The problem of scale

I've been reading Ian Morris' Why the West Rules - For Now over the past couple of weeks (some of the blow by blow in the earlier centuries might have made way to get it down from its 600+ page length) and I've been struck by two things. First the assertion that there have at points in history been barriers or limits to development that have held until conditions or technology moved past a certain limit. And the second is that the problem of scale seems writ large even though it is not really brought out in the text.

The second for me is an integral part of the first and I'm not saying Morris doesn't recognise this or in some ways discuss it. However I thought it was worth making it really explicit. Simply put, big things are not small things made large.

Probably the best piece on this in management literature is the classic 1972 Harvard Business Review article by Larry Greiner Evolution and Revolution as Organizations Grow which discusses the differences between moments of smooth evolution and disruptive revolution based on the age and size of an organization. The idea that the small and the large don't work in the same way is fundamental in physics, in the difference between Newtonian mechanics and the strange world of quantum mechanics (for a musical version of this have a look at the Symphonies of Science the Quantum World).

And in Morris' text what I see lurking is that large countries are not big small countries, if I can mush all of that together. Or to put it another way, the scaling of companies into national economies and from national economies to the global economy involves scaling steps that are discontinuous.

This is very important when trying to understand commentary on the nature of the current recession and the actions that are being taken (or not) to try to reignite growth. How the narrative on how to address the problems is structured depends on what scale you're used to working at. Paul Krugman wrote about this in a direct way in his 1996 piece, again for Harvard Business Review, A Country is Not a Company, where he strongly argued for not following the instincts of CEOs of large companies in terms of economic policy.

It may also point to significant fault lines in economics, between those trying to work up from the microeconomics of companies to the macroeconomics of countries. Maybe, again in parallel to physics, there is no grand theory of everything.

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F

Industrial policy back in the Economist

At the risk of being a cracked record, countries need to consider industrial policy anew. Interestingly even the Economist is looking at industrial policy arguments and is willing to engage in debate on the issues. A new column discusses recent papers by Rodrik and others being relatively open to the arguments made about positive versus negative paths of innovation. 


However the slight bias for the Economist comes out towards the end ...

In effect, Mr Rodrik and others are arguing that industrial policy requires disinterested, benevolent policymakers who can do it well. Unfortunately, they do not yet have a recipe for how such policymakers can be created. Policy is made by real people with political and personal motivations. What they come up with is unlikely to be as well designed as the ones in the models.

Rodrik has argued elsewhere that industrial policy is an ongoing dialogue and depends on input from industry as much as from policymakers. But I am struck by the argument as it could be reflected into the economy generally. The market is embedded in society, designed and bounded by the laws of each country and a set of norms (those criticised by Ed Milliband in his recent Labour Party conference speech). If policymakers cannot be expected to be perfect designers of industrial policy, let's not assume that financial engineers and captains of industry are perfect decision makers either. 


How can such policymakers be created? Well in the UK a step forward is to provide stronger training, as with the new Blavatnik School of Government opening at Oxford, and to have a more transparent policy process that engages a broad conversation rather than trying to keep everything under the covers. By taking us away from the images of Sir Humphrey and into a more professionalised policy process we can hope for better outcomes.


In the meantime let's be grown up and have a realistic conversation on industrial policy that is not trapped in the tropes of the 80s. 


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The strength of radical doubt

Following the news from CERN that they potentially have an experimental result that destroys a foundation of modern physics I joked that I might have to hand back my physics degree. Obviously the degree doesn't get invalidated just because some pesky particle broke the speed of light, but it did remind me that the radical doubt that physicists carry with them is a strength and not a weakness.

It is a great characteristic of the discipline that when faced with a result that clearly is outside existing models rather than circling the wagons there is a palpable sense of excitement and challenge. It may create a lot of problems and take much time to progress, but it would be one of the greatest times to be a physicist. The opportunity to renew and rewrite a discipline comes around very rarely.

So again I am frustrated by mainstream economics and in particular the use of economics within policy and media debates on the credit crisis and the recovery that has not happened. When the world keeps sending this discipline signals that all is not well, that models and methods do not stand the test of reality, the response is very different to that in physics. Rather than accepting the need to start anew, there is a denial that there is any need for change and renewal.

