David Havyatt
December 15, 2015

Are we any closer to growth?

Are we any closer to growth?

University of Sydney: controversy first raged in the 1970s over the place of economics

When Malcolm Turnbull was releasing his Innovation and Science Agenda your correspondent was attending the annual conference of the Australian Society of Heterodox Economists. One paper in particular seemed apposite: a paper on Schumpeter’s business cycles.

Schumpeter is an interesting character because he actually sits outside the mainstream, yet he is often cited by business and political leaders.

He primarily sits outside orthodoxy because he rejects the concept of the economy as being perpetually either in equilibrium or heading towards it

In particular Schumpeter rejects the idea of resource or technological constraints because innovation is directed towards their obliteration. Mor importantly he sees innovation as a creative, not adaptive, response.

Schumpeter’s core thesis was that the process of innovation was both the core of growth and also the underpinning of the business cycle; first expounded in The Theory of Economic Development (1934) and later Business Cycles (1939).

Given we are being regaled by the need for innovation to increase productivity and fuel growth, it might be expected that orthodox economics has a complete description of growth. In reality there are two contending theories of growth within orthodoxy, due to Solow and Romer.

In Solow’s model technological innovation is “exogenous” – it comes from outside the economic system. This is a critical element because the value of innovation inside the system is assumed to be totally captured by the innovating firm. The typical example is that a firm will innovate to reduce its costs. When it does so, it captures the proceeds in increased profit which of itself just adds to capital accumulation.

In the Romer model growth is endogenous, and primarily it comes from spill-overs of the innovative effort of others. This feature of the Romer model puts it at odds with the favoured theory of an extreme view within new institutional economics that the key to spurring innovation is tight intellectual property protection; a regime that is inconsistent with spill-overs.

Both theories differ from Schumpeter because they presume a continuous growth period, rather than underlying growth punctuated by periodic recessions.

Why is all this discussion relevant to the Innovation and Science Agenda? Because it reflects the state of economics.

Whether economics is a “science” is debated. But given that it attempts to provide explanations of observable outcomes it qualifies. That it is hard to construct experiments rather than just rely on observations makes it no different to astrophysics.

Economics, however, struggles with the concept that different explanations might suit different domains. A physicist will happily work with classical mechanics to calculate the trajectory of a projectile, but use quantum mechanics to devise a transistor.

But more significant is the place of economics within our Universities. In the 1970s when the controversy first raged at the University of Sydney between a Department of Economics and a separate Department of Political Economy, both were located in the Faculty of Economics.

Once that Faculty got fully taken over by the peddlers of marketing, finance and human resources to become the Faculty of Business, the Political Economists were despatched to the Faculty of Arts. More recently the Economists followed.

In other Universities the Economics departments have been disbanded all together.

It seems inconceivable that a Bachelor of Commerce doesn’t require a unit taught by economists, only Economics for Business Decision Making.

But from 2015 on Engineers at Sydney no longer study Physics, everything they apparently need to know is taught by the Engineering Faculty. This change seems to have been accompanied by a decision that a Bachelor of Engineering is now automatically a Bachelor of Engineering Honours by virtue of being a four year degree.

Developing degrees to be more focussed on training rather than educating has been a fad over the last decade as Government has tried to press the academy into being the servant of the capitalists. The neoliberal ideal has no place for inquiry, only the application of “knowledge” which has somehow magically “come to be.”

We can’t expect to implement policies to grow the economy if we don’t have students with any understanding of economics, and the various strands of thought within it.

But maybe we don’t have to worry. Schumpeter is a favourite for many business figures, because the phrase “creative destruction” is so evocative and because he was a supporter of large corporation’s creative entities.

But in Capitalism, Socialism and Democracy he posed the question “Can capitalism survive?” His conclusion was that it can’t, not because of inherent contradictions, but because of its success. Once our wants are satiated we no longer need innovation, and without the need for innovation we can run a socialist state.

A similar strand of thought pervades Paul Mason’s book Postcapitalism, at least as described by Scott Ludlum. From the bit I’ve sampled of the book it is about as impenetrable as Schumpeter. While Mason shares Schumpeter’s interest in punctuated growth, he deviates by identifying the demise of capitalism with the impact of communications technologies.

The review for the Real-World Economics Review went a stage further and described this post-capitalist world as the “digital economy.”

Which brings us back to Government policy. The Coalition prior to the last election committed to an update to the National Digital Economy Strategy in its first term. The responsibility for that update has been given to Christopher Pyne as Minister for Industry, Innovation and Science.

The Prime Minister and Minister may claim that this has been overtaken by the innovation agenda. That would be an inadequate response; the digital economy strategy needs to cover both the capabilities and initiatives to fully capture the benefit of a changed landscape. It needs to be a strategy for the transformation of the whole economy, not just spurring growth.

So as we head to our summer holidays hopefully there is some group of policy wonks in Canberra whose plan for the New Year is delivering on the election commitment, unless it is to be added to the collection of unfulfilled expectations.

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