Free trade, deregulation and limiting the federal government’s powers form what Columbia professors Joseph Stiglitz and Bruce Greenwald call the Washington Consensus – the core precepts that have dominated policymaking for the last 50 years. But those ideas are misguided, they contend. Tariffs and trade restrictions, for example, are fine, especially if they are part of a broad framework that stimulates learning throughout a society.
In their new book, Creating a Learning Society: A New Approach to Growth, Stiglitz and Greenwald argue that the key to success for economies around the world is to encourage progress.
According to the authors, the average human standard of living hardly changed from Roman times until 1800. But in the last 200 years, they claim, there has been a transformation to “learning societies” in Western economies. Higher levels of productivity drove improvements in human wellbeing in the last 200 years.
Their argument builds on the findings of Nobel economist Robert Solow. About 60 years ago, Solow found that rising incomes are largely attributable to technological progress (learning how to do things better). Solow’s research showed that such learning improved living standards more than resource accumulation or more-efficient allocation of those resources.
Stiglitz and Greenwald provide economic insights and policy recommendations based on the notion that modern economies have succeeded due to technological progress. The central thesis of this book is that every aspect of the market economy (and more broadly of our society) needs to be reexamined from the perspective of learning and innovation.
In this book, learning does not mean education for children. Instead, according to the authors, creating a learning society “means ensuring that all firms learn quickly to improve their productivity, as best practices themselves improve, so that the gap between average and best practices is reduced; distorting resource allocations toward sectors with more learning and more learning spillovers; and investing more in R & D and in learning to learn.”
Developing countries should do this too, according to the authors, but with a particular focus on closing the gap between their practices and the best practices in advanced industrial countries.
Creating a Learning Society presents historical examples that illustrate the benefits and shortcomings of free trade and reexamines trade policies through a new lens. The authors combine technical economic models with provocative rhetoric to emphasize the significance of learning. I will talk about the central focus of this book: industrial policies and challenges that the authors identify as most important to creating learning societies.
Governments and industrial policies
This book is predicated on one key assumption: Markets and economies are inefficient. According to Stiglitz and Greenwald, because market failures are pervasive, governments must intervene to create a learning society.
They acknowledge that increasing the role of government is a point of political contention. They devote a substantial portion of the book to refuting arguments about the long-term benefits of trickle-down economics.
For example, the authors state that the U.S. median household income is lower than it was almost a quarter century ago. They argue “those who are losing their homes and their life savings as a result of the ‘innovations’ of America’s financial system may take little comfort in the notion that perhaps their grandchildren will be better off.”
Their analysis reveals that not only will the profits generated by innovations fail to trickle down, but also that new technology causes changes in labor demand that may leave workers worst off in the long run.
Knowledge is a public good, the authors claim, something that markets are not efficient in producing and distributing. Thus, we need to implement policies to promote the diffusion of knowledge within societies.
Well-designed trade restrictions, subsidies and exchange-rate interventions can play an important role in promoting learning, according to the authors. For example, it may be desirable for a country with a trade surplus to keep its exchange rates low to encourage the expansion of manufacturing. Manufacturing is an economic sector that leads to more technological progress, according to the authors.
The authors argue that such policies can be particularly beneficial for developing countries. They develop something called the infant-economy argument for protection, which states that it is desirable for governments, particularly in developing countries, to intervene in markets by promoting sectors that lead to more technological progress (e.g., manufacturing).
They discuss China’s remarkable growth in recent decades and argue “the most important sources of growth were in manufacturing, where one could visibly see improvements in productivity, quality and practices, and these improvements were persistent.”
Learning is different in each society. The authors explain that governments and social infrastructures inadvertently influence the degree and the direction of learning within a society. We should not try and implement ‘one-size-fits-all’ industrial policies. For example, we need to recognize that prices of resources may differ based on the region, so “learning how to save on the utilization of one factor versus another may differ.”
Creating a Learning Society expands upon the research of Nobel laureate Kenneth Arrow. Arrow developed the theory of “endogenous growth,” which says that as we produce and invest more, we get better at what we do. The idea that learning by doing is the best way to promote economic growth is at the heart of this book.
