Monday, November 24, 2014

Creating a Learning Society

NEW YORK – 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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    1. CommentedLAWRENCE CARSON - CPA

      Civility in politics is a result of Prudence & Governance which mandates "Truth Or Consequence Accountability" in all governmental civil servant rolls and responsibilities.

      Please Watch -->

    2. CommentedSubhash Garg

      Dr. Stiglitz, the problem in developing countries is self-serving dictators who put their interest above the country's. I submit that the biggest help developed countries can provide is to block dictators' financial transactions. Only then will columns like yours have any relevance /impact.

    3. CommentedDallas Weaver, Ph.D.

      At the same time learning is becoming the clear dominant factor in economic growth, we have the growth of anti-learning/knowledge social forces both within and outside governments.

      We have anti-vaccine activists dominating the creation epidemics of old diseases. This may be an economic stimulus, but not a beneficial one.

      We have regulatory bureaucracies slowing and preventing learning/knowledge in almost every physical sector of our economy. Much of learning (from basic R&D to product development) requires some experiments and some failure, but in the risk adverse world of government regulation that can't be allowed. From the FDA to the NRC to the local building regulations, learning something truly new is discouraged. In the government regulatory world, we now have the "precautionary" principle saying that any uncertainty or anything not fully understood is not acceptable.

      Meanwhile angel investors, VC, etc. have bypassed some of the old financial restrictions to innovation from the past, while the government bureaucracies have limited the areas of learning and innovation to the "permission-less" sectors of our society. Funding anything requiring long complex permit processes is very difficult, for good reasons.

      The limitations and government restrictions on learning and innovation may be the dominant terms in explaining the difference in economic growth rates between nations. In China, it appears that if you have an idea, you can do it and don't require half a decade of lawyers, regulators, environmental experts, activists, hearings and paperwork before you try. That is why China has cheap solar grade silicon for solar panels after an investor build a $1.5 billion plant in less than 2 yr, after there was a world wide shortage of solar silicon (made from sand, available everywhere). US investors and industry saw the same opportunity, but our regulators slowed the response long enough for the opportunity to close out.

    4. CommentedT Selvakumaran

      We discuss the Stiglitz-Grenwald notion of “Learning Societies in the context of Edmund Phelps’ “Mass Flourishing”:

      [1] First, we need to understand that the fundamental question that Western capitalism is struggling with, during these times of economic crises around the world, is this: "how much should Western capitalism accommodate class-based social organization?" For this, we need to first understand Schumpeter's contribution to economic analysis in its proper context.

      In David Ricardo's characterization of the market economy, the landlord class continues to become affluent indefinitely, while the labor class is permanently held down at the level of Malthusian subsistence. The capitalist-entrepreneur-manager class does obtain large incomes for a time, through identification of profit opportunities in the market, allocation/investment of resources, and supervision of the production/distribution processes.

      In Karl Marx's view, this constantly growing inequality in the distribution of wealth between the landlord, labor and capitalist classes was the root cause of the frequent crises that Western capitalism was subjected to, already in the 19th century. Marx's solution was to abolish private property and profits altogether, in the belief that, for the future, new developments in science and technology would lead to greater wealth creation than would land ownership and the profit motive. Besides, with a labor theory of value that Marx inherited from Ricardo, the precise permanent value of all goods could possibly be ascertained, leaving no role for any uncertainties in the production/distribution processes that need to be compensated for by profits.

      Firm belief in the "Scientific Method" made it possible for Marx to envision a class-less society that could continue to gain affluence and wealth. Schumpeter's great insight was that a very special kind of innovation -- created, fostered and exercised by the managerial class -- was what was missing in the Marxian analysis of economic value. As Schumpeter describes in his book, "Capitalism, Socialism and Democracy", Marxists believe that the profit-shares that accrue to capitalist-entrepreneur-managers is nothing but theft.

