Technological Innovation

rialtoWhy did the reintroduction of global markets in the 1980s reflect an economic theory and practical policy consensus ?

OK listen up -

‘The essential point to grasp is that we are dealing with an evolutionary process, a perennial gale of creative destruction' - Schumpeter Capitalism.

In 1900 economics was the 'dismal science', post enlightenment ideas envisaged the economy as a gigantic clockwork machine, where aggregate behaviour could be predicted and controlled from an understanding of the parts. But real diverse human behaviour was an embarrassment and the dramatic self sustaining growth of technology unexplained.

Theory underpins all policy and by the 1980's a new understanding had emerged -

Adam the Smith suggested universal moral sentiments in social animals underpinned market exchange.
Supply & demand provided a justification for market deregulation, and also market failure.
An 'invisible hand' emerging to efficiently 'co-ordinate systems' as diverse as health care, education, social welfare and environmental pollution ... the concept was counterintuitive and misunderstood because some economic science was based on unrealistic assumptions. 

David Ricardo and comparative advantage emphasised the mutual benefits for everyone from specialisation and free trade but again the concept is counterintuitive - Nobel laureate Paul Samuelson – 'thousands of important and intelligent men have never been able to grasp it or believe it even after it was explained to them' ...

Robert Solow and total factor productivity highlighted the overwhelming dependence of economic growth and wealth creation on the process of technological and institutional innovation but this concept is also counterintuitive - total factor productivity is a measure of our ignorance ...

Paul Romer and endogenous growth theory lifted some of the gloom by focusing on increasing returns in Adam Smith's 'Pin Factory'. He integrated into mainstream economics the growth effects of specialisation and scale through education, training, R&D, incentives and co-ordinating institutions ... and also the effects of political collective decisions, protectionism, regulation and taxation ...  

paul romerA global policy initiative was driven by some North American academic institutions and the IEA in England focusing on improving consumer welfare and economic efficiency. Policies enabling a Darwinian process of diversity and choice in imperfect markets were preferred to the alternative of more direct political command. 

It is the counterintuitive ideas of evolutionary economics that explain how endogenous technological innovation in competing democratic institutions drives progress through consumer and investor choices in markets.

This is how it worked ... hard work, honesty & thrift drove the discovery & accumulation of profitable projects as trade, torts & technology grew synergies of specialisation & scale -

 investment in technological innovation upped GDP per head even as demographics upped retirees 

 output per hour (productivity) upped real wages 

 flexible labour markets, gig economy & immigration upped total employment employment  

emissions reduced as GDP manufacturing share declined with upped GDP services share  

SatisficingConsumer and investor choices involve individual decision making behaviour based on discovery & accumulation

Herbert Simon's 'satisficing' -  

build on inherited success, chase profits & cut losses by hard work & moral urgency - imitate!

choose freely between options available here & now, unhindered by 'rent seeking' Bishops, Princes, Generals or bureaucratic majorities - speed up!

experiment to generate diversity and increase the chances of discovering new tricks, unhindered by risk averse 'rent seekers' -  innovate!

cooperate with others to discover better tricks from synergies which are not available to individuals - specialisation, scale & science - tort, trade & technology!

retaliate to protect from the inevitable parasites & predators and to grow trust & accumulate colonisation benefits - invest!

learn from the emergent outcomes of differential survival and start again - more hard work!

control loopMarkets coordinate activities 'as if' a control loop -

inherited price information from millions of trades in technological 'know how' (the sensors) lead to

diversity as innovative alternatives are generated by competing entrepreneurs (the set points) for

selection and testing by customers who sift value (the algorithms) resulting in 

some investments (the actuators) differentially surviving and changing the population frequency of successful 'know how' 

A diversity of randomly generated ideas are tested against alternatives in competitive markets where the most valuable for the cost incurred differentially survive and grow. The process results in monopolistic competition and increasing returns from technological 'know how' and seeds further innovation and diversity. 

There does seem to be a 'logic' of moral and economic efficiency associated with satisficing behaviour and market co-ordination - 

evolutionary processes - copy / vary / select

enabling environments - freedom for diverse competitive generating and testing 

cooperative synergies of specialisation & scale - discovery & accumulation of new survival tricks 

protective immune systems of tit for tat behaviour - defence from parasites and predators

survival 'know how' ... morality itself could be an evolving survival trick ... ?

In 2008 a financial crisis rocked world trade and the old Washington Consensus was turned into a political football ... and lost all 'economic' significance as 'politics' took over. The Washington Consensus was rubbished and rebranded as 'structural reforms'? The Washington Concensus was developed by John Williamson an English economist, and contained 10 specific economic policy recommendations.

The crisis emphatically endorsed the economic policy principles but it polarised the petty party politics and scuppered the Doha Round - it required rebranding as Structural Reforms -  Pro Business, Pro Globalisation, Pro Free Trade ... Pro Liberal Democracy - 

fiscal discipline, balance the books

enabling investment, compound interest

low marginal tax rates,

market interest rates

market exchange rates

market free & fair exchange trade

foreign direct investment, no protective barriers

privatisation, subsidiarity, modularisation, diversity

deregulation, innovation

patents & intellectual property rights, the law of the land

After 2008 The Washington Consensus was rubbished and rebranded as 'structural reforms'?

But always remember to paraphrase Winston -

'Market exchange is the worst form of social interaction for discovering & accumulating synergies of specialisation & scale ... apart from all the alternatives which have been tried from time to time' 

Adam Smith got it right, he wrote 'The Theory of Moral Sentiments' (1759) before he wrote 'The Wealth of Nations' (1776) !

Arthur Peacocke, Oxford University -

'The technical words are immanence and transcendence, the process of evolution seems to have a propensity towards goodness, but death and suffering are part of a package deal, if you are free you can't have goodness without evil, in this way death and suffering are related to creation and not to sin'.

'as soon as there are stocks there are parasites & predators.

Robert Lucas, University of Chicago -

'The consequences for human welfare involved in questions about human capital spillovers are simply staggering. Once one starts to think about them, it's hard to think of anything else'.

The Open University -

'The principles of comparative advantage and gains from trade are the most important results in the whole of economics. They apply at national, and also individual level. If each specialises in the activity in which they have comparative advantage and engage in trade they are both better off than if each tries to be self sufficient'.

If trade shaped the world; Why tariffs? Why barriers? Why subsidies?


Read my essay notes here

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