

Reform the patent system … Renegotiate the intellectual property regime, with a view to creating better access for the poor to knowledge that already has paid for itself many times over in the West. Consider anew the institutions that call knowledge into being, in hopes of making them more efficient … And by all means, continue to innovate boldly in new industries … But first, rebuild the education systems of the old industrial nations and create new ones for developing nations. (P.407)

“So there is a new economics of knowledge, What has changed as a result? The answer it seems to me (Warsh) is not much—at least not yet”. (P.399)Secondly, we can consider how innovation economists themselves view their theoretical approach. Turning once again to Warsh, a strong proponent of growth/innovation economics, who asks the question in his conclusion: “So there is a new economics of knowledge, What has changed as a result? The answer it seems to me (Warsh) is not much—at least not yet”. (P.399) His basic criticism is that excepting the elegant math and incredible modeling equations, the essence of growth/innovation economics (knowledge is good) is obvious. Also, the importance of technology as a creator of change and progress is understood by a fifth grader with an Apple. Warsh further acknowledges Solow’s observation that the chief limitation inherent in growth economics is that “we can’t routinely double R&D spending and expect to get results, any more than we can routinely slash taxes and expect revenue to increase”. (P. 401) Romer, himself, posits that the impact of knowledge and technology on growth is more or less confined to the “meta” ideas (which support the production and transmission of other ideas, i.e. the internet—not an internet router) (P.401), not the run of the mill “innovations” which are produced daily. Both Romer and Krugman have left academia and no longer pursue innovation economic research.

And what is the reaction from conventional Two Neo economists who still dominate the economics discipline and profession? Harvard’s Greg Mankiw, a firm adherent to an augmented Neo-Keynesian Solow model of growth. He, like Warsh, compliments innovation economics for its elegant modeling explanation of the obvious “living standards (growth) rise over time because knowledge expands and production functions improve”. (P.377). But then he not so gently questions why there were still differences between nations (and firms) in growth rates—why do some nations either choose or simply do not benefit from easily accessible knowledge and technology? Are they stupid or incompetent?

Instead, Mankiw asserted the missing ingredients for growth were entrepreneurs who given a favorable environment seized upon knowledge and technology to earn a profit and a fortune. Instead of a regulatory-activist government, the solution was a more limited and restrained public policy.No, Mankiw suggests, knowledge is NOT a non rival good. Trade secrets, proprietary knowledge, the presence and absence of technological knowhow and the sticky transferability of intellectual property itself mean education and innovation are rival goods. Instead, Mankiw asserted the missing ingredients for growth were entrepreneurs who given a favorable environment seized upon knowledge and technology to earn a profit and a fortune. Instead of a regulatory-activist government, the solution was a more limited and restrained public policy.

Mankiw said nothing that dissuaded the growth economists, and he abandoned his fight with them and left Harvard to become George W. Bush’s Chairman of the Council of Economic Advisors and he has since returned to Harvard to replace Martin Feldstein, and is presently an advisor to Mitt Romney.

The Curmudgeon Speaketh

And finally, the reader knows it was coming, what are the Curmudgeon’s warblings regarding growth and innovation economics? From a more practical, non economist, but local economic development perspective, the Curmudgeon offers the following concerns and observations:

