The "Growth Illusion" vs. "New Growth Theory"

Keith Rankin, 8 February 1998.


The Sustainable-Economics program at Communications for a Sustainable Future is holding an Internet seminar from February 18 to February 25, 1998. While the central focus will be on Richard Douthwaite's book Growth Illusion, one of the key subplots will be new growth theory; in particular the work of Paul Romer. A particularly useful introduction to Romer's work can be found in an article by Kevin Kelly on the Internet magazine Wired (issue 4.06, June 1996).

I am particularly fascinated with Romer's work because it opens up a whole new field of "public domain economics", or what he calls the economics of non-rival goods. The productivity possibilities implicit in Romer's theories are of major significance to economic thought. Indeed, so long as the word "productivity" is emphasised over the word "growth", then the theory opens up the prospects of a genuinely sustainable form of long-run growth.

I am also fascinated by Romer's work because of its distributional implications; ie that public domain inputs should return a social profit from which a social dividend would be paid. While Romer himself is not known for addressing the distributional implications of new growth theory, the implications were noted at, for example, the Vienna Conference of BIEN (the Basic Income European Network).

It seems clear to me that many of the quite impassioned differences on the topic of economic growth relate more to semantics than substance. As such it is interesting to compare the way growth sceptics such as Herman Daly, a Maryland professor of ecological economics, see orthodox economics with Romer's insider understanding of his discipline:

"Until environmental sustainability became a recognized need, economic growth generally ruled supreme as the organising principle of public policy. Economic growth is a subject about which conventional economics has a good deal to say [emphasis added]."

Daly, Herman E. and David C. Korten (1994), A Case of Job Protection Most Economists have Overlooked, PCD [People-Centered Development] Forum Article #5.

"Romer burst onto the economics scene in 1986, with the first in a series of path-finding papers that revived the study of economic growth, which had been moribund for a generation [emphasis added]. ... For generations, mainstream economists had expected growth in the industrialized countries to taper off. ... [Romer's] central claim [is] that new ideas, embedded in technological change, drive economic growth and allow us to escape the gaunt future economists have so often imagined."

Kevin Kelly, The Economics of Ideas, Wired, Issue 4.06 - June 1996.

Ecologists (and many others) tend to think that economists are obsessed by economic growth. This is not the case. Indeed, growth theory has been marginalised within economics, in part by being linked with economic history, which is often regarded as soft-core economics, tainted by eclecticism and economic relativism. 'Real economists' see their discipline as being like Newtonian physics, subject to absolute laws that are true for all time.

Economics gained a longstanding reputation as the dismal science, thanks to its fatalism towards long-run growth. Today, it is ecological economics, in which the biosphere is seen as a zero-sum game, that is taking over as the dismal science. Ecology has taken over the mantle of classical economics, which regards resources as exogenous and finite, and growth as nothing but a consequence of the increased use of such resources:

"We need to devise a biophysical budget that allocates the available life support capacity between human and non-human species, and between present and future generations. At some point we would need to address the question of how the human portion is divided between supporting a larger number of people at a lower level of physical consumption or a smaller number of people living at a higher level of consumption."

Daly and Korten, op.cit.

On the other hand it is new growth theory, which emphasises the endogenous resources (such as ideas) that are created as part of the growth process, that is helping to redefine economics as an optimistic discipline. The new economics draws its inspiration from the chaotic science of evolutionary biology and not, as did neoclassical economics, from old-fashioned physics:

"Taken as they are, objects are scarce and subject to the law of diminishing returns. Alone, they cannot drive economic growth. But ideas can. Human beings, Romer says, possess a nearly infinite capacity to reconfigure physical objects by creating new recipes for their use. ... Romer's hobbies include devouring books about biology."

Kelly, op.cit.

A key feature of Paul Romer's public domain economics is the idea that non-rival goods are free yet expensive:

"'You can't overuse an idea. Anybody in the world who can benefit should be free to use it,' [Romer] says. 'So the right price is zero.' To promote economic growth, policymakers [should] encourage the development and diffusion of new ideas what economists call 'nonrival goods' [emphasis added]. They're nonrival because they can be used by everyone at the same time. Software is a nonrival good because it can be copied endlessly at essentially no cost and be used by many people at once. So there's a deep economic problem to solve setting a high price to encourage research but a low price to encourage use."

