Theory, History and Industrial Policy -- Joe Stiglitz's View on Creating the Learning Economy

|Peter Boettke|

If anyone doesn't believe that theory guides interpretation of the "facts", then consider the latest from Joe Stiglitz, Creating a Learning Society.  To anyone who has followed Stiglitz's career, none of the arguments are new.  In essence he is making a typical Stiglitz-type market failure argument grounded in an argument for the positive spillover effects of technological innovation.  Since the incentives are not aligned perfectly, private sector actors will underinvest in the things that produce technological innovation.  As Stiglitz neatly summed it up in a recent Project Syndicate column:

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.

Note how Stiglitz sets the terms of the debate -- it isn't about picking winners and losers, but about encouraging sectors where learning results in positive externalities that 'might' generate benefits throughout the economic system.  This is how "we" become smarter, more efficient, and more innovative -- and "we" get that way through judicious governmental action.

Stiglitz's intellectual move to emphasize the utilization of knowledge and learning through time must be applauded, while his failure to confront the knowledge problems and poltical failure problems with industrial policy should be highlighted for the shortcomings in analysis that they are.  A more robust political economy approach --- as I argued in my JEL review of Stiglitz's Whither Socialism? -- follows when the assumptions of benevolence and omniscience are rejected.  In other words, when the knowledge problems that government planning [managing] of a dynamic and innovative economic system are acknowledged, and the reality of government failure whenever political decision making is substituted for market decision making is incorporated into the analysis.

So it is time to return to Don Lavoie's wonderful National Economic Planning: What is Left? to see how we should be thinking about the growth of knowledge in a free society (or as Hayek put it 'the creative power of a free civilization') and the problems in the politics of attempts to steer that growth of knowledge.

Stiglitz is indeed correct that "Viewing economic policies through the lens of learning provides a different perspective on many issues."  It is just that the lessons he suggests we learn aren't the one's we should be learning from the comparative historical analysis of erring entrepreneurs and bumbling bureaucrats.

 

Comments

[Jim Rose]

Pete,on "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", Sinclair Davidson dug out this:
In 2003, the OECD published an official report into ‘The Sources of Economic Growth in OECD Countries’.

As part of that analysis the OECD investigates the impact of R&D on economic growth. Specifically, they disaggregate R&D into a private and public component.

As expected there is a positive and statistically significant relationship between overall R&D and economic growth, and also between private R&D and economic growth.

In contrast to the usual assumption... there is a statistically significant negative relationship between public R&D and economic growth.

[Glenn]

At least he's over trying to reduce the actions of free agents in a complex system to a co-variance matrix...

[Mario Rizzo]

All sorts of positive externalities are attributed to government funding of all sorts of research and knowledge production schemes. Most of the time there little hard evidence that, at the margin, there is anything significant there. In any event, one thing is certain: No one has shown that government subsidy of economic research has produced social benefits even remotely proportional to its costs.

[Rick Clay]

Stiglitz argues that governments can sometimes do a better job than private actors at identifying and supporting good ideas (those with positive externalities). What seems to be missing from this discussion is the far more compelling evidence of the contrary effect. An equally powerful aspect of free markets is their almost magical ability to stop investing in lousy ideas. Is there any doubt from the historical record that the free market is far more effective in removing support for failing ideas?
Customers stop buying what no longer works for them and the business is forced to change for the better or wither.
Governments frequently increase their investments in failure, perpetuating costs and negative externalities far into the future.

[Rafe Champion]

Terence Kealey devastated the Stiglitz thesis in a massive, historically informed book on the economics of scientific research, summarized here
http://www.the-rathouse.com/2010/Kealey-EconomicsofScience.html

On the agricultural revolution in England he showed that innovations such as crop rotation and systematic improvement of crops and pastures were driven by gentleman farmers such as “Turnip” Townsend and associations such as the Lunar Society which consisted of a mix of scientists, engineers and industrialists. By 1850 agricultural productivity in Britain was increasing by 0.5% per annum, unprecedented in history. Laissez faire ruled (almost) and there was no state involvement in research or industry policy.

He described the way science Czars used the wars of the 20th century to advance Big Science on the back of Big Government. One of the results is the scandal of climate science, driven by the politics of the IPCC and massive government funding of research.