Until radical doubt and to be honest more humility enters the discipline there is little hope that we can move forward towards a productive version of economics. We live with flat earth economics in a time when we need to be moving faster than the speed of light.

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The tensions of innovation policy in Europe

The Centre for European Reform has released a very interesting collection of pieces on innovation in Europe which highlights all the difficulties in talking about and supporting innovation. It has contributions from John Kay, Maire Geoghegan-Quinn and Amar Bhide amongst others, so does not suffer from a single perspective on the issues.

As discussed here previously, there is continuing confusion over what we all mean by innovation (still!) which is acknowledged in the collection. However according to one of the editors, Philip Whyte, there is a tension between those who study innovation (academics or those in think tanks) and those who have to develop and implement policies in support of innovation (policy makers in general). He claims academics "... point out that Schumpeter's famous description of innovation as a process of 'creative destruction' has two components that are inextricably intertwined. One cannot embrace creation (that is, the emergence of innovative young firms) without accepting destruction (letting uncompetitive incumbents go to the wall). Yet policy-makers ... want innovation, but without the accompanying economic dislocation and social disruption."

I'm not sure that such a tension really exists. Most policy makers understand that firms fail at somewhere about 10% of firms per year in developed economies and that a constant supply of new firms, let alone innovative new firms, is required for growth. Perhaps the policy maker has two roles, to support innovation to occur and to soften some of the transitional pains that come with the changes innovation brings in markets and in society?

Perhaps the biggest problem is one of timescales and incentives - academics have years, policymakers tend to have days. As Sam says in the West Wing "... we play with live ammo around here ..."

A small follow up on the crisis in economics

In my last post I touched on whether there is or there needs to be a crisis within the profession and teaching of economics. As I may have mentioned there seems to be a rumbling noise that many wish to ignore, something in the woodshed that won't go away. This came up again this morning during a panel session at the YouGov-Cambridge Forum 2011, where Vicky Pryce and Lord Griffiths were in conversation with Paul Mason.

In questions I brought up that economics may have failed to train policy analysts and policy makers effectively over the past 20 or 30 years, as macro went into abstract mathematics in an all encompassing way and structural or industrial economics basically was ignored. This didn't really get much traction with Vicky Pryce, but it did beg the question whether economics is now getting in the way of good policy making?

The latest expression of concern about the discipline comes from none other than Paul Krugman and his recent Presidential address to the Eastern Economics Association. There he makes the case that there are three complaints that could be made - that economists did not see the crisis coming, that economists failed by not even considering that such a crisis could occur, and finally that they have failed to provide useful advice in the midst of the ongoing crisis. 

He concludes that the first would be unfair, that the second is substantially true, but that the third is true and is the worst failure. He charges that "We’ve entered a Dark Age of macroeconomics, in which much of the profession has lost its former knowledge, just as barbarian Europe had lost the knowledge of the Greeks and Romans."

As we head towards a double dip and in some eyes potentially a second credit crisis this is not the time for joy in the pain of others. However it is a time when policy makers at the most senior level, whether they come from an economics background or not, to face up to the shortcomings in economic knowledge and practice and to be open to non-dogmatic solutions to the problems of most developed economies. The limits of evidence, knowledge and practice within specifically macroeconomics must be openly acknowledged so that other voices can get into the policy process. Not because we don't like economics, but because we need solutions that work and quick, not more of the same.

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Renewing economics by going opensource

As I mentioned in previous post John Kay has taken on economics as not being a science. However, in his latest piece in Prospect he laments that we have wasted a good crisis. The window of opportunity to change the narrative, to remove some of the sacred cows of the policy debate seems to have closed, as I briefly mentioned. He does a good job of highlighting how the story changed from greedy bankers being reckless to blaming the government for not regulating them enough. This was the government that in every other way was supposed to be too big, too burdensome and too much in the way, right?

So that economics is a discipline in need of renovation if not revolution is getting lost in the return to the new normal. There is some hope though, some within and some without the field of economics who are prepared to point to the emperor's new clothes. For example, Joe Stiglitz has been very direct in saying that there needs to be a crisis in the discipline, that macroeconomics essentially failed when challenged by the credit crisis. These comments were part of his recent speech at the Lindau Conference, which brings together Nobel laureates with promising young researchers and has been running since 1951. Interestingly this meeting is only the fourth dedicated to economics, with a plan to have such a focus every three years, and as he says at the meeting in 2008 nobody was talking about the crisis. Other economists willing to challenge the status quo include Ha-Joon Chang and his influential 23 Things They Don't Tell You About Capitalism.

