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: