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Upbeat re-packaging of dot-com economics (2.5 stars)
on March 14, 2010
This book, which touts something the authors (K&S) call "Economics 2.0," has an oddly amnesiac quality to it. Its breathless adulation of "intangible wealth," entrepreneurship, and innovation could have been written at the height of the dot-com era, yet that not-so-distant epoch is never mentioned. This book's main "innovation" over scads of books about the "new economics of information" from 10-15 years ago is that K&S adopt a top-down approach, starting from macroeconomics, rather than a bottom-up approach starting from microeconomics & business strategy. Indeed, if you're looking for concrete ideas you can apply to your own business, you're better off with the old books -- this one is too "high concept."
If, however, you feel that the entrepreneur -- the "heart that pumps innovation" (Chap. 5) -- is underappreciated, or are wondering why Americans are basking in the free-thinking paradise represented by rap music, extreme sports and Google (@ 108) while the Chinese may trip over their "deference to elders" (id.) and we folks here in Japan are allowing our whole economy to be dragged down by "stagnant" retail (@259), then you'll find in these pages much to comfort and intrigue you. The doctrine in this book is that innovation is always good (_pace_ one dissenting interviewee), the most successful economies are those willing to accept and promote change (@278) and that culture should adapt to new technologies, rather than the other way around (@279). One subtlety that the authors do capture is that intellectual property (IP) laws aren't always good for innovation -- which is why I've given this book a half-star reprieve than a flat 2 stars.
Some more detailed observations:
1. The erasure of the dot-coms is hardly the only example of amnesia. In Chapter 2, "Economics 2.0" is given credit for more than a half-century of growth, and perhaps the Industrial revolution as well (@34); none of the data purporting to show the impact of "Economics 2.0 in action" is newer than 2001. So what's so "2.0" about it? K&S also refer to the differing economic fates of N. and S. Korea, and of E. and W. Germany, as "natural experiments" (@136) showing the differing impacts of capitalism and communism -- conveniently neglecting to mention that one and only one country in each pair got hefty economic aid from the US. And apropos of both 'amnesia' and 'natural,' you won't find environmental problems of economic growth discussed in this book at all.
It's not amnesia but disingenuousness, though, to speak of per capita "intangible wealth" (@38-39). K&S say "intangible capital" (IC) includes the value of "your skills and education as a worker as well as the quality of the economic institutions in the country where you happen to live" (@39). In language K&S define in the book, this includes both rivalrous IC (e.g., the stuff in your head and hands) and non-rivalrous IC (in this case, institutions). Aside from issues relating to educational opportunity, it's a self-serving fiction to assume that all people in a country enjoy equal access to non-rivalrous "intangible wealth," just as it would be to say that we all get to enjoy the benefit of US tax law provisions that in practice can only be used by oil companies. The authors' attitude recalls Anatole France's remark, "The law, in its majestic equality, forbids the rich as well as the poor to sleep under bridges, to beg in the streets, and to steal bread" -- but K&S aren't being ironic.
2. This majestic point of view may explain why, aside from the interviewees, the economist with far and away the most mentions in this book (8) stemmed from Austrian nobility: Friedrich von Hayek. (That champion of "creative destruction" and entrepreneurs, Joseph Schumpeter, appears only once.) This is the Hayek who is "the most important social scientist of modern times" (@155, per Douglass North), not the one who told a Chilean newspaper during the dictatorship in 1981 that he would "prefer to sacrifice" democracy before "doing without freedom." I guess that's the Hayek they mean, anyway.
3. The economist who gets by far the longest interview (30 pages) is Stanford economist Paul Romer. His 1990s-vintage version of "new growth theory," based on the notion of unlimited economic growth thanks to the "unlimited scope for discovering new recipes"(i.e., ideas; @86), was feel-good fluff that helped to inspire the dot-com boom.
I don't have space here to analyze all the difficulties in his claim that in our economy "we don't produce anything, we just rearrange it. The way we create value is by rearranging the physical mass that's available here on earth, and the value-creation process amounts to using recipes for rearranging things ...to put them in more valuable configurations than older ones, and that helps people understand why running out of stuff [i.e., resources] is not the problem" (@84). (To mention just a couple: not only do humans not have access to all the "stuff" on earth, but we don't necessarily understand in anything close to real-time *how* we are rearranging it, to say nothing of the fact that it's not just human agency that is doing all the rearranging. His argument also seems to shoot itself in the foot by denying that we produce *new recipes*; implicitly, it also denies the existence of symbolic representation, notwithstanding Romer's own evident skill in that art.)
There's plenty of other sleight-of-hand in the interview: e.g. his reference to a "powerful theorem that traces back to Adam Smith" saying that "in a well-defined sense, the best institutions you can craft for creating value out of scarce physical objects are ones which involve prpoerty rights and trade in markets" (@87). The theorems are the First and Second Welfare Theorems, which were proved by Arrow and Debreu in the 1950s, using highly mathematical language nothing like Adam Smith's; and the "well-defined sense" means, although Romer's comment suggests something more concrete, very specific mathematical assumptions that never reflect reality (see Joseph Stiglitz's Nobel lecture). Romer also prefaces a discussion of IP with the hypothetical, "if the great, great, great grandchildren of Pythagoras still had rights in the Pythagorean theorem ..." (@92), thereby obscuring the fact that they *never* had such rights -- maybe because that would undercut his frequent argument (including here, at 92-93) that we need IP as an incentive for discovering stuff. (Cf. his 1997 interview in Strategy+Business, where he mentions that Edward Jenner and his heirs don't have any IP rights in the concept of a vaccine, and in the next breath mentions that we need IP to encourage people to invent stuff like vaccines.)
This interview also brings us back to the amnesia trope: conveniently forgotten are the 1995 papers by Charles Jones, also at Stanford, pointing out that new growth theories, including Romer's, are empirically false, at least when looking at historical data for the US, Japan, Germany and France. Despite Jones's papers being quite well-known, K&S never mention them, even to invite Prof. Romer to refute them.
4. While I'm not particularly a fan of many of MIT Nobelist Solow's ideas, the interview with him was a breath of fresh air, despite its at times Greenspanish prose. "It is not enough to speak in terms of clichés like rule of law, property rights, incentives" in connection with growth and development, Solow notes (@67-68); and, of innovation, "there is no automatic guarantee that it will not be unfavorable" (@70). No surprise, then, that his is by far the shortest interview in the book (a slight 4 pages, less than half the length of its closest competitor). Evidently, K&S were far more comfortable hearing the clichés.
5. There are plenty of minor gaffes. William Lewis's criticisms of Japanese retailing and food processing for their "low productivity" shows how little he understands the local culture: not only does Japan have the world's most attentive service in retail (visit here, if you're tempted to disbelieve me), but a spectrum of local food microcultures as rich as or richer than any in Europe. Lewis also is anachronistic when he refers to US antitrust policy in 1890 as being "pro-consumer" (@268); in that period (and for many decades thereafter) the focus of antitrust law was to protect small competitors, not to benefit consumers. K&S or their fact-checkers might also have been kinder to William Baumol. His comment that "the last time [he] checked" Japan published pending patent applications while the US did not (@288) embarrassingly reveals that the last time he checked was in 1999 or earlier: that's the year when US patent laws were amended to provide for publication 18 months after filing (with the first actual publications in March 2001).
Readers who'd like to check assertions in the book that might be less patently wrong will be frustrated by the footnotes, which cite to entire books, rather than to specific pages therein. Nonetheless, if you're interested in state-of-the-art apologetics for ostensibly apolitical Hayekian neo-liberalism, this book will be instructive.