  1. Innovation economics, in current usage, has become an ivory tower buzz-policy. As such, innovation and knowledge based literature is a mélange of very generalized, broad policy prescriptions which often fail to discern or even concern itself with the logical question of which types of innovation initiatives produce the most significant results. That is to say, what actually has worked? For instance, is technology commercialization preferable to basic research? The academic theoretical answer is both, but offers no proof. And, if you can’t do both with existing resources which of the two policy options has the greater potential impact. How does one measure these impacts?
  2. The lack of policy specificity and evaluation has led to a laundry list of academically created curriculums in innovation, entrepreneurship etc. (taught, of course, by tenured academics). Growth economics calls for government and educational institutions to teach what the Curmudgeon believes is the unteachable and ignores what the Curmudgeon thinks have been significant catalysts for past innovation: necessity (as in the mother of invention), adventure, laziness and greed. Innovation policy and economics is pure rationality at its best; innovation and entrepreneurship curricula ignore the non rational, idealist elements of life and simply assume that “you too can be an entrepreneur” and “everybody can be an innovator”. Garrison Keiler said it best when he described his hometown as a place where “everyone is above average”—so too with entrepreneurism and innovation.
  3. Innovation and knowledge based policy is inherently broad brush, macro-economic, long term, aggregate level policy. Can innovation economics and policy be relevant to sub-state policy-makers (with the obvious exception of universities and schools)? How can macro-policy initiatives bridge a cultural gap to include local sub-state economic development whose policy characteristics are instinctually silo-specific, micro-programmatic, short term, decentralized and heavily politically impacted? Not surprisingly, innovation-style policies often are felt to require a new level of government in order to be successfully implemented (witness Andrew Cuomo’s recent New York regional council initiative). Regions are needed to isolate innovation initiatives from these cannibals of progress, knowledge and innovation who dwell below.
  4. Is government up to the task? The expanded role of government inherent in innovation economics belies American government’s complexity and its inherent limitations. Also, the inconsistency ,if not illogic, of innovation economics is self-evident in that a theoretical approach which is fundamentally rational, anti political and anti emotional, turns to government which (duh!) without question is based on politics, emotion and a variety of unpredictable monetary and institutional pulls and pushes. Indeed, many students of American governmental and political history might suggest that much of American public policy results less in “opening” opportunities and increasing competitiveness than “closing” or restricting opportunities and decreasing competitiveness through iron triangles (interest group and campaign funding-based policy-making), tax loopholes, Congressional sub-committee silos, and earmarks. To teach skills, select occupations and future growth technologies and sectors government gets into the business of picking winners. Why is government better at picking winners than the market? Is a government bureaucracy that much better at spotting and facilitating innovation and growth than the private sector has been?
  5. American government is built on compromise as we all now realize. American federalism is based on diversity of response from the fifty “laboratories of democracy” (the States). Even clusters or regional councils are likely to display divergent and competing competency in responding to innovation policy. Can American government & federalism provide the patient, coordinated structure for a broad brush, long term, consistently applied macro environment sufficient for attainment of this policy. We all read the newspaper. Is it likely that a policy consensus exists presently in the US? Is it likely our current (and future) political process can devise and agree upon a national policy for innovation and a knowledge-based economy? Even if innovation economics is all it is cracked up to be, shouldn’t we move on to policy initiatives that are more short term and approvable (not to mention implementable)?
  6. Knowledge and innovation ultimately are built upon productivity and creative destruction. The question that emerges from both productivity and creative destruction is that conceding its long term benefits, can we absorb in today’s economy their short term disruptions and dislocations? At what point does a temporary transition from one career or occupation to a new gazelle-type occupation become a case study in structural unemployment? Carpenters cannot become engineers overnight and construction workers transformed into entrepreneurs very easily. Is there sufficient short term job creation generated by innovation and knowledge-based initiations to provide a boost to current unemployment? Recent BLS data on the wireless industry, for instance, suggest a negative relationship between productivity and job creation in even the most dynamic of wireless gazelles.

The notion, implied throughout growth economics is creative destruction, new gazelles replacing older, tired gazelles. Creative destruction is central to the Curmudgeon’s concluding comments on growth/innovation/knowledge-based economic approach. Growth economics stress the long term transformative innovation and knowledge-based economy. But in the short term it is similar to watching sausage being made (as the recent debt ceiling politics has been described). The shift from dying gazelles to new gazelles, as far as growth economics is concerned, is as simple as a workforce training program, an entrepreneur seminar, or moving to where the jobs are. Life, and people, is not that simple. Growth economics says little about decline, structural unemployment, and people frozen in their mortgage-underwater homes. It says nothing about dying clusters and collapsed regional economies. To the state and local economic development director and planner, the demand is for more immediate solutions which do not ignore human frailty, inequality, voter unrest and broken households. Certainly, an important component of future policy ought to address our fragile educational system (even through its restored effectiveness will not become apparent for probably several decades), but the shift to a growth economy ought to also consider those who need immediate assistance, jobs quickly.

This innovation economics cannot do.

 

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