New Economic Thinking Landscape Review: an opportunity?

There is a call for proposals out that I quite like, and goes well with the Sci-Fi Economics Lab.

Yet, there is new economic thinking that offers alternative ideas to neoliberalism that may be better suited to solving the challenges of the 21st century. The 2008 financial crisis, the global climate crisis and the COVID crisis offer an ‘opening in the clouds’ to alternative thinking. We could see an economic paradigm shift out of the COVID crisis.

Laudes Foundation aims to support this shift in two ways:

  • Building the new economic paradigm: Applied research in new economic thinking, which involves working with think tanks, academics, policymakers and industry to rethink how value is created and measured.
  • Mobilising around the new economic paradigm: Using policy advocacy and strategic communications to build support within government, business and society for new economic thinking.

[…] Laudes Foundation and Partners for a New Economy need a better understanding of the individuals and organisations contributing to a new economic paradigm shift and what tactics they are using. We also need an inventory of who is funding these organisations and individuals."*

They are looking for micro models and experiences, not macro and theory.

It’s a small project, but kind of nice. It goes quite well with the research we have been running under the aegis of the Sci-Fi Economics Lab: finding the “viable mutants”, designed for a future economy that is not here yet, but that still need to be able to survive and prosper in the economy we do have.

We, the Edgeryders Research Network, are interested in partnering up with a person, or an organization, to do desk research during summer 2021 (literature review and interviews). We ourselves would provide some analysis on (mostly) interviews – we have a method for that. These activities would both be part of phase 1 of the research, which is the object of this call. We would also be super-interested in developing this in phase 2 (object of a future call).

The person we are looking for would ideally be a scholar of social enterprises, with field research experience and knowledge of the relevant literature. The total amount offered is around 30-35K in total. Most of it would go to the person we are looking for. The work is to be done in July and August 2021.

If you are interested, then do get in touch with me (alberto@edgeryders.eu). Be fast, because the deadline is on June 11.

Ping @Worldbuilders.

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Alberto-

I just want to note that you are so intent on supposing that the current study of economics is incapable of producing a worthwhile model that your proposal ONLY asks for “alternatives to neoliberalism”. I need not remind you that economists rarely use the term “neoliberalism”, as it is solely a political slur. Moreover, as far as I can tell what you are calling for falls more within the realm of politics than economics, as the things which neither you nor I like about the current system in various European countries and the US are not economic in nature – they are political. Economists have long recommended alternatives, many of which would have been preferable to the existing systems, but the politicians and business owners, and other supporters of existing systems, including clerics, institutions of higher learning, etc., would rather things remain as they are. It is great to propose alternative economies, but a political, and, even more important, cultural path to that alternative is necessary for it to come into being. Moreover, it is unlikely to come into being as a top-down intellectuals’ project to improve the lives of the masses – primarily because of the necessity of mobilizing society first.

This is prologue to bringing to your attention an intriguing book I have come across, which might interest you. Here is the review:

" THE SHADOW OF GROWTH

While Romer was publishing his Nobel Prize-winning work, Aghion was already taking analysis of the growth process further, to account for outstanding missing links. Romer’s model lacked an engine that would drive the creation of productivity-enhancing knowledge in an economy populated by incumbent competitors. With a series of collaborators, notably Brown University’s Peter Howitt, Aghion found such an engine in the Schumpeterian growth model.

The key to Aghion’s analysis is that it encompasses both sides of Schumpeter’s notion of “creative destruction.” One must account not only for the creation of new, more competitive products and processes, but also the destruction of the existing, established products and processes. In The Power of Creative Destruction , Aghion and his colleagues expand the reach of the model to define a “new paradigm” for evaluating economic history and policy.

The authors’ paradigm applies to a wide range of relevant and timely issues, from economic development in one country to the globalization of markets and the supply chains that link them, and from the post-2000 slowdown in productivity growth to growing concern about sustainability in the context of climate change. The overarching theme is that promoting creative innovation and mitigating its destructive consequences should form the two poles of public policy.

