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FromWelfareStatetoInnovationStatebyDaniRodrikProjectSyndicate

ECONOMICS
DANIRODRIK
DaniRodrikisProfessorofSocialScienceattheInstituteforAdvancedStudy,Princeton,
NewJersey.Heistheauthorof OneEconomics,ManyRecipes:Globalization,
Institutions,andEconomicGrowthand,mostrecently, TheGlobalizationParadox:
DemocracyandtheFutureoftheWorldEconomy.

JAN14,2015

FromWelfareStatetoInnovation
State
PRINCETONAspecterishauntingtheworldeconomythespecterofjobkilling
technology.Howthischallengeismetwilldeterminethefateoftheworldsmarket
economiesanddemocraticpolities,inmuchthesamewaythatEuropesresponsetothe
riseofthesocialistmovementduringthelatenineteenthandearlytwentiethcenturies
shapedthecourseofsubsequenthistory.
Whenthenewindustrialworkingclassbegantoorganize,governmentsdefusedthethreat
ofrevolutionfrombelowthatKarlMarxhadprophesiedbyexpandingpoliticalandsocial
rights,regulatingmarkets,erectingawelfarestatethatprovidedextensivetransfersand
socialinsurance,andsmoothingtheupsanddownsofthemacroeconomy.Ineffect,they
reinventedcapitalismtomakeitmoreinclusiveandtogiveworkersastakeinthesystem.
Todaystechnologicalrevolutionscallforasimilarlycomprehensivereinvention.The
potentialbenefitsofdiscoveriesandnewapplicationsinrobotics,biotechnology,digital
technologiesandotherareasareallaroundusandeasytosee.Indeed,manybelievethat
theworldeconomymaybeonthecuspofanotherexplosioninnewtechnologies.
Thetroubleisthatthebulkofthesenewtechnologiesarelaborsaving.Theyentailthe
replacementoflowandmediumskilledworkerswithmachinesoperatedbyamuch
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smallernumberofhighlyskilledworkers.
Tobesure,somelowskilltaskscannotbeeasilyautomated.Janitors,tociteacommon
example,cannotbereplacedbyrobotsatleastnotyet.Butfewjobsarereallyprotected
fromtechnologicalinnovation.Consider,forexample,thattherewillbelesshuman
generatedtrashandthuslessdemandforjanitorsastheworkplaceisdigitized.
Aworldinwhichrobotsandmachinesdotheworkofhumansneednotbeaworldofhigh
unemployment.Butitiscertainlyaworldinwhichthelionsshareofproductivitygains
accruestotheownersofthenewtechnologiesandthemachinesthatembodythem.The
bulkoftheworkforceiscondemnedeithertojoblessnessorlowwages.
Indeed,somethinglikethishasbeenhappeninginthedevelopedcountriesforatleastfour
decades.Skillandcapitalintensivetechnologiesaretheleadingculpritbehindtherisein
inequalitysincethelate1970s.Byallindications,thistrendislikelytocontinue,producing
historicallyunprecedentedlevelsofinequalityandthethreatofwidespreadsocialand
politicalconflict.
Itdoesnthavetobethisway.Withsomecreativethinkingandinstitutionalengineering,
wecansavecapitalismfromitselfonceagain.
Thekeyistorecognizethatdisruptivenewtechnologiesproducelargesocialgainsand
privatelossessimultaneously.Thesegainsandlossescanbereconfiguredinamannerthat
benefitseveryone.Justaswiththeearlierreinventionofcapitalism,thestatemustplaya
largerole.
Considerhownewtechnologiesdevelop.Eachpotentialinnovatorfacesalargeupside,but
alsoahighdegreeofrisk.Iftheinnovationissuccessful,itspioneerreapsalargegain,as
doessocietyatlarge.Butifitfails,theinnovatorisoutofluck.Amongallthenewideasthat
arepursued,onlyafeweventuallybecomecommerciallysuccessful.
Theserisksareespeciallyhighatthedawnofanewinnovationage.Achievingthesocially
desirablelevelofinnovativeeffortthenrequireseitherfoolhardyentrepreneurswhoare
willingtotakehighrisksorasufficientsupplyofriskcapital.
Financialmarketsintheadvancedeconomiesprovideriskcapitalthroughdifferentsetsof
arrangementsventurefunds,publictradingofshares,privateequity,etc.Butthereisno
reasonwhythestateshouldnotbeplayingthisroleonanevenlargerscale,enablingnot
onlygreateramountsoftechnologicalinnovationbutalsochannelingthebenefitsdirectly
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tosocietyatlarge.
AsMarianaMazzucatohaspointedout,thestatealreadyplaysasignificantroleinfunding
newtechnologies.TheInternetandmanyofthekeytechnologiesusedintheiPhonehave
beenspilloversofgovernmentsubsidizedR&DprogramsandUSDepartmentofDefense
projects.Buttypicallythegovernmentacquiresnostakeinthecommercializationofsuch
successfultechnologies,leavingtheprofitsentirelytoprivateinvestors.
Imaginethatagovernmentestablishedanumberofprofessionallymanagedpublicventure
funds,whichwouldtakeequitystakesinalargecrosssectionofnewtechnologies,raising
thenecessaryfundsbyissuingbondsinfinancialmarkets.Thesefundswouldoperateon
marketprinciplesandhavetoprovideperiodicaccountingtopoliticalauthorities
(especiallywhentheiroverallrateofreturnfallsbelowaspecifiedthreshold),butwouldbe
otherwiseautonomous.
Designingtherightinstitutionsforpublicventurecapitalcanbedifficult.Butcentralbanks
offeramodelofhowsuchfundsmightoperateindependentlyofdaytodaypolitical
pressure.Society,throughitsagentthegovernmentwouldthenendupascoownerof
thenewgenerationoftechnologiesandmachines.
Thepublicventurefundsshareofprofitsfromthecommercializationofnewtechnologies
wouldbereturnedtoordinarycitizensintheformofasocialinnovationdividendan
incomestreamthatwouldsupplementworkersearningsfromthelabormarket.Itwould
alsoallowworkinghourstobereducedfinallyapproachingMarxsdreamofasocietyin
whichtechnologicalprogressenablesindividualstohuntinthemorning,fishinthe
afternoon,rearcattleintheevening,criticizeafterdinner.
Thewelfarestatewastheinnovationthatdemocratizedandtherebystabilized
capitalisminthetwentiethcentury.Thetwentyfirstcenturyrequiresananalogousshiftto
theinnovationstate.ThewelfarestatesAchillesheelwasthatitrequiredahighlevelof
taxationwithoutstimulatingacompensatinginvestmentininnovativecapacity.An
innovationstate,establishedalongthelinessketchedabove,wouldreconcileequitywith
theincentivesthatsuchinvestmentrequires.
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