Cre­at­ing a learn­ing so­ci­ety

Financial Mirror (Cyprus) - - FRONT PAGE -

Cit­i­zens in the world’s rich­est coun­tries have come to think of their economies as be­ing based on in­no­va­tion. But in­no­va­tion has been part of the de­vel­oped world’s econ­omy for more than two cen­turies. In­deed, for thou­sands of years, un­til the In­dus­trial Revo­lu­tion, in­comes stag­nated. Then per capita in­come soared, in­creas­ing year af­ter year, in­ter­rupted only by the oc­ca­sional ef­fects of cycli­cal fluc­tu­a­tions.

The No­bel lau­re­ate econ­o­mist Robert Solow noted some 60 years ago that ris­ing in­comes should largely be at­trib­uted not to cap­i­tal ac­cu­mu­la­tion, but to tech­no­log­i­cal progress – to learn­ing how to do things bet­ter. While some of the pro­duc­tiv­ity in­crease re­flects the im­pact of dra­matic dis­cov­er­ies, much of it has been due to small, in­cre­men­tal changes. And, if that is the case, it makes sense to fo­cus at­ten­tion on how so­ci­eties learn, and what can be done to pro­mote learn­ing – in­clud­ing learn­ing how to learn.

A century ago, the econ­o­mist and po­lit­i­cal sci­en­tist Joseph Schum­peter ar­gued that the cen­tral virtue of a mar­ket econ­omy was its ca­pac­ity to in­no­vate. He con­tended that econ­o­mists’ tra­di­tional fo­cus on com­pet­i­tive mar­kets was mis­placed; what mat­tered was com­pe­ti­tion for the mar­ket, not com­pe­ti­tion in the mar­ket. Com­pe­ti­tion for the mar­ket drove in­no­va­tion. A suc­ces­sion of mo­nop­o­lists would lead, in this view, to higher stan­dards of liv­ing in the long run.

Schum­peter’s con­clu­sions have not gone un­chal­lenged. Mo­nop­o­lists and dom­i­nant firms, like Mi­crosoft, can ac­tu­ally sup­press in­no­va­tion. Un­less checked by anti-trust au­thor­i­ties, they can en­gage in anti-com­pet­i­tive be­hav­ior that re­in­forces their mo­nop­oly power.

More­over, mar­kets may not be ef­fi­cient in ei­ther the level or di­rec­tion of in­vest­ments in re­search and learn­ing. Pri­vate in­cen­tives are not well aligned with so­cial re­turns: firms can gain from in­no­va­tions that in­crease their mar­ket power, en­able them to cir­cum­vent reg­u­la­tions, or chan­nel rents that would other­wise ac­crue to oth­ers.

But one of Schum­peter’s fun­da­men­tal in­sights has held up well: Con­ven­tional poli­cies fo­cus­ing on short-run ef­fi­ciency may not be de­sir­able, once one takes a long-run in­no­va­tion/learn­ing per­spec­tive. This is es­pe­cially true for de­vel­op­ing coun­tries and emerg­ing mar­kets.

In­dus­trial poli­cies – in which gov­ern­ments in­ter­vene in the al­lo­ca­tion of re­sources among sec­tors or fa­vor some tech­nolo­gies over oth­ers – can help “in­fant economies” learn. Learn­ing may be more marked in some sec­tors (such as in­dus­trial man­u­fac­tur­ing) than in oth­ers, and the ben­e­fits of that learn­ing, in­clud­ing the in­sti­tu­tional de­vel­op­ment re­quired for suc­cess, may spill over to other eco­nomic ac­tiv­i­ties.

Such poli­cies, when adopted, have been fre­quent tar­gets of crit­i­cism. Govern­ment, it is of­ten said, should not be en­gaged in pick­ing win­ners. The mar­ket is far bet­ter in mak­ing such judg­ments.

But the ev­i­dence on that is not as com­pelling as free-mar­ket ad­vo­cates claim. Amer­ica’s pri­vate sec­tor was no­to­ri­ously bad in al­lo­cat­ing cap­i­tal and man­ag­ing risk in the years be­fore the global fi­nan­cial cri­sis, while stud­ies show that aver­age re­turns to the econ­omy from govern­ment re­search projects are ac­tu­ally higher than those from pri­vate-sec­tor projects – es­pe­cially be­cause the govern­ment in­vests more heav­ily in im­por­tant ba­sic re­search. One only needs to think of the so­cial ben­e­fits trace­able to the re­search that led to the de­vel­op­ment of the In­ter­net or the dis­cov­ery of DNA.

But, putting such suc­cesses aside, the point of in­dus­trial pol­icy is not to pick win­ners at all. Rather, suc­cess­ful in­dus­trial poli­cies iden­tify sources of pos­i­tive ex­ter­nal­i­ties – sec­tors where learn­ing might gen­er­ate ben­e­fits else­where in the econ­omy.

View­ing eco­nomic poli­cies through the lens of learn­ing pro­vides a dif­fer­ent per­spec­tive on many is­sues. The great econ­o­mist Kenneth Ar­row em­pha­sized the im­por­tance of learn­ing by do­ing. The only way to learn what is re­quired for in­dus­trial growth, for ex­am­ple, is to have in­dus­try. And that may re­quire ei­ther en­sur­ing that one’s ex­change rate is com­pet­i­tive or that cer­tain in­dus­tries have priv­i­leged ac­cess to credit – as a num­ber of East Asian coun­tries did as part of their re­mark­ably suc­cess­ful de­vel­op­ment strate­gies.

There is a com­pelling in­fant econ­omy ar­gu­ment for in­dus­trial pro­tec­tion. More­over, fi­nan­cial-mar­ket lib­er­al­iza­tion may un­der­mine coun­tries’ abil­ity to learn an­other set of skills that are es­sen­tial for de­vel­op­ment: how to al­lo­cate re­sources and man­age risk.

Like­wise, in­tel­lec­tual property, if not de­signed prop­erly, can be a two-edged sword when viewed from a learn­ing per­spec­tive. While it may en­hance in­cen­tives to in­vest in re­search, it may also en­hance in­cen­tives for se­crecy – im­ped­ing the flow of knowl­edge that is es­sen­tial to learn­ing while en­cour­ag­ing firms to max­i­mize what they draw from the pool of col­lec­tive knowl­edge and to min­i­mize what they con­trib­ute. In this sce­nario, the pace of in­no­va­tion is ac­tu­ally re­duced.

More broadly, many of the poli­cies (es­pe­cially those as­so­ci­ated with the ne­olib­eral “Wash­ing­ton Con­sen­sus”) foisted on de­vel­op­ing coun­tries with the no­ble ob­jec­tive of pro­mot­ing the ef­fi­ciency of re­source al­lo­ca­tion to­day ac­tu­ally im­pede learn­ing, and thus lead to lower stan­dards of liv­ing in the long run.

Vir­tu­ally ev­ery govern­ment pol­icy, in­ten­tion­ally or not, for bet­ter or for worse, has di­rect and in­di­rect ef­fects on learn­ing. De­vel­op­ing coun­tries where pol­i­cy­mak­ers are cog­nizant of these ef­fects are more likely to close the knowl­edge gap that sep­a­rates them from the more de­vel­oped coun­tries. De­vel­oped coun­tries, mean­while, have an op­por­tu­nity to nar­row the gap be­tween aver­age and best prac­tices, and to avoid the dan­ger of sec­u­lar stag­na­tion.

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