"Romer supports government funding for basic research and advocates revamping patent and copyright laws to limit the control companies can exert over new technologies. The balance, he hopes, will provide enough incentive for companies to pursue new technologies and, at the same time, allow other individuals and companies access to the ideas that flow from research."

Kelly, op.cit.

Non-rival goods operate very much on the interface between the private and public spheres of economic life, creating a synergy between those spheres. Creativity is a private matter - sometimes a very expensive private matter - which essentially feeds the public domain. And free public domain goods are very much inputs into private activity. The funding formula is, in essence: tax, subsidise and regulate; tax users, subsidise creativity, and regulate to prevent restrictive monopoly. Pure science rather than commercially applied science should be subsidised:

"'You don't want pork barrel programs to get in the way of effective economic outcomes,' [Romer] warns. At the same time, he believes it's vital that government supports basic research, the birthplace of ideas. ... [Romer] isn't so sure that Microsoft should be hammered by trustbusters yet. 'The crucial question with Microsoft,' he adds, 'is whether it has reached the point of stifling creativity and slowing the discovery of new ideas. I don't think that has been demonstrated yet'."

Kelly, op.cit.

Where I part company with Romer is in his interpretation of how new growth policy at the national level converts to a policy program for the global economy; an economy where there is no legitimate sovereign able to implement the crucial 'tax, subsidise and regulate' formula.

"Romer argues [that] to develop successfully, countries must be open to new ideas and capture the benefits of the latest technologies. The only logical path, he suggests, is to embrace free trade and encourage investment by large corporations. These companies will then bring the necessary knowledge of industrial organization, international markets, and product differentiation to allow developing nations to become truly global players. Romer's theory hints at an unexpected benefit of free trade: access to new ideas."

Kelly, op.cit.

It is not at all obvious to me that large transnational companies, subsidised and regulated by particular national governments, would do anything other than channel the profits (arising in large part from their use of the international public domain) to anyone other than their shareholders and their national sponsors. It is quite false to claim that a free international economy is incompatible with the taxation of international trade, which is what tariff protection is. And Romer's support for global free trade may well discredit his really important message in the eyes of most of those looking for left-wing solutions to the problems of global capitalism.

On the global issue, I come down on the side of Herman Daly. Ecological economics has made one crucial contribution; the understanding of protection as a requirement for the health of the international economy, and not simply as a device to advantage one national economy to the detriment of all other national economies. Indeed, Romer's ideas require an international fiscal contract - tax, subsidise and regulate - for the same reasons that national economies require such intervention.

There is an important point of intersection between Daly and Romer; a point made by Keynes in the middle of the Great Depression.

"John Maynard Keynes, in 1933, wrote an overlooked essay on national self-sufficiency. I've heard this referred to as the aberration of a great mind. But I think it was the clear thinking of a great mind. He said the following: 'I sympathise therefore, with those who would minimise, rather than with those who would maximise, economic entanglement between nations. Ideas, knowledge, art, hospitality, travel, these are the things which should of their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible. And above all, let finance be primarily national'."

Herman E. Daly (1994), When Protectionism is a Good Thing, PCD Forum Column #67.

John M. Keynes (1933) "National Self-Sufficiency", Yale Review 22(4):755-769.

Internationalism is of central importance in many critical respects of economic life; indeed in those respects that Romer emphasises: knowledge and ideas. But here I side with Daly, in believing that each nation should give its own producers some advantage, and that such moderate protection, generally applied, fully enables new growth to take place. In such an environment, "tax, subsidise and regulate" is the rule that works best given a world of increasing returns to the key resource, the creativity of the human mind. Furthermore, protection, as a form of international regulation, prevents the destabilising effects of financial instability and the stifling impact of capitalist monopoly.


© 1998

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