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July 17, 2007

Timmy Elsewhere

At the ASI. If innovation, not capital, is the source of growth, then might we have our education policy the wrong way around?

July 17, 2007 in The Blogger Himself | Permalink

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Levels of education aren't related to innovation, but are related to the amount of capital?

Tim adds: Education is human capital....

Posted by: Matthew | Jul 17, 2007 10:07:49 AM

So you are saying that human capital is unrelated to growth?

Tim adds: No, the argument is more than that. Hey, buy the book to read it in all its detail!

No, his point is that innovation is the cause of most growth. Capital accumulation (both physical and human) is part of it, but the lesser part of it.

Posted by: Matthew | Jul 17, 2007 10:30:41 AM

Let me weigh in here. To put it quite bluntly, the ASI--whoever they are (I'm not up to speed on organizations, etc.)--doesn't understand the subject very well.

"Capital accumulation" and "innovation" are not two different sources of human improvement of conditions; both spring from a constant searching for improvement on the part of some individuals. Those improvements involving novel mechanisms, processes, or combinations, we perceive as "innovative," though there are many such to which the same term might well be applied but which, for one or another reason, turn out to have been misguided and their product simply failure (reducing human welfare--we call them malinvestment).

In a certain real sense, every idea for improvement, which, when put into practice, results in the sought improvement--may be said to be innovative. Up to the moment of its implementation, it remained among the ideas thought to be "impossible," "impractical," or merely "too expensive" (wasteful of resources); proof is to be seen in the fact that it hadn't already been in existence.

A very simple example of improvement available (without what is normally regarded as innovation) surrounds us all.
Literally everything may be improved by constructing it more durably, whether a roadway or a pair of shoes; in so proceeding, however, we come up against the question of whether the improvement is "worth it" or whether, while improving one aspect of existence, we waste resources by applying them to needs considered less urgent. In many such cases, the choices faced by the entrepreneurial businessman are relatively simple: the increased costs (including, very importantly, the interest cost on the cost increases) is simply compared to the (estimated) value of the (estimated) improvement. Very frequently, the result of this contemplation (the famed "economic calculation" unavailable to socialist entities and foreordaining their eventual failure, regardless the absolute quantity of "innovation" available for exploitation by the commissars) is that it's "too expensive." If we wished, we could vastly imoprove every road and make it much more durable. That we don't is because we have other urgent wants whose satisfaction will be impaired by the costs of the longer-lasting road.

The world is chock-full of innovation--already thunk up and lying all around us in an invisible pile reaching to the stratosphere--but for which the time has not yet come on account of the costs. Even what we consider "resources" are dependent on the state of the want-satisfaction with respect to all other unrelated things. Routinely, conditions arise which lead us to abandon land or mines previously exploited (or to open new such lying idle, though recognized for very long, because
their exploitation was "economically unviable" (think low-grade coal, oil shale, and tar sands).

The question whether either capital accumulation or innovation is more responsible for improvement in conditions is, for all practical purposes, moot* because, as a group, we can have no effect on either except insofar as we can influence the basic inclination of majorities toward "freeer" or "less free."
The requisite conditions are not mysteries--they've been recognized by economists for quite a while: free trade, free markets, and sound money.

* The question is related, tangentially, to the old concept (put forth by Bohm-Bawerk in the late 19th century) of the "roundaboutness" of improvements in production--of the fact that most such improvements involve a lengthening of the productive process (dependent on devotion of already-accomplished capital accumulation) simply because the shorter, more direct approaches are already used because of their greater obviousness and attainability.

The "engine" of human improvement is called "entrepreneurialism" and is dependent (at least for its routine expression) on the "capitalistic" system of "profit and loss," i.e., the free market. The difference between such a system in its laissez-faire mode and all other even thinkable systems is that it has human improvement as its wellspring while, to the others, such improvement is, at best, merely an ancilliary consideration rendered even more unreachable by interference with the market-price "signalling" process on which the former is dependent.

Posted by: gene berman | Jul 17, 2007 12:53:09 PM