      [2] In the Schumpeterian analysis, the creative/innovative contributions made by the managerial class, within corporate environments, needed a different framework than was provided by the free market mechanism of classical economics. To encourage business organizations to obtain the full benefit of this innovation, some allowance for monopolies should be made. In this way, by accommodating an elite class of capitalist-entrepreneur-managers within the class-less Western society, as suggested by Schumpeter, Western capitalism was able to avoid the collapse that the communist economies could not avoid in the 70s and the 80s.

      As Joseph Stiglitz has noted in this article, Robert Solow observed in the 1950s that rising incomes are attributed not so much to capital accumulation. That is, employing more money or better land or more people while following the same methodologies is not what contributes most to economic growth. Instead, the technological progress that happens at the work-place of business organizations, that is achieved by combining the factors of production -- land, labor, capital -- in new and innovative ways to produce more efficiently and to produce new products is, what creates economic wealth.

      Kenneth Arrow’s concept of “Learning by Doing” also emphasizes that workers/employees learning to operate, co-ordinate and produce in the industrial/corporate arena is what causes their compensation to be so much higher than agricultural workers. Thus the settings for the creation of economic value in the situations described by Solow and Arrow actually fit well within the Schumpeter’s concept of innovation at the business/professional workplace. Stiglitz-Greenwald notion of “Learning Societies” thus assumes a special class of workers/employees who would be able to upgrade their economic value because they have more access to learning in these industrial workplaces.

      [3] Ned Phelps’ concept of “Mass Flourishing” derives from historical examples of cultural renaissance that Western societies have gone through, roughly in parallel to the first, second and third industrial revolution. These societies experienced a sustained increase in real wages and productivity that could not be accounted for by just saying they were reaching economies of scale. Phelps ascribes this sustained increase in the standard of living to indigenous innovation. Though it derives largely from quantifiable improvements made at the professional workplace, it is a little bit more general. It takes into consideration flourishing in the general culture, and it is driven by the ascendancy of modern values – vitalism, individualism and self-expression – over traditional values that emphasize societal needs over the individual’s goals.

    5. CommentedROBERT BAESEMANN

      Not long ago, there were no interstate banks. Many states did not allow branch banking. The SEC and the IRS imposed reasonably reliable accounting rules on corporations and other businesses. Publicly traded companies were capitalized using bank loans, commercial paper, the sale of equity in stock markets and the sale of bonds in organized exchange markets for debt. This sort of system seemed to sustain the economy and economic growth for many years. Beginning in 1973, the Chicago Board of Trade formed the Chicago Board Options Exchange. Derivatives and risk management became common terms for what has always seemed to gambling with other peoples money. I might be wrong about this, and if I am please someone give me a source? But I have never seen a shred of evidence that economic growth depended on anything but commercial banks and private equity. The notion that Michael Milken, Jamie Dimon, or Wall Street ever contributed anything to growth or capital formation seems to me to be self serving fatuous propaganda. I = S one way or another with or without Wall Street.

    6. CommentedMarc Laventurier

      Let this be regarded as the slightest and most tardy contribution to the Learning Society:

      DNA was discovered and progressively characterized by European scientists, including Nobelist Albrecht Kossel, through the later 19th and early 20th centuries. Its' double-helical chemical structure was famously discovered by Watson & Crick, aided by the work of others, as is the way with science.

      However, somebody at MIT around 2000 seems to have selected Kary Mullis' development of the polymerase chain reaction (PCR) as the most consequential (in the productive sense that Prof. Stiglitz seems to intend) scientific contribution of the 20th century, given that PCR made practical further work unlocking the power of genetic technology.

    7. CommentedBrett Williams

      I agree that care must be taken to avoid adverse consequences of having too high a level of IP protection in a particular country's circumstances. The IP rules in the WTO allow some latitiude. However, I disagree with the propositions made about protection. Professor Stiglitz emphasizes positive production externalities in this article and in some of his other writing.I have not read anything where he points out that it is a fairly narrow set of circumstances where the optimal policy to address a positive production externality is trade protection - in the sense of import barriers. Nor have I read anything where he acknowledges that the positive production externalities might be accompanied by positive consumption externalities - with the effect that any import barrier implemented to achieve a gain by addressing a positive production policy will also cause a loss as it enlarges the size of the consumption externality.
      The omission of these points does matter because when the story is told without including these important aspects, then it provides ammunition to advocates for developing countries who wish to justify a view that trade liberalization is good for rich countries but not good for poor countries. That is a shame. It leads to enlarged claims for special and differential treatment in WTO negotiations - which leads to no agreement in WTO negotiations. In turn that leads to small countries having to reach an accommodation with a much bigger country in an FTA - which frequently has some disadvantages for the smaller country including the likelihood of excessively heavy obligations in some other area like IP, investment or immigration.

