Economic growth allows us to enjoy an improving material existence and the wealth to pursue other goals as a society, such as a clean environment. Yet we often pursue other goals in ways that strangle growth, when in fact those goals and growth are fundamentally compatible.
Two articles that caught my attention today approach this issue from different but complementary perspectives. One is by John Cochrane of the University of Chicago, a lengthy piece called simply “Economic Growth“. At the outset, Cochrane asserts that the one, ultimate source of economic growth in the long-run is through advancing productivity. He notes, however, that the U.S. has been falling short in that department of late. Re-establishing growth should start with a clean-up of the many harmful public policies that have cluttered the economic landscape, especially over the last few decades. Unfortunately, politics makes this easier said than done:
“The golden rule of economic policy is: Do not transfer incomes by distorting prices or slowing competition and innovation. The golden rule of political economics seems to be: Transfer incomes by distorting prices and regulating away competition. Doing so attracts a lot less attention than on-budget transfers or subsidies. It takes great political leadership to force the political process to obey the economic rule.“
Cochrane’s discussion is wide ranging, covering a number of areas of public policy that require “weeding”, as he puts it: the regulatory arena (finance, health care, energy and the environment), tax policy, debt and deficits, the design of social programs and entitlements, labor law and regulation, immigration, education, agricultural policy, trade, and the process of infrastructure investment. There may be a year’s worth of blog posts to be drawn from Cochrane’s essay, but I think “weeding” understates the difficulty of the tasks outlined by Cochrane to reignite growth.
The second article that interested me today dealt with technological advance, which is a primary driver of productivity growth. Economists and pundits often prescribe policies that they believe will lead to transformational breakthroughs in technology. This usually manifests in advocacy for increased public funding for basic scientific research. This is a mistake, according to Matt Ridley’s great article, “The Myth of Basic Science“. In fact, one might say that he’s identified another government-nourished weed for Cochrane to pull. I found Ridley’s opening paragraph intriguing:
“Innovation is a mysteriously difficult thing to dictate. Technology seems to change by a sort of inexorable, evolutionary progress, which we probably cannot stop—or speed up much either. And it’s not much the product of science. Most technological breakthroughs come from technologists tinkering, not from researchers chasing hypotheses. Heretical as it may sound, “basic science” isn’t nearly as productive of new inventions as we tend to think.“
Ridley’s thesis (actually, he credits several others for formulating this line of thinking) is that technology growth is very much an independent process, impossible to push or steer effectively. He goes so far as to say that it can’t be stopped, but he also cites ways in which it can be inhibited.
This perspective on technology has implications for patent law, a subject that Ridley explores to some extent. It also reflects badly on government efforts to direct and stimulate advances by granting subsidies to favored technologies and more aggressive funding of “basic science”. Government, in Ridley’s view, is largely impotent in spawning technological advance. By pushing technologies that are uneconomic, government distorts price signals, diverts resources from more productive investments, and embeds inferior technologies in the economy’s productive capital base.
But Ridley’s point has more to do with the futility of basic science as a driver of technological advance, and the strong possibility that causation often runs in the other direction:
“It is no accident that astronomy blossomed in the wake of the age of exploration. The steam engine owed almost nothing to the science of thermodynamics, but the science of thermodynamics owed almost everything to the steam engine. The discovery of the structure of DNA depended heavily on X-ray crystallography of biological molecules, a technique developed in the wool industry to try to improve textiles.
Technological advances are driven by practical men who tinkered until they had better machines; abstract scientific rumination is the last thing they do. As Adam Smith, looking around the factories of 18th-century Scotland, reported in ‘The Wealth of Nations’: ‘A great part of the machines made use in manufactures…were originally the inventions of common workmen,’ and many improvements had been made ‘by the ingenuity of the makers of the machines.’
It follows that there is less need for government to fund science: Industry will do this itself. Having made innovations, it will then pay for research into the principles behind them. Having invented the steam engine, it will pay for thermodynamics. This conclusion … is so heretical as to be incomprehensible to most economists, to say nothing of scientists themselves.“
It’s good to qualify that “industry will do this itself” only if it isn’t severely hamstrung by meddling politicians and regulators.
Ridley goes on to cite a few inconvenient historical facts that run counter to the narrative that public funding of science is a necessary condition for technical advance. He also cites empirical work suggesting that the return on publicly-funded R&D is paltry. In fact, he allows that government involvement in “basic science” may inhibit more economically viable advances and their adoption. There is no question that government often chooses unwisely without the discipline of market incentives. If it gets funded, then bad science, politically-driven “science” and ultimately nonproductive science might very well crowd-out better private science and innovation.
In a time of strained government budgets, public funding for basic science should be subjected to as much scrutiny as any other spending category. Like Ridley, I have much more faith in private tinkerers to choose wisely when it comes to the development of new technologies. Intimacy with actual markets and with the production process itself improve the odds that private developers and technologists will be more effective at boosting productivity.