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Creating a learning society

By Joseph E. Stiglitz
June 3, 2014 Project Syndicate

Citizens in the worlds richest countries have research and learning. Private incentives are
come to think of their economies as being based not well aligned with social returns: firms can
on innovation. But innovation has been part of gain from innovations that increase their
the developed worlds economy for more than market power, enable them to circumvent
two centuries. Indeed, for thousands of years, regulations, or channel rents that would
until the Industrial Revolution, incomes otherwise accrue to others.
stagnated. Then per capita income soared, But one of Schumpeters fundamental insights
increasing year after year, interrupted only by has held up well: Conventional policies
the occasional effects of cyclical fluctuations. focusing on short-run efficiency may not be
The Nobel laureate economist Robert Solow desirable, once one takes a long-run
noted some 60 years ago that rising incomes innovation/learning perspective. This is
should largely be attributed not to capital especially true for developing countries and
accumulation, but to technological progress emerging markets.
to learning how to do things better. While some Industrial policies in which governments
of the productivity increase reflects the impact intervene in the allocation of resources among
of dramatic discoveries, much of it has been sectors or favor some technologies over others
due to small, incremental changes. And, if that can help infant economies learn. Learning
is the case, it makes sense to focus attention on may be more marked in some sectors (such as
how societies learn, and what can be done to industrial manufacturing) than in others, and
promote learning including learning how to the benefits of that learning, including the
learn. institutional development required for success,
A century ago, the economist and political may spill over to other economic activities.
scientist Joseph Schumpeter argued that the Such policies, when adopted, have been
central virtue of a market economy was its frequent targets of criticism. Government, it is
capacity to innovate. He contended that often said, should not be engaged in picking
economists traditional focus on competitive winners. The market is far better in making
markets was misplaced; what mattered was such judgments.
competition for the market, not competition in
the market. Competition for the market drove But the evidence on that is not as compelling as
innovation. A succession of monopolists would free-market advocates claim. Americas private
lead, in this view, to higher standards of living sector was notoriously bad in allocating capital
in the long run. and managing risk in the years before the global
financial crisis, while studies show that average
Schumpeters conclusions have not gone returns to the economy from government
unchallenged. Monopolists and dominant research projects are actually higher than those
firms, like Microsoft, can actually suppress from private-sector projects especially
innovation. Unless checked by anti-trust because the government invests more heavily
authorities, they can engage in anti-competitive in important basic research. One only needs to
behavior that reinforces their monopoly power. think of the social benefits traceable to the
Moreover, markets may not be efficient in research that led to the development of the
either the level or direction of investments in Internet or the discovery of DNA.
But, putting such successes aside, the point of impeding the flow of knowledge that is
industrial policy is not to pick winners at all. essential to learning while encouraging firms to
Rather, successful industrial policies identify maximize what they draw from the pool of
sources of positive externalities sectors where collective knowledge and to minimize what
learning might generate benefits elsewhere in they contribute. In this scenario, the pace of
the economy. innovation is actually reduced.
Viewing economic policies through the lens of More broadly, many of the policies (especially
learning provides a different perspective on those associated with the neoliberal
many issues. The great economist Kenneth Washington Consensus) foisted on
Arrow emphasized the importance of learning developing countries with the noble objective
by doing. The only way to learn what is of promoting the efficiency of resource
required for industrial growth, for example, is allocation today actually impede learning, and
to have industry. And that may require either thus lead to lower standards of living in the long
ensuring that ones exchange rate is run.
competitive or that certain industries have Virtually every government policy,
privileged access to credit as a number of East intentionally or not, for better or for worse, has
Asian countries did as part of their remarkably direct and indirect effects on learning.
successful development strategies. Developing countries where policymakers are
There is a compelling infant economy cognizant of these effects are more likely to
argument for industrial protection. Moreover, close the knowledge gap that separates them
financial-market liberalization may undermine from the more developed countries. Developed
countries ability to learn another set of skills countries, meanwhile, have an opportunity to
that are essential for development: how to narrow the gap between average and best
allocate resources and manage risk. practices, and to avoid the danger of secular
stagnation.
Likewise, intellectual property, if not designed
properly, can be a two-edged sword when Joseph E. Stiglitz, a Nobel laureate in economics and
viewed from a learning perspective. While it University Professor at Columbia University, was
Chairman of President Bill Clintons Council of
may enhance incentives to invest in research, it Economic Advisers and served as Senior Vice President
may also enhance incentives for secrecy and Chief Economist of the World Bank.