Innovating out of the crisis

Robert Atkinson

While the causes of the global financial crisis are many, at the core there is one: Washingtons belief in the primacy of unfettered markets. This belief is not just some random notion that happens to be in vogue. Rather, it lies at the heart of the prevailing doctrine of neo-classical economics: the primacy of stable markets driven by rational actors responding to price signals. Whatever the challenge faced, the answer from the neo-classicists is largely the same: the market will take care of it. If a role for government is acknowledged, it is a strictly delimited one, so as not to distort the workings of the market. The current crisis demonstrates the failure of this doctrine as an effective guide to policy.

The centre-left now has a once-in-a-generation opportunity to shift the debate about the role of the state and the market. But unless they embrace the correct economic doctrine, their efforts will fail both economically and politically. For if in rejecting the neo-classical free market economic doctrine, the centre-left replaces it with the big government, populist Keynesianism that reigned during the post-war era, it will have failed to respond adequately. Neither neo-classical nor Keynesian economics provides an adequate guide for action in an economy transformed by technology, globalisation, and entrepreneurship. If we are to get out of the current economic maelstrom and ensure long term, broad-based prosperity, the following steps must be taken:

Put innovation at the heart of a new economic framework
The most important step the centre-left needs to take is to embrace a new economic framework. That framework  innovation economics  reformulates the traditional model of economic growth so that knowledge, technology, entrepreneurship, and innovation are positioned at the centre of the model rather than seen as independent forces that are largely unaffected by policy. It is based on two fundamental tenets: first that the central goal of economic policy should be to spur higher productivity and greater innovation; and second that markets relying on price signals alone and actions by independent firms will not be as effective as smart public-private partnerships. If centre-left policymakers understand and embrace this doctrine, the likelihood of the right policies emerging is significantly higher.

Realise the global potential of digital information technology
In a world being transformed by digital information technologies, it is time to set a goal of making the world alive with information. The last decade has been about connecting computing devices. Now we can connect the world, and in so doing empower all citizens.  This means creating intelligent infrastructure systems, including a smart electricity grid, real-time environmental monitoring systems, smart public safety systems, patient-centred health IT systems, and digital innovations in a host of other areas.

Abandon mercantilism in favour of an economic doctrine based on innovation
The global economy, which has evolved into a beggar-thy-neighbor system where national advantage is at odds with global advantage, is crying out for solutions. At the heart of this dysfunction lie a host of mercantilist policies, including tariff and non-tariff barriers, subsidies to promote exports, forced technology transfers, theft of intellectual property, restrictive procurement policies, and tax policies that subsidise exports.
All nations must be encouraged to abandon mercantilism in favor of an innovation-economics doctrine that focuses on raising productivity in all sectors, not just internationally traded ones. Global bodies like the WTO need to work more proactively against beggar-thy-neighbor mercantilist strategies. International organisations, like the World Bank and the IMF, and national development organisations, will have to stop promoting export-led growth as a key solution to development. They will also have go further and use their assistance to actually incentivise a rejection of negative-sum mercantilist policies by rewarding countries whose policies are focused on spurring domestic productivity, not on protecting the status quo.

Progressives are defined by their belief in progress.  If they can embrace an economic doctrine that puts progress first, works to spur a digital transformation and enacts a win-win system of globalisation, they will have put in place the foundations for a lasting prosperity for all peoples. The right may blithely accept a fundamentally flawed global economic system, and the left may seek to return it to the days of old. The centre-left now needs to chart a course to a fully-integrated global economic system that works for workers, nations and the globe.

Robert Atkinson is president of the Information Technology and Innovation Foundation