According to the Liberal Party’s campaign ads, the economy is central to everything. If so, you’d reckon that the Tories would be focussing like laser beams on how they can help the economy grow, right? Concentrating on the factors that really make a difference? Well, let’s have a look at what the economics profession has to say about economic growth.
Paul Romer is one of the leading figures in the development in one of the major developments in economics in the last few decades, endogenous growth theory. In this theory, innovation is the key to long-term economic growth. As he puts it in this encyclopedia article:
Economic growth occurs whenever people take resources and rearrange them in ways that are more valuable. A useful metaphor for production in an economy comes from the kitchen. To create valuable final products, we mix inexpensive ingredients together according to a recipe. The cooking one can do is limited by the supply of ingredients, and most cooking in the economy produces undesirable side effects. If economic growth could be achieved only by doing more and more of the same kind of cooking, we would eventually run out of raw materials and suffer from unacceptable levels of pollution and nuisance. Human history teaches us, however, that economic growth springs from better recipes, not just from more cooking. New recipes generally produce fewer unpleasant side effects and generate more economic value per unit of raw material.
According to this theory, governments can increase long-run economic growth rates by, for instance, subsidising R&D. Things like debt levels, by contrast, make comparatively little difference in the longer term. Now, there are very good arguments that we should redirect our efforts to allow ourselves to work less, protect the environment more, and that we should share what we have more equally. But it’s going to be much easier to do all those things if the pie is getting bigger.
For all the things we’ve all given Rudd-led Labor stick for over the past little while, on this issue at least, they seem to grasp its importance – in fact, here’s thirty pages of policy on the topic from April. The money quote:
In the twenty-first century, industry policy is innovation policy.
The Liberal Party only has a summary policy document up on their website at this point, which devotes a total of four perfunctory paragraphs to science and innovation. There’s six paragraphs on teaching history in schools, and a similar amount on citizenship tests. The Greens and Democrats have some interesting things to say in their R&D policies, notably the role for governments in funding basic research that the private sector won’t.
If the economy really is central to everything, why are the Tories giving such perfunctory attention to one of the major areas – perhaps the major area – where the government can influence it?
“Now, there are very good arguments that we should redirect our efforts to allow ourselves to work less, protect the environment more, and that we should share what we have more equally. But it’s going to be much easier to do all those things if the pie is getting bigger.”
You’ve finally bought into the neoliberal project Robert. Welcome aboard.
But seriously, you’re right that governments can support innovation. Subsidising R&D is one potentially useful way of doing this. Another way is to give firms greater scope to pay for R&D themselves and apply new, more productive, technologies in the workplace. Cutting the company tax rate and getting rid of investment-stifling capital gains taxes are two key parts of the solution. Howard and Costello have been well and truly asleep at the wheel on this one.
Cheers
BBB
I’m sorry but that was longer than 5 words.
I think they believe that Howard has the monopoly on it because he can say it much shorter than anyone else. “Economy: Liberal good, Labor bad”. And the vast majority of people buy that, not because of logic or anything else, but just cause Howard says it and gets lots of media.
I do like the cooking analogy though.
“…in fact, here’s thirty pages of [Labor's] policy on the topic…
The Liberal Party only has a summary policy document… which devotes a total of four perfunctory paragraphs to science and innovation. There’s six paragraphs on teaching history in schools, and a similar amount on citizenship tests.”
There may be a fair point in comparison here, but it may also be that there is simply more than one way to interpret this information. For instance, Labor’s thirty pages could just as easily be another illustration of the old joke about “step one, assume a can opener.”
Innovation is good. Advanced industry is good. Where do these things come from, though? What sort of platforms (social, political, cultural) support the strong development of industrial innovation? And what sorts of platforms hinder it?
As we well know, not all societies, and not all types of societies, are equal when it comes to advanced achievements in the sorts of innovation that Labor’s thirty pages place such emphasis and value upon. Of the societies that are successful in this regard, it could be asked, Do they have anything in common on the issues of approach to education, attitude towards citizenship, attitudes towards cultural cohesion and sense of common belonging? Do they celebrate unity, or diversity?
What about the societies that are less successful, or that are backward? What do they have in common, and in what ways are they different from, or the same as, the successfully innovative societies?
Is it possible (it at least seems fair to ask) that Labor’s thirty pages might be a discussion of how to harvest a crop once it’s already been grown, and that the Liberals’ meager paragraphs are more concerned with putting seeds in the ground and watering them in the first place?
BBB: What do you think Hawke and Keating were trying to do (with a lot of success, in hindsight) through the 1980s and 1990s? Or, on foreign shores, Clinton and Blair?
As to your points on company tax and CGT – perhaps, though I’m not convinced. But they’re not even trying to make the case, and surely it’s something that we should be debating other than crap about “Labor debt”.
The Government’s relative reduction in spending on higher education makes no economic sense, and has a certain amount to do with historical resentment of the institutional power of academia within political debate. That said, there was (and is) a serious problem of maladministration within universities, but, the Government’s policy has done little to address this.
