The quest for innovation economics

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Adherents of the classical economic doctrines have different approaches to trade and fundamentally different beliefs about its efficiency. Supply-siders and liberal neoclassicalists with their overriding focus on promoting allocative efficiency and consumer welfare, strongly favor free trade. They oppose tariffs or other restrictions in large part because they see them as reducing allocative efficiency. Neoclassicalists believe that, if each country specializes in what it supposedly is good at or has a competitive advantage, efficiency is increased just as it would be if prices were not distorted at home.

And they believe that what countries are good at is largely fixed, determined by factors outside of government control. They tar with one broad brush any efforts by nations to change what they are good at. They do so regardless of whether these efforts are appropriate and fair, such as targeting certain industries for help, or inappropriate and unfair such as manipulating standards to benefit domestic firms.

In either case, the effort is branded as misguided industrial policy that only hurts the country practicing it. Moreover, neoclassicalists largely focus on the benefits to consumers from low-wage production overseas and ascribe the costs to workers as just the natural results of market forces that are only resisted at the cost of economic peril. The only real difference between the two neoclassical camps is their difference in what to do about workers who are hurt by trade.

Jeff Faux, founder and Distinguished Fellow of the Economic Policy Institute in the United States stated that, supply-siders generally argue that there are significant risks from more generous policies to help those who are hurt by trade, including increasing government spending and blunting incentives for workers to work and take risks. In contrast, liberal neoclassicalists argue for helping workers who are hurt by trade, in part because they believe that by doing so they can limit political opposition to trade. Jeff Faux further noted that, because neo-Keynesians are concerned first and foremost with workers’ welfare, they are more skeptical of trade, seeing that it leads to some workers losing their jobs. They also focus not on the benefits to consumers from low-wage production overseas, but on the costs to workers.

liberal neoclassicalists argue for helping workers who are hurt by trade, in part because they believe that by doing so they can limit political opposition to trade

Neo-Keynesians believe that many United States workers see their wage increases restricted because of pressures on production wages from low-wage workers in developing nations. For that reason, most neo-Keynesians favor limiting new market-opening steps, particularly with countries with lower wages and weaker labor and environmental standards. Because they want to blunt low-wage competition, neo-Keynesians’ preferred solution to globalization is to push for stronger labor and environment standards assuming that if corporate costs go up in other nations, United States workers will benefit. The same motivation underlies neo-Keynesians’ support for steps to have nations like China increase their currency values vis-à-vis the United States dollar.

Adherents of innovation economics are generally supportive of globalization and unimpeded international trade, but their support for trade is not based on increasing allocative efficiency, as is the case with neoclassicalists. Instead, they support global trade for three main reasons. First, the increases in competition can spur companies to be more innovative and productive. Second, the natural evolution to a global trading system should naturally benefit high-wage countries by creating a new global division of labor where the industrial base of these economies evolves toward more high-value-added and innovation-based goods and services. Third, they see globalization as increasing innovation in the sense that it spurs greater learning and collaboration across borders.

Yet adherents of innovation economics temper their support for global trade with the concern that manipulation of the trading system by countries embracing mercantilist policies favoring exports such as tariffs, unfair taxes, currency manipulation, discriminatory standards coupled with disregard of intellectual property standards, can hurt richer nations’ productivity and innovation. Potentially, they can also lead to lower levels of global growth as companies make investments in places and in types of production that they would not make absent these mercantilist policies.

Peter Rashish, senior trade advisor at Transnational Strategy Group LLC in the United States argued that in this way, they don’t believe that efforts to put in place robust innovation policies is “industrial policy” or any effort to fight unfair trade practices is protectionism. According to Peter Rashish, this is why people who subscribe to innovation economics advocate international efforts to move the global trading system away from national economic policies that promote exports in a beggar-thy-neighbor fashion and toward policies that support domestic innovation and productivity.

Robert Atkinson, President of the Information Technology and Innovation Foundation in Washington D.C. stated that like neo-Keynesians and liberal neoclassicalists, innovation economists do favor policies to help workers and communities adjust to trade-related dislocations. However, they would generally oppose policies to protect domestic companies from legitimate impacts from trade. Innovation economists argue that for trade to be effective, it must be complemented with domestic innovation policies to help the economy move up the value chain and take advantage of global economic opportunities and respond to global challenges.

For unlike neoclassical economists, innovation economists believe that competitive advantage has to be created and continually sustained. In the 21st century global economy, innovation and knowledge are the most important factors driving economic growth. To effectively foster an innovation economics agenda, policymakers must understand the limitations of today’s prevailing economic doctrines and appreciate the opportunities of the emerging doctrine of innovation economics.

In addition, policymakers must embrace an innovation economics agenda that puts spurring organizational innovation and productivity at the center of their economic policy. For unless the current playbook of economic doctrines changes, the plays available to policymakers will remain the same. Given the new challenges facing the global economy, what is needed is both new plays and a new playbook.