Aghion’s long commitment to this research program fits squarely within the mainstream of neoclassical economics. Yet this book and the ongoing research that it inspires (both by Aghion and many others) also demonstrate how that mainstream has been evolving. By seriously addressing the downside of Schumpeterian destruction as well as the upside of creation, Aghion and his co-authors find roles for the state in the market economy both as “investor” and as “insurer.”

In their conclusion, they identify a “Golden Triangle” where the interaction of state and market is extended to include the influence of “civil” society, here defined as the cultural norms that inform economic and political actors’ behavior (both individually and jointly). The book thus moves the debate a long way past the old idea that the only role for the state is to interfere with the smooth operation of otherwise efficient markets. Gone is the extreme “methodological individualism” exemplified by former British Prime Minister Margaret Thatcher’s claim that “there is no such thing as society.”

MODELING CREATIVE DESTRUCTION

The mathematical model underpinning this research program is not presented in The Power of Creative Destruction . A brief examination of it, however, can illuminate how Aghion’s paradigm works and, more generally, how a mathematical model abstracted from the real world can guide practical policies to shape behavior.

At the core of Aghion’s model is an ongoing competition to become the monopoly provider of an intermediate product essential to the production of a final good. With this position comes economic “rents” – profits captured above and beyond the cost of the capital expended in the competition.

The model’s most radical abstraction is that the final good is sold in a perfectly competitive market where, by definition, price equals marginal cost. This means that competing inventors can know in advance what the price of their invention will be, the extent of monopoly profits at stake for whomever wins the competition, and how much investment is needed to win. Of course, perfect competition is at the extreme end of the spectrum of market conditions. But this condition is necessary to work out the model’s logic; it is not, and need not be, a reflection of economic reality.

The innovation engine in the model also incorporates a set of parameters that jointly define the productivity of R&D. And though these parameters are exogenous and thus appear to be arbitrary, they offer serviceable targets for policies designed to increase the rate of innovation and economic growth. For example, the value of the parameter for research productivity can be enhanced by public investment in education.

Similarly, the profits earned from winning the competition depend on the degree of protection offered by the patent system. But this cuts two ways, because a stricter intellectual-property regime can strengthen an incumbent’s power to block competition from innovators. Competitive conditions can also cut two ways: “neck-and-neck” competition at the frontier stimulates investment in innovation; but if the gap between leader and follower is too large, potential innovators may withdraw and seek to protect their own niches. This is why antitrust enforcement plays such an important role in the innovation economy.

MISSING MARKET RISK

Comprehensive as Aghion’s paradigm is, it is not complete. The process of innovation implied by the underlying mathematical model is of the simplest kind. It assumes both that the market for a new product already exists, and that it will absorb all that can be produced. Historically, however, the innovations that have generated the most growth and the greatest profit have been those that created entirely new markets for goods and services that the world had never seen before. Think of railroads and automobiles, or the near-infinite array of goods and services enabled by electricity and computing.

In other words, the real market risk that all entrepreneurs face is outside the model and thus tangential to the paradigm. But it is worth remembering that the costly trial-and-error search for new applications derived from advancing technology is categorically different from inventing a new product for an application that is already defined.

Much also depends on another dimension of risk: the availability of finance for a radically uncertain investment. One of the virtues of Aghion’s Schumpeterian paradigm is that it encompasses this tension between the financier and the entrepreneur over the sharing of authority and potential profits. (The entrepreneur, Schumpeter observed, is the one who “loses other people’s money.”)"

The original article is here:

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Agree – mostly.

Yes, “neoliberalism” is a political ideology. In the Sci-Fi Economics Lab, we do not engage with it: we engage with neoclassical economics instead.

However, I don’t see how the realms of economics and politics can be separated. That seems itself an ideological statement. Economics is a rebranding of 19th century political economy, which was itself an outgrowth of moral philosophy.

