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April 19, 2012

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Ian Leslie

Agreed. The other place that needs massive creativity is public sector, particularly in European economies. Demand for public services, especially health, is rocketing, just as the money to fund them has disappeared. The only way to deliver services that are remotely on a par with what we've had will be if we can do more with less. That is the very essence of innovation. But politicians don't seem interested in discussing new ideas; everything is spending vs cuts.

Luis Enrique

Could the idea that consumers needs are satiated could explain under employment, and even suggest that faster productivity growth would make things worse?

"technological unemployment" [*] is averted when as we get better at making existing things, people either want more of them or want new things. But if that isn't happening, because our wants are satiated, there are two possibilities - one, we all work less and enjoy more leisure, as Keynes hoped, or two, some of us continue to work full time and are highly productive, whilst others are involuntarily unemployed.

Maybe our problem is that the existing economic system responds to technological progress plus satiation via the second sort of outcome, and for some reason we cannot attain the outcome Keynes hoped for.

Or maybe our problem is that now we can all get cheap computers and toasters, the "new things" our increased productivity frees up resources to produce aren't manufactured goods where price cuts can drive demand, but services like social care, care for the elderly etc. where the market and price mechanisms that would normally ensure markets clear (or near enough) aren't operational (because they are generally provided by the government?), so it's a failure of organization. We could organise things so that all these people freed up by tech progress are doing things we all value, but the mechanism for reallocating resources isn't doing its job.

[*]about which there is a nice essay by Solow here:
http://www.nationalaffairs.com/public_interest/detail/technology-and-unemployment

was it somebody called Andrew who said on a recent post that most non-economists would never think that productivity gains could create unemployment? That Solow essay shows us that in fact most people have always feared tech progess for that reason.

Adam Bell

There's an interesting argument put forward by the Grantham Research Institute which says that when innovation and investment in the private sector dies down it's the job of Government to identify a direction of travel in order to deliver additional demand:

http://www2.lse.ac.uk/GranthamInstitute/publications/Policy/docs/PB-Zenghelis-economic-growth-green-investment-innovation.pdf

I'm nervous about handing such a tool to Government, of course, but it's something to ponder nonetheless.

Other Pete

"First, it ignores the fact that innovation has positive externalities which mean it will be under-supplied by the market."

I'm pretty sure that this doesn't follow. The fact that the full externalities of a good aren't being captured by its creator does not usually mean that there's an under-supply of it:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=582602##

Metatone

@Luis Enrique

I haven't thought through satiation fully, but on the topic of "services like social care" the reason markets won't care is that the people who need the services don't have any money.

Something analogous might be "saving the whales." There is no money in saving whales, so that it happens is only through altruism (which for social care might mean taxation and redistribution.)

What's interesting about this is that the market economy is essentially, under this scenario, slowing down, because the people who have money are satiated. But without money, you're not part of the market.

Account Deleted

Re "The slowdown in productivity growth and capital spending in recent years are both consistent with a slowdown in technical progress". Not necessarily.

Rapid technical progress can lead to: a) absolute falls in the capital cost of new classes of technology, which can make it difficult to find enough stuff to spend money on; and b) the creation of supernumerary management jobs to protect privileged employment, which in turn erodes productivity.

In the mid-80s, it was easy for an IT manager to spend a million quid just on some disks and tape drives. Today, you'd struggle to spend that on the entire hardware budget. Instead, you spend on software and services. In reality, the high cost of these reflects the army of sales people, managers, testers, support staff, customisers and myriad consultants that live off the host. The actual cost of code development is a small fraction of this.

This creation of pseudo-jobs extends way beyond IT. Consider the growth in marketing, HR, legal, CSR, finance and audit. Marvel at the number of roles with "manager" in the title. Wonder why graduates want to work for PwC or KPMG.

The popular idea that technical change is slowing down is highly questionable. Much of this stems from Huebner's 2005 study (Tyler Cowen refers to this is The Great Stagnation). This was based on two data: the number of US patent filings per year, and backward-looking subjective assessments of major technical breakthroughs. The former is a measure of intellectual property practice, and arguably the litigation climate, rather than innovation. The latter suffers from our inability to gauge the impact of recent change, first because the lag between discovery and application can be decades (e.g. the Internet), and second because the eventual value may be unknown (e.g. Teflon).

Garry Kasparov recently claimed that the retirement of Concorde showed that we were now going backwards, an idea that I found bemusing for reasons explained here:
http://fromarsetoelbow.blogspot.co.uk/2012/04/we-were-promised-jetpacks.html

Apple is not the richest corporation in the world because it has hitherto invested large amounts of capital. The cash pile it plans to fund its first dividend with is 20% of its market cap, which means it has been building for years.

Much of its manufacturing R&D was outsourced after the mid-90s, after its soup-to-nuts style of operation in the 80s proved increasingly unprofitable, with the result that its corporate R&D (mainly architecture and OS) is now only a little more than 2% of revenue. Keeping design in-house does not require large constant capital.

Technical progress (and the economics of globalisation) has been so successful that we are now throwing off huge amounts of wealth. The problem is that this is not being shared out equally. In practice this means employment isn't being shared out equally, either in terms of hours or wages.

Metatone

On the general topic of the post, some general thoughts:

1) We don't really know how to reward creativity. We've killed off "jobs for life" so the social contract there is broken.

Some companies do attempt some kind of market mechanism. But there's a difficulty because too often individuals get rewards that should be split over teams - and so the supporting people get less and less interested in supporting...