One of the most interesting examples cited by the authors was the significant economic growth in Korea after World War II. After the war, Korea found itself with a comparative advantage in growing rice. However, its policymakers acknowledged that even if it became the best rice farming country in the world, it would still be poor. The Korean government implemented policies to promote sectors from which it could learn.
The authors write, “Korea developed complementary industrial, education, and technology policies, and it succeeded, increasing its per capita income more than eightfold in a span of less than four decades.” Korea succeeded because it recognized that its static comparative advantage (growing rice) was not as important as its dynamic comparative advantage.
The problem with the Washington Consensus
One of the most provocative sections of this book is the criticism of past policy prescriptions that have governed global trade. In particular, the authors focus on the shortcomings of the Washington Consensus.
The framework of these policies includes many controversial ideas such as trade liberalization, deregulation, stronger intellectual property rights and a reduced role for the state. The U.S. government and American financial institutions have argued that, in a globalized world, all countries should adopt Washington Consensus policies.
Two problems with Washington Consensus policies are emphasized in this book. The policies assume that markets are efficient and that governments in most developing countries face political-economy problems − in other words, that they are likely to abuse political power.
It is crucial, especially in developing countries, for governments to intervene and correct market inefficiencies, according to the authors. Governments should not be in the business of “picking winners” and trying to outsmart the market. Rather, they should focus on implementing broad policies that affect the entire economy and reduce volatility, such as exchange-rate protections, which can help guard against macroeconomic instability.
A number of East Asian countries (most notably Korea) have used policies to increase standards of living and grow their economies. Many of these successful countries implemented such policies at a time when they were economically and politically as underdeveloped as many poor countries of the world today.
Both developed and developing countries should implement policies regulating trade, such as tariffs and quotas, the authors contend. Trade liberalization by itself does not ensure growth, according to the authors. Limiting trade liberalization directly contradicts the policies in the Washington Consensus.
Policies should limit international financial and capital flows, according to the authors. A number of risks associated with financial and capital market liberalization have been amplified by global trade agreements, according to Stiglitz and Greenwald. Cross-border capital flows are very sensitive to economic downturns and can pose a threat to economic stability. So-called “hot money” flows into faster growing economies, but that introduces risks of inflation and credit bubbles.
To promote learning societies, global trade policies need to include provisions that limit foreign direct investment and promote the use of domestic banks to offset the problems caused by increased global capital and financial trade.
Incentivizing innovation
One of the main ways that learning is promoted is by funding an intellectual property system. But the analysis in this book suggests that current intellectual property laws that are deeply flawed and causing many problems.
Intellectual property rights are essentially a way to privatize knowledge, the authors contend, which is a public good. Too many people contribute to innovation, such as pharmaceutical companies that develop and patent a product almost identical to one on the market.
These abuses of the patent system do not contribute to innovation and can come with high litigation and societal costs. The authors acknowledge that there is merit in “appropriating the returns to investments in knowledge,” but the current intellectual property system does not promote learning efficiently and gives rise to greater monopoly power.
Large monopolies discourage learning and stifle innovation in economies. For instance, the authors write that Microsoft has used patents to gain market power and create barriers of entry. Its control of the PC operating system allowed it to significantly reduce competition in the sale of software. It has also repeatedly invested in R & D and patent acquisitions with the intention of developing products solely to preserve market share.
Societal welfare will decrease if intellectual property regimes are not improved and monopolies continue to limit learning. The authors encourage us to shift our attention to other ways of incentivizing learning: “Intellectual property rights should be part of an innovation system that also includes open source, prizes, and government-supported research and grants.”
Conclusion
The key to increasing standards of living is to improve the diffusion of knowledge within societies. The best way of doing so is not only by implementing broad industrial policies, the authors write, but also by realizing that “the most important determinant of individuals’ learning is their capabilities, their ability to learn, and perhaps the most important determinant of that is education.” This holds true for all societies, despite their differences.
Marianne Brunet is an associate editor with Advisor Perspectives.
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