Innovation Under Inclusive Institutions: A Path to Prosperity. Grace E. Stainback. Concordia University

Transcription

1 Innovation Under Inclusive Institutions 1 Innovation Under Inclusive Institutions: A Path to Prosperity Grace E. Stainback Concordia University

2 Innovation Under Inclusive Institutions 2 On August 1, 1981, MTV Networks aired its first music video on national television. The song chosen for this groundbreaking honor? Video Killed the Radio Star, by the Buggles. The song selection was no mere coincidence (Kansas State University, 2011). MTV knew it would have a massive cultural impact that would change the face of the music industry, and that it did. Industry in the modern United States is constantly innovating, and each push forward brings about the death- or at least the severe compromise- of something else. In this case, the radio industry was the economic loser at the hand of progress. The fostering of innovation colors the landscape of a nation that has successfully established inclusive political and economic institutions; that is, those that encourage participation and a level playing field for the majority of its people (Acemoglu & Robinson, 2010, p. 74). It is this pattern of innovation and destruction that is a centrifugal theme in Daron Acemoglu and James A. Robinson s Why Nations Fail. Whether that innovation is governmental, economic, ideological, or scientific, change shapes societies. The outcome- whether that change affects a nation for the better or worse- according to Acemoglu and Robinson, is the result of a complex web of organizational patterns and historical events that either propels a nation towards inclusive institutions or extractive ones. The book s central theory maintains that nations with inclusive economic and political institutions will eventually find a road to prosperity, while nations with extractive economic and/or political institutions- those that extract wealth to benefit a certain subset of society- will ultimately fail. Furthermore, Acemoglu and Robinson (2012) posit that innovation is a key component of the inclusive institutions that lead to prosperity, writing that sustained economic growth is almost always accompanied by technological improvements (p. 77). Innovation, running alongside a host of other economic and political factors and influences that play out over time help set in motion either virtuous circles that support inclusive institutions, or vicious circles that promote extractive ones. Acemoglu and Robinson make a compelling and convincing argument for the importance of inclusive institutions in Why Nations Fail. Its historical examples in particular concretely establish the mutual dependence between innovation and inclusive institutions. However, they fail to address the implications of contemporary innovation, particularly in the United States, which would have added to the book s current relevancy. Fear of Creative Destruction Out with the old, in with the new. At its most basic, this is what the economist Joseph Schumpeter termed creative destruction. A necessary evil in terms of development, it creates both winners and losers in the economic landscape as change occurs. Creative destruction is the immediate byproduct of innovation; without innovation, which leads to creative destruction, economic progress will fall stagnant. But in order bring about creative destruction, governments must create an environment that fosters it, providing incentives for workers. But, why

3 Innovation Under Inclusive Institutions 3 don t all nations create institutions that encourage creative destruction, if it leads to prosperity? Although there may be many explanations for this, dependent on each nation s particular organizational history and critical junctures which alter its course, Acemoglu and Robinson (2012) point to fear of creative destruction as the main reason why nations suppress innovation (p. 84). While innovation leads to prosperity for the nation as a whole, it may compromise the prosperity of those in power. With progress and change comes an inevitable shifting of power and influence, a shift which the ruling elite will go to any lengths to resist. A very tangible example comes in the form of early literacy and the Ottoman Empire. Throughout the late 15th century Western Europe, quickly followed by Eastern Europe, adopted the printing press and allowed in to flourish. However, it was expressly forbidden in the Ottoman Empire and thus its population lagged far behind Europe in literacy and education. Write Acemoglu and Robinson (2012), Given the highly absolutist and extractive Ottoman institutions, the sultan s hostility to the printing press is easy to understand. Books spread ideas and make the population much harder to control (p. 215). This fear of creative destruction is well documented throughout Chapter 8 of Why Nations Fail, in which the authors use examples of Spain, Austria-Hungary, Russia, China and Africa resisting progress. Aptly titled Not On Our Turf, the chapter describes each nation s divergent reaction to block the spread of industry. Railroad plans were rejected. Trade routes were blocked. Voices were silenced. All of this had a devastating effect on the industrialization of these nations. It is this lack of inclusive institutions, and subsequent lack of innovation that points directly to the authors argument. Write Acemoglu and Robinson (2012): Central to our theory is the link between inclusive economic and political institutions and prosperity. Inclusive economic institutions that enforce property rights, create a level playing field, and encourage investments in new technologies and skills are more conducive to economic growth than extractive economic institutions that are structured to extract resources from the many by the few and that fail to protect property rights or provide incentives for economic activity. (p. 429) Another example illustrating fear of creative destruction was the underlying factor behind Elizabeth I s refusal of William Lee s stocking machine patent in 1589 England. Now, while Elizabeth I was able to oppose creative destruction for the time being, an institutional drift was already taking place that would set in motion a virtuous circle promoting inclusive institutions. Tudor England brought about not only political centralization, but also a demand for pluralism in society, both of which are the pillars of inclusive institutions (Acemoglu & Robinson, 2010, p. 187). Pluralism allowed for challenges to monopolies in England, and subsequently brought about the Glorious Revolution in This, in turn, led to petitioning, which led to increased protection of property rights, which led to increased innovation, which led to the Industrial Revolution and massive creative destruction.

