Tuesday, May 13, 2014

Macro-Innov 10: Macro-economics and innovation

In my previous blog here, I explained that I am interested in deep structure - the new combinations that Schumpeter implied at the whole economy level. But to establish a case that there is hole at the centre of the 'economics of innovation' it is best to first establish what macro-economics is all about and from there discuss what innovation systems theory is all about.

So to begin: Macro-economics

There are two important elements of macro-economics that are linked but can be treated separately. First, what may be called the aggregate monetary structure of the economy.

Source: Parkin, M. and Bade, R. Macroeconomics : Canada in the global environment 5th ed. Toronto : Pearson, c2003.

As an approximation of the the way money flows around economies for much of the 20th Century, this is not bad. However, increasingly even for money flows this is a bad representation. In 2006 global flows of capital had reached at least 16 % of global GDP. Even the Economist seems almost to be saying there should be greater cooperation between countries on macro-economic policy even if they don't believe it will happen.

So we should start drawing the diagram more like this.

The global is important, more and more so even for the basic macro-economic management - lets ditch the single economy diagram..

Two important criticisms have often been made of the circular flows diagrams. 

The first by ecological economists is that the real world does not exist - natural resources such as minerals, air, water etc and waste are not part of the flows. However, it would be very hard to incorporate material flows and environmental services into this diagram. In any case that is not the point of this diagram, this diagram is of particular use when thinking of the monetary economy - of inflation, interest rates, fiscal policy (in grand terms), unemployment, trade and so forth. help . That does not mean that resources should not be incorporated in an enlarged conceptualisation of the economy, but it doesn't fit here and that is partly the point of my deep structure.

The second is that a dynamic is missing. Search the web and you will see dozens of circular flow diagrams that include an 'entrepreneurial' segment. Again, fundamentally I think this misses the point this diagram is about money flows.

So both of these commentaries are suggestive of the deeper issues, including the powerful nature of visualisations. The criticism are valid, first, these macro-economic flows only represent cash accounting and thus we have no idea of the asset bases of economies. What business would derive its profits statement from just the cash book? Second there is no agency in these diagrams or notations for the changing nature of the structures that operate. Labour has gone through a number of phases - agrarian/feudal, factoryisation - servicisation and now fragmentation. There are others.


The second half of macro-economics is growth accounting. I am not a growth metrics expert so I will keep this short.

For something as conceptually simple as economic growth, it sure causes lots of problems. Sure we can measure increases in expenditure or income year on year - or recessional periods but what is behind the growth. A simple question but it still seems to remains a mystery (Economist 1999 and Helpman 2005).
Productivity matters - it frees up resources to invest elsewhere, but productivity measures are in my opinion increasingly iffy (if you think of servicisation measurement). Even when you accept productivity measures then you have to ask where do they come from. Helpman argues technological change and institutions - because of course as we know technological change is dependent of institutions and institutions that can themselves drive change.

Okay but then we have the paradoxes. High growth old manufacturing industries - the Austrian Paradox. We could go further and claim that Australia and Canada are simple anomalies for whichever theory - technological or comparative advantage (trade theories) you want to bet on as they are high income largely resource based economies.  Another problem for these two is a different kind of productivity paradox. Canada is supposedly way behind the USA but on life indexes such as that developed by the OECD , while the USA compares well on material living standards (no surprise) it compares less well on other measures of well being.

And now there is a new paradox - that of New Zealand. So in this paradox NZ under-performs on growth and productivity, despite having implemented neoclassical policies over many years. So NZ it seems has under-invested in innovation and human capital as well physical infrastructure - including communications. But it turns out just sheer distance matters alot. So short of towing NZ north closer to markets and sources of inputs the country will suffer a productivity gap.

So whats the state of play - well this is what the Economist said in 2006:

How much guidance do these theories offer to policymakers, such as those sitting on the World Bank's commission? In Mr Solow's model, according to a common caricature, technology falls like “manna from heaven”, leaving the bank's commissioners with little to do but pray. Mr Romer's theory, by contrast, calls for a more worldly response: educate people, subsidise their research, import ideas from abroad, carefully gauge the protection offered to intellectual property.

But did policymakers need Mr Romer's model to reveal the importance of such things? Mr Solow has expressed doubts. Despite the caricature, he did not intend in his 1956 model to deny that innovation is often dearly bought and profit-driven. The question is whether anything useful can be said about that process at the level of the economy as a whole. That question has yet to be answered definitively. In particular, Mr Solow worries that some of the “more powerful conclusions” of the new growth theory are “unearned”, flowing as they do from powerful assumptions.

At one point in Mr Warsh's book, Mr Romer is quoted comparing the building of economic models to writing poetry. It is a triumph of form as much as content. This creative economist did not discover anything new about the world with his 1990 paper on growth. Rather, he extended the metre and rhyme-scheme of economics to capture a world—the knowledge economy—expressed until then only in the loosest kind of doggerel. That is how economics makes progress. Sadly, it does not, in and of itself, help economies make progress.

Deep structure 

I started by stating I am interested in something I call deep structure - but there is noting of that kind emerging in macro-economics.

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