        CommentedAdrien Fabre

        Too bad you're not making any concrete proposition. Reducing the duration of patents, suppressing the copyright on scientific research, encouraging free software, revealing the patents on vital medicines, opening as much data as possible : many things should be done. What are you proposing so far ?

    8. CommentedWilliam Wallace

      Every time I have occasion to run across this category of solutions, it begs the same conclusions: basic research, unguided by the economy but rather by science, is best financed publicly. The trickle down from basic research is phenomenally beneficial in unexpected ways (hello, internet). From there on, however, very hard to create a model of a learning society that makes practical sense.
      A deeper disquiet arises from the simple debates that inevitably follow such suggestions, mixing social, economic, and nonsense theories based on rationalist fantasies of the past. The left, with mistaken optimism, conjures social solutions that do not take game theory into consideration. The right clings to models based on a radical divorce of the individual from society that does not hold (thus the lack of perceived shared responsibility), ignoring the myriad ways in which all achievement is based incrementally on those that went before.
      No one goes from mute savannah dweller to king of industry without access to our cultural database. When a man places a shiny diamond on a pyramid and claims monumental achievement, he broadcasts his monumental ignorance.

    9. CommentedJonathan Lam

      Gamesmith94134: Creating a Learning Society

      “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.”
      I have serious doubt in why should Mr. Joseph E. Stiglitz still continue promoting on its “know-how” deserves better compensation or leadership to retribution; in reverse, outcome like copy right to monopolize, or targeting on the institutionalization that ‘Developed countries, meanwhile, have an opportunity to narrow the gap between average and best practices, and to avoid the danger of secular stagnation’ is an understatement of Globalization and institutionalization of industries that oligarchy owned and corporation turned into sovereigns. In creating a learning society, Can he means emerging nations should sit in front of the drawing board to kowtow to TIPP/TPP for all innovations; so, economies will grow accordingly?

      “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.”
      I would regrettably say this statement could have been an insult to many including the underdeveloped countries. However, many learned after “Med Club mergers’, “beggar thy neighbors’ and super telecommunications mergers resulted in an inequality created the unbalanced stratified classes that they took an adverse turn to nationalism and freer market system.

      Apparently, Mr. Stiglitz did not learn well the from the Southern Asian economical miracle that Asian labors is another source of capital that can be innovated from farmer to factory workers; and exchange rate was their secondary priority to enter the industry to capitalize their productivity in order to sustain their value of their currencies. Consequently, productivity in China granted them 3.75 trillion foreign reserves. In contrast, the U.S. trade deficit jumped to a two-year high in April. The deficit rose to $47.2 billion in April, up 6.9 percent from an upwardly revised March deficit of $44.2 billion, the Commerce Department said Wednesday. And what can we do if deficit is a bad element in US economical growth? I just cannot ignor to the facts If the learning society Mr. Stiglitz suggested would work refinance or print more……..

      At present, there is a dispute in the chaos in financial world as bank fines soar, U.S. threatened $16 billion BNP penalty. We cannot fathom what the outcome would be; but the G6 of the G7 is under the show now. I think Mr. Obama emphases American, the leadership onward the industrial world; but he forgets to balance his budget book. Does it mean there is a possibility of just G1 only? I would like to say to Mr. Putin that he may not be the only one or the last in defiance.

      Can Mr. Stiglitz teach America to stand on one foot only and keep it balance? I wonder.

      May the Buddha bless you?