4 Innovation Under Inclusive Institutions 4 England s evolution is Acemoglu and Robinson s primary exemplar of success under inclusive institutions. A process of institutional drift, allowing for increased property rights and pluralism, coupled with the critical juncture that was the Industrial Revolution launched England to the forefront of economic prosperity, propped up by the emergence of co-dependent political and economic institutions. This example effectively illustrates the multitude of factors at stake, which overlap to create the successful outcome. Its complexity also explains the difficulty in prescribing a suitable one size fits all remedy to ailing nations, or even to predict what particular patterns will emerge in the future. Growth Without Innovation There is perhaps no greater example of an institution that failed due to lack of innovation than the mid-20th century Soviet Union. The economy in Soviet Russia expanded rapidly under the policies of Josef Stalin and subsequent leaders, but the working population didn t prosper because both the political and economic institutions were extractive. In Soviet Russia one particular extractive tactic was termed collectivization, which entailed the abolition of private property rights to land and the herding of all people in the countryside into giant collective farms run by the Communist Party. This made it much easier for Stalin to grab agricultural output and use it to feed all the people who were building and manning the new factories (Acemoglu & Robinson, 2010, p. 126). This turned into a vicious cycle of extracting from the rural population to feed to into yet more industry, which was then extracted from as well. The loss of property rights left the working population without any incentive to innovate or make production as efficient as possible. It is this lack of incentive in extractive institutions that tangentially fails to bring about creative destruction, which is essential to progress. In response to this, the Soviet regime sought to create incentives, such as awarding bonuses to workers who met a certain output. There were two major problems with this. First, it only motivated people to do just the right amount to earn the bonus, but no more. These short-term incentives discouraged people from maximizing production, perhaps even overtaking the incentive goal and making progress in the longer term. Second, this form of incentive still doesn t foster creative destruction. If workers are only willing to do exactly what they need to get by, the sort of innovation necessary to set a nation on a path to prosperity will never be created. Because of these extractive institutional issues, the economic growth was not sustainable. By the 1980s, the Soviet economy had crumbled just decades after taking the world economic stage by storm (Acemoglu & Robinson, 2012, p. 132). The situation in modern China eerily mirrors the rise of Communist Soviet Union. However, Acemoglu and Robinson do an effective job of highlighting the contrasts between these two very comparable institutional structures. China has adopted increasingly inclusive economic institutions, welcoming a rise of innovation and

5 Innovation Under Inclusive Institutions 5 technology. However, the extractive force of the government prevents this ingenuity from flowering into creative destruction. Chen Yun, a member of China s Communist Party, coined a bird in the cage metaphor that aptly illustrates the party s views: China s economy was the bird; the party s control, the cage, had to be enlarged to make the bird healthier and more dynamic, but it could not be unlocked or removed, lest the bird fly away (Acemoglu & Robinson, 2012, p. 438). The iron grip of the ruling party that was essential to Stalin s Soviet Union is similarly exerted in China today. In particular, the Communist Party s control over the media, despite the liberties of modern information technology, is both remarkable and disturbing. The comparison between the Soviet Union and modern China in Why Nations Fail helps to illustrate the very unique situation currently playing out before the world eyes today. China s unique mixture of extractive and inclusive institutions, and skyrocketing growth at the hands of it, has led to economists worldwide considering the merits of authoritarian growth for the first time, although Acemoglu & Robinson (2012) posit that this system will not lead to long-term prosperity unless inclusive political institutions are established as well (p. 442). Another interesting comparison to analyze through the authors model would have been that of modern China and the modern United States, another growth powerhouse operating under very different economic and political institutions. The United States: At a Critical Juncture? The word innovation is inextricably married to the modern United States economy. Although not emphasized in the text, creative destruction has manifested itself in the heart of American entrepreneurship and a mixed economy that defines itself more closely with capitalism than any other ideology. Microsoft Office. The Huffington Post. ipods. These entrepreneurial experiments would never have made such swift strides in technological innovation if they were not supported by inclusive institutions that allowed them to not only expand, but reap the benefits of their work, albeit at the expense of others. Microsoft Office drastically reduced the need for secretaries and bookkeepers. Online newspapers like the Huffington Post limited the legitimacy of print newspapers. ipods destroyed the CD industry virtually overnight; its parent company, Apple, is the face of the technological boom, leaving a tidal wave of creative destruction in its wake. The three examples above reveal a common theme in modern American innovation- that of information technology. The revolution of information technology in the United States over the past half-century is a direct byproduct of its inclusive institutions. In particular, entrepreneurs have secure property rights, which Acemoglu and Robinson argue are crucial for incentives to innovate and maximize output. In a campaign speech last year, Newt Gingrich defended America s capitalist-leaning policies:

6 Innovation Under Inclusive Institutions 6 The fact is the entrepreneurial free enterprise system, which attracted people from Benjamin Franklin to the Wright brothers to Henry Ford, to Thomas Edison, to Bill Gates, to Steve Jobs. That model of maximizing the development of new approaches, new energy, new opportunities, new technology has raised the standard of living of people across this planet more than any other system in the history of the world (Kaminsky, 2012). However, some argue that information technology may not, in fact, be maximizing development, harkening a general lag of potential output in the workforce nationwide. A recent article in The Economist attempts to grapple with the accusation that innovation in the U.S. in on a decline, perhaps for good. Many leading economists, pointing to the steady decline in GDP per person and a stagnation in real incomes in the United States, claim that the economic impact of the innovations of today may pale in comparison with those of the past (Economist, 2013). In particular, they claim that information technology is not up to par with inventions of the previous 200 years in the United States. The Economist (2013) notes: As early as 1987 Robert Solow, a growth theorist, had been asking why you can see the computer age everywhere but in the productivity statistics. In the end, The Economist defends the potential of information technology, arguing that there has historically been a time gap between innovation and its practical use in society and the economy. Whether it will maximize innovation or not, there are two interesting implications of information technology to note. The first is that many jobs are at risk in the dawning information age, when, for example, cars drive themselves and computers can write newspaper articles. Just like the case of the Luddites in Industrial England, as discussed in Why Nations Fail (Acemoglu & Robinson, 2012, p. 85), the livelihood of countless working-class citizens stands in the path of creative destruction. Furthermore, the expansion of a global economy, aided by information technology, is playing a key role in the rise of the emerging world on the economic landscape. While outsourcing and the globalization of its technology may not be the best for America s economy, it is helping establish a marginally more level playing field worldwide. Writes The Economist (2013), raising Asia s poor billions into the middle class will mean that millions of great minds that might otherwise have toiled at subsistence farming can instead join the modern economy and share the burden of knowledge with rich-world researchers a sharing that information technology makes ever easier. In TIME Magazine last year, Bill Clinton wrote about the role of cell phone technology in lifting Haitians out of poverty, writing, technology fosters equality (Clinton, 2012). In a way, this revolution can be analyzed through Acemoglu and Robinson s model. If you look at the globalized world as one entity, information technology has welcomed an age of pluralism. Information technology

7 Innovation Under Inclusive Institutions 7 provides more people with access to knowledge. It also gives them a voice; blogging is like a magnified form of petitioning in medieval England, allowing the masses to engage in public debate and policy-shaping. Acemoglu and Robinson, in fact, conclude Why Nations Fail with a discussion of the modern media and its potential to shape international institutional drift. Twitter, Facebook and other social media outlets were important tools in the Arab Spring and other massive protests worldwide, and gave Iranians a voice in their opposition to Ahmadinejad s coup of the 2009 election (p. 461). Conversely, the Iranian government s control of state media, just as in China, is central to its method of extractive political policies. These two opposing forces of information technology is an interesting dichotomy that should have been addressed in the text. A discussion of the rise of information technology in the United States, as well as its multitude of implications, from transforming the economic landscape in the U.S. and abroad to influencing the outcome of major political shifts worldwide, would have fit well in the closing chapter of Why Nations Fail. Using the U.S. would have also been an effective counterexample to China and authoritarian economic growth. It is yet to be seen what will become of the U.S. economy and its innovation patterns, but it will undoubtedly affect the rest of the world. It is arguable that the U.S. is at what Acemoglu and Robinson define as a critical juncture, with information technology embedded in the very heart heart of it.

8 Innovation Under Inclusive Institutions 8 References Acemoglu, D., & Robinson, J. A. (2012). Why nations fail: the origins of power, prosperity, and poverty. New York: Crown Publishers. Clinton, B. (2012, October 1). The Case for Optimism. Time, 180. Retrieved February 3, 2013, from Kaminsky, R. (2012, January 13). Creative Destruction, Properly Understood. The American Spectator. Retrieved February 7, 2013, from Economist. (2013, January 12). Innovation pessimism: Has the ideas machine broken down?. The Economist. Retrieved February 7, 2013, from Kansas State University. (2011, June 21). Music Experts Share How MTV Killed The Radio Star And Changed Culture Forever 30 Years After Launch. Newswise. Retrieved February 6, 2013, from