Others "buy in" creativity - pharma companies - the social model of creativity reward being the buyout or IPO. Problem there is we're seeing a lot of winner takes all and that has two issues. The first is that if you know you have a small innovation, you're not going to bother, because small innovations (esp. in the UK) don't attract investment. The second is that if you're gambling on a bigger idea, the odds are you're going to fail. The small percentage who instantly succeed (a la Facebook) are served well by this model. But the rest... well only a small percentage again can survive the first failure and keep on trying to create something new.

I'd guess that the Citizen's Basic Income is probably the philosophical solution... but it's a long way from happening...

Metatone

2) Education (and the rest of our culture) is bedevilled by a mystical view of creativity. It's true that some 1% of creation is the act of genius (Mozart, etc.) but we need more than that - lesser acts of creativity may not be genius, but they are still valuable. And lesser acts can be nurtured, taught and organised for.

But we don't. Until we do, we won't get far.

dirigible

"how to encourage creativity"

Give people the time, space and freedom to be creative.

In other words, be less efficient...

Mike Killingworth

Well, every boss I ever had wanted to take the credit for any creativity I displayed. Admittedly this was in the public sector, but I'd like to hear an explanation of why the private sector is any different...

Zorblog

Once again, this blog raises the right questions, those that go beyond the extent of the economic models, and that are not addressed in other blogs.
It is striking how even very competent economists and bloggers (like Paul Krugman for example) keep faith in models.
Of course you may construct a model with creativity as a variable, but you cannot construct a model that predicts a creativity crisis.
This is not to say that Chris is necessarily right, and that there is a creativity crisis (it would probably require a lot of additional research in order to build a convincing case). But it is a very good question anyway.
And if there is a creativity crisis, the role of economics is to understand the causes and the implications (and there economists might play with models again).
I feel usually so much disconnected with academic economists that I'm never sure whether I totally miss the point or I state the obvious. Increasingly, I start to believe that's what the whole profession does, not me (and certainly not this blog).

Britmouse

On the slowdown in capital spending...

Is this going to become another of those endlessly repeated falsehoods like the myth that the wage share of GDP has gone down because the profit share of GDP has gone up?

UK gross capital spending as a proportion of GDP rose from c.16% after the 1991 recession to peak at c.18% in 2007 right before the Bank of England allowed a collapse in nominal GDP in 2008.

Andrew

@Luis Enrique

"was it somebody called Andrew who said on a recent post that most non-economists would never think that productivity gains could create unemployment? That Solow essay shows us that in fact most people have always feared tech progess for that reason."

Well, yes "create problems" I said.

You make a good point of course. Weaving machines. Automatic tills at supermarkets.

In other words productivity increase by reducing demand for labour for a given output.

However, productivity increase by increased population education levels, or by a decrease in the cost of energy, or by a increase in demand that raises prices, or by the opening of a new factory making new products...is not feared in the same way.

So actually people don't fear productivity increase per se, they fear their particular kind of labour going out of demand because of technological alternatives. This may result in (remaining) labour productivity increase, but it is not identical with productivity increase.

Andrew

@Chris

"1. How do we generate creativity and technical progress? The “leave it to the market” school is inadequate on (at least) two counts. First, it ignores the fact that innovation has positive externalities which mean it will be under-supplied by the market. And second, rests upon an optimism about human ingenuity which might not be fully justified and which is certainly not a necessary feature of free market thinking."

The above paragraph is a total mess of non-sequiturs.

1. Undersupply of creativity is a silly economist's way of looking at it since there is no optimal supply level for innovation.

2. it does not follow that because there are positive externalities to creativity that there must be undersupply. If you mean that fully capturing the rewards of innovation for the innovators would result in more innovation, then support the contention with evidence. Do you think that penicillin would have been invented sooner if Fleming had received ALL the net benefit to humanity that resulted? The web? The transistor? Stainless steel?

Indeed it is one of free-marketeers' most used arguments that there are positive externalities to entrepreneurial activity. What indeed would be the value in encouraging creativity if there were no positive externalities? "Economic growth" you say. And why exactly is that good again?

3. This illustrates yet more economic muddy thinking. If innovators captured ALL the value of the innovation, there would be NO demand for it (and thus no value). People only pay if they perceive the good to be worth more to them than the price. Demand results from a sharing of net benefits between supplier and consumer. (Where does this total idiocy come from? Equilibrium price models?)

3. Most importantly, even if there is "under-supply" by the free market of creativity, it does not follow that the leave-it-to-the-market school is not the best.

4. Whether human ingenuity is up to the job is hardly relevant to whether the leave it to the market school is right. All approaches must currently rely on human ingenuity.

Andrew

Five points for the price of four. Now that's a positive externality.

Ruthcatchen

Thank you for the great post and thoughts from the comments. Creativity is essential and I know from my experience that many people in the workplace are not comfortable with those who are creative. The can be overwhelming and too "out of the box," so their ideas never see the light of day. Many of the unemployed and underemployed may be in this category. It is much safer to hire those you can control. The public must demand the return of these people and ideas in the workforce. Schools must hire creative people and those who are not afraid of change to get education back up to speed. The workplace is not different. There is still innovation happening, but I agree it is not at the rate it should be. I think competition has ruled over creativity. If you fear someone may have a better idea or threatens your place, just keep them from moving ahead. This is not the country I believe we had and I hope it will not be in the future. It is a big world and there should be room for everyone to be successful and contribute.

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