Smithian vs. Schumpeterian Growth

In this quote from his latest book Joel Mokyr contrasts two important views on the origins of economic growth:

“[…] The difference between “Smithian” and “Schumpeterian” growth is that for the former, exchange and cooperation based on trust or respect for the law are treated as a game between individuals whereas the essence of Schumpeterian growth is based on the manipulation of natural regularities and phenomena and thus au fond should be seen as a game against nature.”

“Smithian” refers to Adam Smith, of course, who is seen as the founding father of modern economics. In his work, Smith emphasized the role of trust, cooperation, and the rule of law as the necessary prerequisites for trade and economic activity. If you can guarantee the former, entrepreneurship (broadly defined) by free citizens will soar and the economy will flourish.

This view has always been pervasive in economics. Modern proponents are, for example, Daron Acemoglu and James Robinson who, in their book “Why Nations Fail” point to the importance of “inclusive institutions” for economic growth, by which they mean a society that allows “everyone to participate in economic opportunities”.

In contrast, you have the work by Joseph A. Schumpeter who stresses the role of new products and production techniques as a stimulus for economic growth. Clever business people will constantly look for possibilities to outsmart their rivals and make more money. As a result, what Schumpeter called “creative destruction” will occur. Old businesses get driven out of the market and replaced by new firms with better products and more efficient production techniques. The basis for this are new inventions and advances in science and technology. With their help businesses are able to serve new customer needs and operate more efficiently.

But in order to come up with such advances in science and technology we need to have a good understanding of the physical world around us. Although precise knowledge about a physical phenomenon is not always needed to put it to use, we still need to carefully investigate its regularities and discern causes from effects. That’s the origin of the term “game against nature”, as Mokyr puts it. Instead of a mere cooperation game between individuals, the challenge lies in teasing out nature’s deep secrets.

Both views have their merits and they shouldn’t be seen as mutually exclusive. Acemoglu and Robinson are right in saying that a participatory society is necessary in order to stimulate creativity and to incentivize investments in innovation. Nevertheless the Schumpeterian perspective is still kept too much at the fringes of economics (I’m still waiting for Aghion and Howitt to win the Nobel!). Despite their importance for economic growth, topics of science, technology, and innovation remain underrepresented in the literature. Especially finance people seem to have the habit to treat R&D as yet another form of investment (see this paper for a current example).

Innovation as a separate research topic figures much more prominently in the business administration literature. Fields such as strategy, corporate finance, or accounting have realized how important business innovations are for a company’s economic success. Economics should follow suit.

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Networking For Innovation

Olav Sorenson from Yale published a new NBER working paper called “Innovation Policy in a Networked World”. The essay is quite interesting because it reviews insights we got from social network theory (no, not Facebook, although you could analyze Facebook with the same tools) and puts them into context for designing effective policy measures to stimulate innovation. Continue reading Networking For Innovation

Innovation on (government) demand?

Next week we will organize the 7th ZEW/MaCCI Conference on the Economics of Innovation and Patenting in Mannheim and the program will be great. We will have Bronwyn Hall from Berkeley and Pierre Azoulay from MIT as keynote speakers. I’m definitely looking forward to hear them speak.

Myself, I will present a new project on the relationship between public procurement and innovation. In brief the research question is the following. Continue reading Innovation on (government) demand?

Cardwell’s Law

While reading Joel Mokyr’s newest book I came across an older paper of him, which I found very interesting. It is about what Mokyr calls Cardwell’s law*— the empirical regularity that “most societies that have been technologically creative have been so for relatively short periods”. Throughout economic history successful countries in terms of innovation and economic growth have usually lost their competitive edge pretty soon again and were overtaken by others. Continue reading Cardwell’s Law

Innovation,unemployment and subjective well-being

These days, everybody is talking about the losers of globalization and how they made Trump and Brexit happen. People in industrialized countries lose their jobs due to offshoring and international competition, which leads them to vote for right-wing populists, so the common narrative goes. That might not be the full story though. Continue reading Innovation,unemployment and subjective well-being