The problem is that too many policy positions are bunged up with people who may have the best intentions but don't have the time and space to reinvent the discipline on the fly. They are faced with real problems in real time. It may take a generation to get new thinking deep into multilateral and national government organisations. Hence the hope that new courses such as that at the Blavatnik School of Government at Oxford will produce policy folks with a broader set of perspectives.

In the meantime there is a real need for the discipline to potentially go back to the start, right back to the beginning and build itself anew. The challenge is immense, both intellectually and in terms of trying to get enough minds pointed in a common direction. This may be the moment when we need to opensource economics and start producing an economics fit for the real world.

As I mentioned there are some folks heading in this direction. A great example is Doyne Farmer at the Santa Fe Institute. He's trying to build an agent based model of the US housing market that works at the level of the individual (here's a video of him talking about it to INET who have funded some of his work). Horrendously complicated but a great attempt to start afresh. And the really interesting thing about Prof Farmer? He was a physicist before he got into all of this!

Here's to starting with a blank sheet of paper and seeing if we can build an economics that actually works.

Best

Finbarr

Broken narratives of innovation

A post or two ago I briefly grumped that innovation was everything and everywhere. What that post may have been clumsily trying to get at was that the narrative of innovation is broken, that is the stories or interpretative structures that we use to describe what we think innovation might be and what its impacts are do not work any more.

This is a problem for academics, policy makers and anyone trying to apply innovation to their company. It probably isn't a problem for the industry of business books about innovation, as the confusion and overreaching probably serves that particular group well. But if you're actually trying to improve the performance and outcomes of companies and countries this is a real issue.

The dominant narrative for innovation is that it is uniformly good. Innovation, simplified as the introduction of new products or services, is a move forward, the arrow of progress taking us forward. Now here is where the first wrinkle comes in - some 'definitions' of innovation wedge in the word 'successful' (for example the 2008 UK government Innovation Nation paper). So something isn't an innovation unless it is successful, and the definition of successful is left as an exercise for the reader.

Macro policy talks of policy in these terms of successful introduction but the measurement of innovation takes a completely different position. The questionnaire for the 6th Community Innovation Survey carried out in 2009 uses this definition of innovation -

Innovation, for the purpose of this survey, is defined as new or significantly improved goods or services and/or the processes used to produce or supply all goods or services, that the business has introduced, regardless of their origin. These may be new to the business or new to the market.

So from the policy analyst or academic perspective (the results of the survey are used by academics to write many papers) innovation becomes something simpler or softer, as the criterion is new to either the business or the market. The approach here says nothing about whether the new product or service is successful, it just asks whether it is new. The questionnaire does go on to ask how the revenue of the company depends on new products, but this is not the same as the macro 'successful'.

Now don't get me wrong I'm as up for positive change, for improvements in technology and institutions, as the next policy wonk. I don't want to rip out the computers and to head back to the land without access to indoor plumbing or my treasured mobile phone.

I'm really concerned though that in painting innovation, in its broadest sense, as all change, always positive, that we're clouding the issues we really need to face. Specifically, how do we achieve growth that is sustainable and equitable? Because that slippery little 'successful' doesn't clarify who is benefiting. Is it just the company and its increased market share, or is it consumers getting a truly better product, or the national economy having increased GDP?

And here's the reason that this probably becomes too complex. When we talk about innovation it will have different meanings, processes and impacts depending on what country you're in, whether you're talking about technology companies or publicly provided healthcare. There cannot be one conversation or one narrative that encompasses productive changes in all of these contexts.

If you were very cynical you could say that the macro definition of innovation, the one that includes the successful rider, is self proving - by enforcing the criterion of successful you are by definition focusing on something that is positive.

So what may be a small step towards making innovation as a term have more bite again is to admit that some changes, some new products and services are negative for some stakeholders. I'm not asking for a measurement of that positive/negative balance, but at least to recognise that some of what we currently talk of as being innovation is marketing fluff at least or sometimes damaging would be an interesting change.

I'm sure some of you would agree that we could have done with a lot less financial innovation over the past decades.

Best

Finbarr