THE POLITICS OF INNOVATION: PUBLIC RISKS AND PRIVATE PROFITS


By the Association for Plural Economics


[This article published on October 30, 2016, is translated from the German on the Internet, http://blog.arbeit-wirtschaft.at.]


Innovation is the unsurpassable buzzword in political-economic debates. The former head of the WIFO, Karl Aiginger, never tired urging investments in research and education under this keyword. Austrian chancellor Christian Kim also relies on this word. Like Aiginger, he emphasizes the fundamental responsibility of the state to take risks and guide the direction of development and not only finance research and offer incentives for investments. He appeals to new discoveries of the economist Mariana Mazzucato and also leans heavily on the renaissance of industrial policy that is currently proclaimed.


TWO APPROACHES


What is innovation? From an economic perspective, innovation is the realization of a new progressive solution for a certain problem or the introduction of a new product. The development of new products should ensure growth and permanent employment. Innovative economic zones are regarded as competitive with the US Silicon Valley leading the way.


Where do these innovations come from? They are the marvelous result of the teamwork of risk capital, consumption, and market forces - in the standard economic approach taught in management seminars and at universities. Entrepreneurs recognize problems, combine existing technologies or develop new technologies and offer solutions or supply us with new consumer goods.


In this way of looking at things, the private sector guides the innovation process in the right direction and does not only create innovations. In the dogmatic interpretation, the state is even regarded as an evil. "Good" research is pushed back and the results from governmental research programs are made insignificant compared with developments in Silicon Valley.


In her book "The Capital of the State" published in Germany in 2015, the US economist Mariana Mazzucato contrasts the historical experiences of the 20th century with this orientation. She shows nearly all great technological revolutions would not have been possible without state investments. Path-breaking inventions, the Internet, GPS (global positioning system), electron semiconductors and the touch-screen are all fruits of state-financed research. The Apples and Googles of this world are businesses that developed the results of decades-long state-financed basic research into marketability. The IT-revolution would not have been possible if public institutions and funds had not made investments.


The changeover to renewable energy is a similar challenge. In this area, states with their institutions are considered innovation leaders and promote many free enterprise futurist projects. So wind parks can arise because state funds flowed into the development of turbines decades ago and the electricity market is specially regulated.


NEW IDEAS


Mazzucato makes a clean break with the dominant economic opinion that restricts the role of the state in clearing up market failures. According to this view, the state should only focus on the conditions that make possible innovations. A passive role as a mere supporter is ascribed to the state. That the state also acts as a risk-taker is ignored, Mazzucato argues. States are able and ready to bear risks that free enterprise businesses cannot take. This refers above all to projects marked by great uncertainty as to whether the funds will ever flow into marketable products.


If state financed or promoted investments are successful, the realized profits should not be thoughtlessly left to the private businesses that carried out the innovations. The state should actively promote and guide the innovation process and share in the profits. The terms in the discourse around state investments should be filled with new contents.


HETERODOX BACKGROUND


Mazzucato received her Ph.D. at the "New School for Social Research" in New York that is known in heterodox circles and acknowledged beyond heterodoxy. She is part of the Institute for New Economic Thinking that promotes alternative approaches.


Her ideas are based theoretically on the works of Josef Alois Schumpeter on entrepreneurship and the dynamic ideas of John Maynard Keynes. Schumpeter emphasized the dynamic effect of technological social development and did not only see the function of economic competition in arriving at uniform prices. The post-Keynesian school stresses the importance of a comprehensive and far-reaching public sector for economic stability. This also explains the clear demarcation from economic orthodoxy. Both theoretical strands are classified today as heterodox economics that must struggle for academic recognition, research funding and paid research positions, as the Association for Plural Economics often criticizes.


The responsibility of the state does not end with product innovations. In the medium to long-term, alternative, critical and progressive approaches to economics must be promoted so political-economic discoveries can be gained and given the attention they deserve.



WHAT IS PROSPERITY?


By Sven Hergovich


BEYOND THE GDP


[This essay is a revised summary of the article "Beyond the GDP: Can We Re-Focus the Debate?" by Georg Feigl, Sven Hergovich and Mirian Rehm published in 2012. The report of the Stiglitz-Sen-Fitoussi commission is a reference point for the current Beyond GDP debate.]


Even before the financial crisis, many people were convinced our economic system does not function optimally - despite relatively high growth- and declining unemployment rates. Does prosperity mean more than the per capita gross domestic product? What indicators are needed to measure the prosperity of a society?


At least in the EU, economic growth before the financial crisis seemed to be increasingly uncoupled from the subjective well-being of the majority of the population while ecological problems intensified. Even though the current financial crisis shows neoliberal economic policy was not and is not able to sustainably improve the living conditions of everyone, the financial crisis has led to a slackening of discussion about how prosperity can be measured and to a concentration on short-term problems like the collapse of economic growth.


GDP IS NOT AN END-IN-ITSELF


The discussion whether a certain GDP growth can be an end-in-itself or a means for reaching other goals is very important. One essential result of happiness research is that more economic growth after reaching a certain level of prosperity has only very weak or no effects on subjective well-being. Rather well-being may be determined by the distribution of monetary resources, unemployment, quality of work, free time, and other factors like health or social integration.


Defining and measuring these overall social goals is difficult because this can only happen in a political process based on philosophical reflections. The decision about prosperity indicators is a political decision that cannot be decided by experts. In the following, indicators measuring prosperity will be evaluated in the areas of material prosperity, quality of life, and ecological sustainability and their actual development analyzed.


MATERIAL PROSPERITY


The shriveling of the European economy altogether characterizes the economic development in Europe from 2008 to 2013. The results for the Human-Development Index demonstrate that the living standard for broad sectors of the population depends on more than material possibilities. Whether a higher living standard can also be maintained in a shriveling economy is unclear. Unemployment and poverty in Europe increased sharply as a consequence of the current crisis.


This negative development will intensify since low-income groups are less able to mitigate negative income shocks and prevent skidding into poverty. In addition, income inequality in itself has many negative effects like higher criminality, more gender discrimination, and lower life expectancy. Therefore additional economic indicators that focus more on consumption and less on the production side are indispensable. The income distinction between women and men should be given more attention. The distribution of assets (wealth) should play a central role in the quantitative evaluation of prosperity.


NEW TECHNOLOGIES


New technologies and efficiency gains will certainly play a central role in combating climate change. Whether they alone will be able to adequately reduce greenhouse gas emissions is questionable. A part of all efficiency gains is counteracted by the Rebound Effect. Resource-sparing technologies lead to lowering the price of the corresponding resource so its use can be increased. For measuring ecological problems of a society, indicators on reaching ecological goals should be given more attention than indicators that measure possible solutions (for example, the size of the environmental economy).


NEW WAY


Finding proper indicators for measuring sustainable progress socially and ecologically in the sense of improved quality of life for everyone, distribution of prosperity in an ecologically sustainable development goes along with shifting attention from the GDP to themes affecting the living standard of broad sectors of the population

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