But then again, it seems these guys are not going for anything at this level of abstraction. They seem to want examples of what we have been calling “viable mutants”: alternative ways of organizing production, that encode values different from MSV, greed is good, everything is a process and employees are perfectly interchangeable etc., and that still are able to exist and hopefully thrive in the current economic landscape. Also, they want to map where the state of economic thinking is, and who is funding what. I understand it as empirical research.

Thanks for flagging the book, it does seem very interesting. Even though

This puts me a bit off. I used to do work that was kind of similar, back in my first PhD program. I will spare you the grisly details, but I grew very uneasy with that work. This logic of solving for maximum expecetd value of (net) payoff seemed to not capture at all the essence of what innovation is (and certainly not “creative destruction”). And indeed

I am not sure this stuff is barking up the right tree. I know my own work was off: left that PhD program to be in a band (yes), and when I did went back to PhD I did network stuff, as far from marginalism as I would get away with.

What is so bad about Marginal Social Value?

“Greed is good” was never an economics meme – it is from a Hollywood (read anti-business) movie. Utilitarianism at its best (which was probably with J.S. Mill in the nineteenth century) is about maximum well-being for the greatest number – it is hard to improve on that with multi-cultural societies each sub-set of which defines “well-being” differently.

I admit that the idea that employees are interchangeable is ludicrously over-rated – a lot of this comes from business schools, which as a class do not understand PEOPLE or how they work – which is insane for institutions that purport to manage companies made up of them… It is changing, but not enough and not fast enough.

As it happens, just today the US passed a major piece of legislation to significantly increase the money the government spends on research into new technologies. This is intended to improve the US’ ability to compete with China in the most important advanced technologies, such as AI, robotics and fundamental research in faster chip technology (Moore’s Law). The US government currently spends about .7% of GDP on research, whereas in the 60s, at the height of the Cold War, it spent upwards of 2%. China’s government currently spends 1.3% of GDP on research, and are touting efforts to advance the same technologies.

Concurrently, the first leader in the latest The Economist (June 5-11) asks where Europe is in the creation of new technologies. Whereas 41 of the world’s largest companies in 2000 were European, now 15 are – 76 are now either American or Chinese. They lay the blame on the 2010-12 currency crisis and unproductive political meddling and protectionism. Further, they worry that similar problems could erode innovation in the US and China. Their recommendations include finally creating the “European single market” that Europe has promised for decades, along with much more actual tolerance of “creative destruction” of existing industries, with encouragement of the new industries that are replacing them. These are all policy choices, of course, and are outside the realm of economics strictly defined.

GIGO problem. The theorems of welfare economics only hold for assumptions we know to be false. Colander and Kupers have a book out with a good historical explanation on how (ironically) neoclassical econ became what it became because economists were using inadequate math.

The mutant economies I referred to live in an environment made of real-life companies and policy makers, where “greed is good” is very real. I used to be a musician, and watched private equity funds buy up the record companies, fire A&R, lobby for insane copyright legislation and proceed to make money off suing Internet companies and trade associations. If you want to be viable in that sector, those are your competitors. Legislation does not protect you, because GDP (though it itself does not work) is considered to be the supreme good. Marginalism has something to do with this – link well documented in Mazzucato’s The Value of Everything.

As for innovation – beware. A lot of it is non-beneficial. Those researchers in the Cold War were not nobly pursuing knowledge, but prototyping weapons of mass destruction. Like Mazzucato, I no longer find it enough to know the pace of innovation and economic growth, I want to know, and co-determine, their direction.

Nice finding in a study of academic papers on AI: in the middle of an explosion of research on AI (and research funding), the impact of being about AI on papers on COVID-19 is negative. If your COVID paper is also about AI, it has fewer citations. COVID was solved by old-school clinical trials + logistic. AI is good and consumer surveillance, facial recognition and deep fakes, but wen a real problem hit, it was essentially a brain and money drain on the people doing the important work, manufactured by VCs and hapless governments. But, sure, “innovation”.