Posted by: Michael Mandel on January 14
Daron Acemoglu, whom I identified here as one of the leaders of innovation economics, has written a paper titled The Crisis of 2008: Structural Lessons for and From Economics. It’s being widely quoted and criticized. Mark Thoma has a post titled Acemoglu: The Models are Broken. Arnold Kling likes Acemoglu’s essay, calling it “highly recommended”. But Yves Smith calls the analysis in the essay “shallow and profession serving”.
I’m going to focus on a different part of the Acemoglu essay than these commentators. I’m going to focus on his analysis of growth and innovation, as it relates to the crisis. Acemoglu writes:
Barring a complete meltdown of the global system, even with the ferocious severity of the global crisis, the possible loss of GDP for most countries is in the range of a couple of percentage points, and most of this might have been unavoidable given the overexpansion of the economy in the prior years. In contrast, modest changes in economic growth will accumulate to much larger numbers within one decade or two. Thus, from a policy and welfare perspective, it should be self-evident that sacrificing economic growth to deal with the current crisis is a bad option.
Recent events have not shed doubt on the importance of innovation. On the contrary, we have enjoyed prosperity over the past two decades because of rapid innovations quite independent from financial bubbles and troubles. We witnessed a breakneck pace of new innovations in software, hardware, telecommunications, pharmaceuticals, biotechnology, entertainment, and retail and wholesale trade. These innovations are responsible for the bulk of the increases in aggregate productivity we enjoyed over the past two decades. Even the financial innovations, which are somewhat tainted in the recent crisis, are in most cases socially valuable and have contributed to growth. Complex securities were misused to take risks with the downside being borne by unsuspecting parties. But when properly regulated, they also enable more sophisticated strategies for risk sharing and diversification. They have enabled and will ultimately again enable firms to reduce the cost of capital. Technological ingenuity is the key to the prosperity and success of the capitalist economy. New innovations and their implementation and marketing will play a central role in renewed economic growth in the aftermath of the crisis.
I think this point is being dramatically overlooked in the rush of today’s crisis. Innovation is essential, and probably the only way out of the mess in the long run.
Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.