    10. Portrait of Michael Heller

      CommentedMichael Heller

      On Stiglitz vs Schumpeter:

      In his introduction to the most recent edition of Schumpeter’s ‘Capitalism, Socialism, and Democracy’ (2010) Joseph Stiglitz attempted a demolition job on Schumpeter’s explanation of capitalist crises. It is telling that in that introduction Stiglitz wrote about the difficulties of “translating” Schumpeter. Yet Schumpeter wrote in excellent plain English. So what is the problem?

      Stiglitz supplies misleading hatchet ‘translations’ of Schumpeter’s central message because Stiglitz apparently requires great names like ‘Schumpeter’ to give pseudo-credibility to the specious socialist interpretation of the financial crisis of 2008/9. Yet Schumpeter was consistent and unrelenting in exposing the many silly guises of socialism. Schumpeter spotted pranksters like Stiglitz a mile off.

      The Stiglitz edition of Schumpeter’s ‘Capitalism, Socialism, and Democracy’ conveniently omits several of Schumpeter’s own ‘Prefaces’ in which he responds with self-confessed “amusement” to various misinterpretations of his monopoly argument by the less competent economists. They “thunder on”, he said, but they leave out the qualifications, and “to leave out the necessary qualifications is not to present the whole truth”. There is much much more to Schumpeter’s arguments about competition and monopoly than Stiglitz is willing to let on.

      The real content of Schumpeter’s “long-run” innovation perspective, which Stiglitz pretends to praise, is fundamentally the opposite of the one Stiglitz advances here. It is a complicated theory of long-run capitalist cycles with their indispensable evolutionary ups and downs. No one except Stiglitz would have the temerity to infer and foist upon the unsuspecting public the erroneous idea Schumpeter supported industrial policy. Schumpeter thought industrial policy a terrible idea !! Schumpeter did have a theory of ‘learning’, but it was closer to the Washington Consensus than to the Beijing Consensus.

      Anyone familiar with the true evolutionary Schumpeterian view of dynamic economic learning could offer countless counter-blasts to the hot air in this article. A pithy paragraph from Schumpeter’s introduction to his own ‘Business Cycles’ (the book which outlines his theory of long-run innovation in ways apparently unrecognisable or untranslatable to Stiglitz) will suffice.

      “It is important to keep in mind that what we know from experience is not the working of capitalism as such, but of a distorted capitalism which is covered with the scars of past injuries inflicted on its organism. The very fundamentals of the industrial organisms of all nations have been politically shaped. Everywhere we find industries which would not exist at all but for protection, subsidies, and other political stimuli, and others which are overgrown or otherwise in an unhealthy state because of them. Such industries are assets of doubtful value, in any case a source of weakness and often the immediate cause of breakdowns or depressive symptoms. This type of economic waste and maladjustment may well be more important than any other.”

      That’s the real Schumpeter speaking. Too subtle for some?
      Heller Economic History Entertainments

        CommentedTim Chambers

        Does someone pay you to be a troll or do just do it for amusement? I am sure it doesn't occur to you the the distortions Schumpeter wrote about are what led us to the impure form of capitalism and markets that we have today, polluted as they have have been for the last century and a half by corporations and crony government. If it weren't for corporations demanding ever bigger markets for themselves, so that they could continue to grow ever larger we would have the purer form of capitalism you don't realise you seek, the form in which firms are small and privately owned and markets were more localised, and monopolies did not exist. The whole structure of laws and regulations, under which we live today, was instituted to foster the growth of large corporations.

    11. CommentedDallas Weaver, Ph.D.

      I am not convinced by the arguments presented. Yes, the future and economic growth is tied to innovation and Schumpeters observation that the successful are usually only a few percent superior or more innovative than those that fail and preventing failure will prevent success and innovation (as we have done with our sugar industry).

      However, assuming that some super bright government staffers are wise enough to make allocation decisions may be asking way too much of people and organizations. The internet wasn't invented by DARPA to be the INTERNET we know and love today, but to be a scientific communication system that was robust to disruption with no thought of Amazon, Google, Facebook, etc. It wasn't even designed with enough address space or built in security, with these features being add-ons along with a robust DNS system allowing users to type in instead of a bunch of numbers.

