Innovation Economics

I have a policy that if I blog about someone I'll send them a copy of the blog post just so they know. It is useful to avoid errors and I generally think polite.

After my comment on Robert Atkinson's critique of Progressive Economics I did so and received a nice reply. In it he did two things. The first was to say he is a big fan of institutional economics and the second was a defence of "corporations". I want to comment on both.

Rob pointed me to another website for Innovation Economics. That site has a nice call to arms up front that reads;

While the U.S. economy has been transformed by the forces of technology, globalization, and entrepreneurship, the doctrines guiding economic policymakers have not kept pace and continue to be informed by 20th century conceptualizations, models and theories. Without an economic theory and doctrine that matches the new realities, it will be harder for policymakers to take the steps that will most effectively foster growth.

Fortunately within the last decade a new theory and narrative of economic growth grounded in innovation has emerged. Known by a range of terms – “ institutional economics,” “new growth economics,” “evolutionary economics,” “neo-Schumpertarian economics,” or just plain “innovation economics”: – collectively, this new economics reformulates the traditional economic growth model so that knowledge, technology, entrepreneurship, and innovation and are now positioned at the center, rather than seen as forces that operate independently.

But up to now, innovation economics, and innovation policy, has not fully been appreciated by policymakers, in large part because the dominant economic policy models advocated by most economic advisors and implicitly held by most policymakers largely ignore innovation and technology-led growth, in favor of macroeconomic issues, such as tax cuts on individuals, budget surpluses, or social spending, which at the end of the day pale in significance to innovation in driving economic growth.

In contrast, “innovation economics” recognizes the reality that a global, knowledge-based economy requires a new approach to national economic policy based less on capital accumulation, budget surpluses, or social spending and more on smart support for the building blocks of private sector growth and innovation.

Rather than focus on ensuring that prices accurately reflect costs to drive what conventional economists call allocative efficiency, innovation economists argue that the lion’s share of economic growth is determined by productivity and innovation.

Rather than focus principally on markets assumed to be in equilibrium and individuals assumed to be acting rationally in response to price signals along supply and demand curves, innovation economics recognizes that innovation and productivity growth take place in the context of institutions. In this sense it is based on the notion that it is only through actions taken by workers, companies, entrepreneurs, research institutions, and governments that an economy’s productive and innovative power is enhanced.

The neo-Schumpterian view and embrace of evolutionary economics means that we are talking far more about neo-institutional economics rather than New Institutional Economics. The former focuses on the dynamic effects of institutions while the latter identifies the role of institutions in shaping the preferences of economic actors.

The dynamic side takes us far more to the complexity issues identified by Ormerod as discussed here yesterday.

Rob and I diverged over the role of corporations. Responding to my line "Most large corporations are the opposite of innovation." To this he has replied that corporations are actually more productive than SME's and that no nation can be indifferent to the health of its large enterprises.

The productivity of a corporation and innovation are vastly different things. I discussed the concept of innovation and large IT firms some weeks ago, noting the surprising survival of IBM.

As another example of non-innovation by big firms I take the case of News Corp. Back in the 90s News was highly focussed on the issues of "convergence", as a simple read of the Shawcross biography will show. But News failed with investments in online services through Delphi and now the retreat from Myspace.

News Corp is a growing, productive, profitable firm - but it can't innovate.

In particular Myspace - a place for personal site building - got surpassed by Facebook - a place for connecting.

The innovation space is now a battle between Google and Facebook, each of which is now a big corporation. That battle has moved on with the launch of Google +. But Google is doing catch-up in creating a social dimension - though possibly adding the value of defining multiple friendship circles. But ut isn't innovation.

In general my thesis is that the policy focus needs to be on how competition and the market works, not as a device to ensure "that prices accurately reflect costs" but that they work to transmit information. I have a belief that the focus on intellectual property needs to maximise its spillovers not its private capture.

These are things that happen by focussing on "smaller" corportations - not SME's, but certainly not established TNCs.




Novae Meridianae Demetae Dexter delenda est

More on markets and property rights - tobacco

Ever since Ronald Coase created the foundations of the New Institutional Economics with his papers on the theory of the firm and social cost, a body of work has developed that has equated economic growth and progress with the creation of "property rights".

Douglass C. North is probably the foremost exponent of the application of the concept in economic history and development.

Many of the economists of the "new right" championed the importance of "property rights", none more so than Milton Friedman in his Capitalism and Freedom, which linked the economic theory of competition/choice to the political idea of freedom.

But the important point to be drawn from the Inquisitional view is that property rights are, in fact, a social construction. This is less easy to see with tangible goods, but even there the "right" to exclusive ownership is a relatively recent creation (England's enclosure happened between 1760 and 1820).

It is more obviously a social construction with respect to intellectual property. The creation of both copyright and patent protection are political acts. The inexact nature of both is legendary, and the facility with which the law has been changed equally so. The infamous "Mickey Mouse" clauses that extend the period for which copyright endures after the creators death are the best example.

This brings us to the extraordinary campaign by Big Tobacco against plain packaging legislation. Firstly there is the ad campaign trying to push the "Nanny State" line. As this ABC news report shows the companies are wise to care - after all the US is now implementing the Australian graphic images approach and the UK is following the take the product off display approach.

But there has also been the big threat of legal action, notably under section 51(xxxi) of the constitution - the infamous "vibe of the thing" clause as celebrated in the movie The Castle.

But now Phillip Morris is evidently going early using a clause in a trade agreement with Hong Kong to argue a case that the proposed law infringes their intellectual property. The reality is these clauses are inserted in trade agreements to protect against software piracy and brand name faking.

But the appeal of their case is that people interpret it as a "battle for commercial freedom". And hence we see the link back to the idea created by Friedman.

So let's get this clear from a theory and policy point of view. Property rights are social constructions. The clear allocation of property rights facilitates trade, markets and economic activity.


But clarity of property rights does not equate to a presumption of unrestrained property rights. When you buy land you do so subject to the planning laws about what you can build on it.

Let's imagine the case where the government decided to make tobacco an illegal drug. Would the tobacco companies make the same claim about the infringement of their property rights in the brand.

Let's try something simpler. A drug company invests in the IP of R&D from a drug, they invest in the clinical trials and then they invest in branding it. Let's call the drug Thalidomide. The company then markets the drug only to discover that the drug is directly responsible for birth defects.

The Government bans the drug. Does the drug company have a case for the loss of all that IP?

You may rightly point out that the drug company is at risk from a legal action - I think it is a tort - for the damage the drug caused so it removed the product itself. But that doesn't change the logic.

The property right in a brand is a social construction that it is the gift of the "polity" to restrain, so long as that is an action taken for a public not a commercial purpose.


Novae Meridianae Demetae Dexter delenda est