And, on a lighter note, a shameless plug for my parody of the “Our Economy is Central to Everything” ad: http://www.youtube.com/watch?v=xBXQ5_aMJH0
You also forgot that other party with a monopoly on economic issues especially small business and coal mining, Family First. But I guess I know why. Their policies are 1 page, double spaced, action-less waffle. I guess they will therefore be getting lots of high up preferences again, based on their solid policy platform.
For the record, neither Fundies First’s education policy, or “industry, business, enterprise, and the workplace” policy, have one sentence to say about science, innovation, or economic growth.
I wonder have they ever considered what unemployment does to families…
You forget Robert, voting Labor or Green creates unemployment, not R&D or appropriate economic structures. I guess that is the basis of their thinking on employment.
Just being cheeky, Robert. You’re right, full credit to all of them. You forgot the ones who did the really heavy lifting though: Thatcher and Reagan.
Now regarding ‘Labor’s debt’ and all that: again, you’re absolutely right. In a saner world, we’d all be discussing how Howard and Costello are getting away with a criminally lazy balance sheet.
BBB
Barry Jones was onto the way innovation is critical to the future of the economy in his 1982 book "Sleepers Wake! Technology and the Future of Work" I guess all the rest of the canberra politicians and the economists have just been wacheting themselves auf for the last quarter of a century. Sorry, couldn’t resist the pun.
Indeed he was, Dave. But unfortunately Barry wasn’t the greatest at identifying the key parts of his message and expressing them clearly and succinctly.
They all start out from the obvious premise: innovation is good, but you cannot ‘plan’ it.
Then they all realise that they can Create Conditions Conducive To…
THEN they realise who the motors of wealth generation really are: private sector/The Insivible (Benevolent!) Hand of the Market. And from this they reach the conclusion that the state doesn’t have to put in, because the Market Will Take Care of It. Because the market is a proactive force guys, I MEAN GOD…
Snafu.
Robert,
Jones once gave a lecture on Sleepers to a business audience. One of the audience asked for a simpler version. Jones referred to the fact that Sleeps was a Victorian HSC (year 12) English book, and so therefore was the question implying that business types had less capabilities with reading than a year 12 student (and not necessarily one doing physics or literature). I often ask “What’s the difference between an executive summary and a dummy’s guide”, and none of the answers are flattering to executives (e.g. Dummy’s guides are read by those who admit their ignorance about something).
BJones is nuanced and understood shades of grey, so his prose was dense. Still, once recognized as important (not too difficult), a decent policy maker would have assigned someone to write the idiot’s guide)
H&R,
Actually, it IS possible to plan environments that lead to innovations (Bell Labs, Thomas Watson and Xerox PARC are obvious examples), but it’s almost impossible to predict what sort of innovations you get … and anyway, Australia has a pathetic record of putting those innovations to good use (although Cochlear is a good example of how to do it).
It’s also possible to create environments where innovation is stifled. J-Ho’s plans for a “National Unity Agenda” in his next term (he should be so lucky) would go a long way to turning the whole country into such a place.
For example, a good way to turn kids into rigid, unimaginative little authoritarians is to teach them one standard version of history, with OzCon approved key dates and events and a lot of hero-worship for past generations of nation builders. Instil the idea that all the work’s been done, that’ll stop the little buggers from thinking to much or dreaming unorthodox dreams.
Orthodox innovation – it’s the way of the future under John Howard.
I’m a booster for Aussie innovation – ram-jets and Metalstorm for just two – but agin ‘picking winners’.
The state is simply too slow and bureaucratic to manage innovation and the state should never become dominant in any sane economic model. Most democratic and libertarian socialists have twigged to this after 90 years of Chekist mass murder.
Gummo – hear , hear on stifling innovation.
In fact, the labs I mentioned had TWO sorts of management
(1) Getting the innovations implied letting the techies PLAY on whatever takes their fancy. (JW, BL and XP were all good). Note that Google have a policy that 20% of an employee’s time should be spent PLAYING with something that takes their fancy, not doing stuff for their managers.
(2) Using the innovations from the techies for the advantage of the business (XP were hopeless. They invented the graphical computer interface, but not until a young Steve Jobs from Apple saw it on a visit through the labs was somebody smart enough to know how to sell it).
Also note that US big pharma relies on snaffling all the free work done in government-funded labs. So, effectively the state funds the innovation, and business takes advantage.
“So, effectively the state funds the innovation, and business takes advantage.”
A powerful argument against R&D tax subsidies, I would have thought. Better to just not take the money in the first place and avoid issues of (un)fair re-distribution.
BBB
Robert, the question is less about whether the government should subsidise R&D and more about how much they should subsidise it and what types of R&D they should subsidise.