      Remember, brilliant planners in France had a huge head start with their Minitel system back when we were playing with slow dial up modems and acoustical couplers. Meanwhile, Japan with all their brilliant scientists and planners spent billions to take over the microprocessor market with their 5th generation project, while Europe spent billions to subsidize the next generation of memory chips only to have that market taken by Korea and the US.

      Noting that "Private incentives are not well aligned with social returns" seems to imply that public service staffers and agencies are well aligned with social returns when in reality, if those social returns would result in the decrease in the agencies or staffers jobs or power their incentives are not aligned with social returns. The examples of private sector misalignments often require government assistance such as preventing competition, blocking disruptive innovation with regulations, rent seeking with franchises, etc.

      How many government agencies have been given tasks and objectives that would result in their demise as an agency have succeeded in that task? The Manhattan Project (A bomb) was the only obvious one and going to the moon which resulted in a huge NASA budget cut (the bureaucracy learned the real incentives from the moon landing and has never done anything again on time or on budget) is another. The DEA failure to solve the addiction problem is a prime example with our prison systems total failure at recidivism reduction. Even our school system, public health and parks have perverse incentives that budget increases often depend upon failure, as we observe our parks being closed by spending money on guards when the budgets are challenged (how to do the most damage to the citizens per dollar of budget cut is an art form in government agencies -- aka the Washington Monument defense).

      Private incentives may be much better aligned with social returns that public incentives in real government organizations.

      Basic research is another issue and should be heavily government funded as the results have little appropriability, in most cases. There is often well over 10 years between a basic discovery and any cash flow from that discovery. In the late 60's we had "guns and butter" by LBJ with a corollary of killing R&D in the material sciences (all major National Labs hit at 50% type levels), then a decade later we have a national commission wondering why Japan was way ahead of the US in material sciences (the basic research they did was published in Japanese). Of course the Commission only looked back a few years and suggested protectionist measures and more education of a new crop of scientists, meanwhile people like me moved into other areas. I moved into aquaculture and biology only to have aquaculture killed by the regulators and activists in the US, while it is rapidly exponentially growing around the world.

    12. CommentedPaul Daley

      It's good to emphasize how big a role imitation plays in development and economics more generally. Allowing Imitation ensures ease of entry and more vibrant competition in markets. But learning through imitation does impact the rewards that might otherwise be available only by learning through experimentation. The trick is to balance the two types of learning by providing property rights for the results of experimentation, but not monopoly rights. Compulsory licensing rules might do the trick, or the government might want to use its powers of eminent domain, if and when monopolies develop.

      On the issue of industrial protection, the question might really revolve around how structured the protective environment would have to be. Ideally, one would want a situation that worked like an apprenticeship with a fixed date for graduation. A playground where the local elite could just play at business wouldn't do anyone any good.

    13. CommentedLanre Rotimi

      It appears to me that the focus is more on the problem than the Solution. How can Local Governments, State Governments, National Governments Build Bridge between Lessons Learning and Lessons Forgetting? Why is it the case that Universities and tertiary Institutions in Developed and Developing Countries Research do not contribute much towards achieving increasing convergence between National and Global Development Cooperation Goals and Targets Intention and Reality? Can Lessons Learning not help tackle Distress in Local Governments, State Governments and National Governments in US and World? Given Evidence that Washington Consensus Policies Actually Increase Poverty, What can be Done to Avoid this in the future? Glad to have Practical Answers to these Questions.....

    14. CommentedProcyon Mukherjee

      One of the important observations in the report by the Majority Staff of the Joint Economic Committee as attached in the article by Stiglitz is that basic research as percentage of the GDP has plateaued at 0.3-0.5% of the GDP, which is largely funded by Federal Government. Further inquiry into this aspect would reveal that more funding alone may not solve the problem, the pipeline of talent around basic research has also dried up, so it would take time before this changes to make fruitful contributions in the likes of the DNA, Internet, etc.

      There is fundamentally something very wrong that Society has chosen as attributes of success otherwise why would it be that in our youth we knew that the best talents were meant for basic research in Physics or Maths, but now it is a different matter where the talent is headed.