Clearly, it would be silly to devote all of our resources to R&D. We would all starve!!! As such, the optimal percentage of GDP to devote to R&D is less than 100. We already subsidise R&D in Australia. What evidence is their that the subsidies are too low?
The “what to subsidize” issue can take two forms. Do we subsidise pure research and leave the private sector alone or do we al;so subsidize commercial R&D? If the latter, which projects get subsidised? partly leads us back to the “picking winners” problem with industry policy more generally. Typically, governments are not good at this.
The last paragraphh of my previous comment should read:
“The â??what to subsidizeâ?? issue can take two forms. Do we subsidise pure research and leave the private sector alone or do we also subsidize commercial R&D? If the latter, which projects get subsidised? This partly leads us back to the â??picking winnersâ?? problem with industry policy more generally. Typically, governments are not good at this.”
Damien, I guess the answer to that is whether “picking winners” is an objection you have that is theoretical or practical. It used to get a bad name in the 80s and 90s because it often referred to subsidising or bailing out particular firms – ie Kodak, the auto industry etc. Basically rent seeking and protectionism. That’s very far from an innovation policy, and I think Rudd will be proposing initiatives much closer to the current practice in Qld and Vic than that model. The practice from State Development in Qld (aside from subsidy for opening corporate offices, luring firms here etc. which is less defensible) is to emphasise infrastructure support for clusters that leverage off existing expertise – ie Biotech, Creative Industries, Aviation, etc. Sometimes maybe the subsidies to big companies – ie Boeing, Virgin – contribute to that leveraging. It’s very much tied in with research funding and education/skills training – ie not just university funding (including phd scholarships and grants as well as big ticket research infrastructure) but also the establishment of dedicated technical/centre of excellence schools in the state system – more recently one for science and maths.
Unless you object to any state intervention on principle, it seems to me that this isn’t a bad way to go. This sort of investment which can also be used to seed startups tends not to happen very effectively on its own particularly when venture capital markets are underdeveloped.
Agree with Kim on the folly of conflating protectionism via tariffs and bailouts with research grants for innovation. They’re opposites in fact – an industry is mollycoddled to keep on underperforming by the former, and made actually competitive and productive by the latter.
The question of which projects get the dosh is probably still as contentious and open to rorting, but at least the theory’s sound.
Much R and D expenditure in a globalised world is driven by expenditure by large multinational corporations. These businesses are the most common and most important agancies for spreading new technologies across national borders.
Australia has traditionally been a consumer of these new technologies and has a reputation for being a very early adopter of them. This feature of Australian culture goes at least as far back as the telephone, autos, and radio communications. It continues with IT, biotech, and other fields.
The question arises why these MNCs, which have done well enough out of the Australian market, have nevertheless steadfastly maintained their Australian operations as branch offices and not as centres of innovation.
A large part of the answer is that a global outlook of MNCs is quite partial. Strategic divisions of these corporations are kept in the home countries. MNCs only pretend to be global citizens.
The only other major source of R and D expenditure originates with taxpayers. Cabinet ministers like being photographed in front of expensive machines that go “PING!”, but the rationale of a national R and D policy is deeply flawed in an era when technocrats are trained on the public purse only to make their fortunes in a distant, private lab.
Certainly, there is scope for public funding of pure, or fundamental science, where the best minds are traded between institutions of higher learning, usually for the relative pittance of a professor’s salary.
But until the Australian economy develops its own MNCs whose mission is to put innovative products into the garages, living rooms, home-theatres, kitchens, factories and farms of this world, Australia will continue to be a net importer of these products and a net exporter of technocrats.
As a taxpayer I’m happy to pay for fundamental science. As a taxpayer, I’m less happy to pay for pioneering processes that will be owned by Sony, or Nokia, or Monsanto.
Thanks for that Katz. I think Costello once delivered a line that went something like: ‘it’s more important to buy and implement the world’s best R&D than it is to actually produce it yourself’. Australia’s economic performance over many decades probably bears that view out.
BBB
BBB: that may or may not be the case – and, clearly, “innovation” is a lot broader concept than just high-tech R&D. But the question remains – if the government is all about growth, why aren’t they spending any time talking about the area which makes the most difference to it?
Lowering real wages you mean.
Not sure about this.
There are some phases in the evolution of the world economy when the high value-added products are generated by industrial R and D.
There are other phases when the terms of trade run hard against mass-produced consumer durables.
And Australian prosperity has ebbed and flowed according to these relativities.
At the moment the resources boom has turned the terms of trade in favour of resources. That relationship will change, and change again.
National industrial policy was a product of the kind of autarky needed to fight a total war like WWII. I can’t see such a world returning in the foreseeable future.
There are other reasons for national industrial policies, but they don’t seem to me to be as urgent as the need for wartime autarky.
Therefore, I can’t get particularly exercised by the need for such a policy, even though the terms of trade sometimes run hard in favour of industrial processes.
Because they don’t have a clue and are too busy fiddling with the income tax system?
BBB
That was in response to your last query, Robert.
BBB