perjantai 4. kesäkuuta 2010

Economic growth – hope for job creation

1. The economic growth theories

The entrepreneurial function in a society is as old as the institutions of exchange. An entrepreneur is someone who has foresight and willingness to assume the risk and takes the action to make profit or loss. Joseph Schumpeter is the farther of entrepreneurship[1]. He proposed that an entrepreneur, as innovator, creates profit opportunities by devising a new product, a new production process, or a new marketing strategy[2].[3] Globally school children are an infinite source of new innovations. In the digitalized, global economy, they are ‘entrepreneurs of their own labor' to the extent that they face opportunity costs of his time and talents. As Schumpeter has found, temporary monopoly profit(s) are the lifeblood of innovativeness. An entrepreneurial discovery occurs, when someone makes the conjecture that a set of resources is not allocated, to its best use.For most of school children a relevant profit is a few dollars. The motivation is not primarily monetary, but the feeling to be a member of the global community. An example of this belongness is the passion what poor people in Africa feel when they can get access to mobile phones. While they are able to use it for only few minutes per day, they feel themselves as global citizens. They have got hope for their lives. That is what the hope economics is all about.

In Schumpeter’s view of the economic system, business cycles are the major catalyst of economic growth[4]. Schumpeter not only recognized the need for a theory of economic development, but also came to understand that such a theory would have to deal with the impacts of transition from individual to collective entrepreneurship on the process of technological change[5]. Following the guidelines of Schumpeter (1939), we can expect that the Kondratieff’s long-wave theory explains the dynamics of the technological revolutions (Table 1).

Table 1: Taxonomy on the level of technological change

First Kondratieff 1780s–1840s
Industrial Revolution: factory production for textiles Cotton

Second Kondratieff 1840s–1890s
Invention of steam power and its application in railways

Third Kondratieff 1890s–1940s
Invention of electricity, steel and application of the process industry

Fourth Kondratieff 1940s–1980s
Mass production of automotives and synthetic materials, especially oil

Fifth Kondratieff 1980s -2010s
Digital information techniques, the internet and micro-electronics

Sixth Kondratieff 2010s-???
Age of nano-engineering and manufacturing

Schumpeter views creative destructions as the source of long-waves. His model on technical changes is incorporated into economic theories. A parallel explanation of long waves in economics lies in the Kuhnian model of scientific development[6]. Kuhn used the term paradigm shift to refer to the mark of maturity of a science or techno-economic paradigm that refers to an innovation or an innovation chain that affects the whole economy, e.g. electric power or computer[7]. The nanotechnology is expected to be the sixth Kondratieff. The nanotechnology is different from all other Kondratieff cycles[8]. The nanometer scale science and engineering research deals with atom and molecule level and needs multidisciplinary knowledge. There is the possibility of scientific revolution in physics, biology, materials and engineering[9]. Many industries benefit of nanotechnology. When using less material and resulting in less waste the nanotechnology contributes to the sustainable development.

The positive tunaround point of a long wave is an introduction of a general purpose technology (GPT) standard, a solution that is used throughout the economy, has a profound effect on the markets and societies, and gives rise to chains of innovations associated with its increasing use. School children were pioneers in the early adaption of new ICT[10], the lattest GPT (Fifth Kondratieff). School children will be in the key role to invent how to use the the nanotechnology, the next GPT. What is particular to a new GPT or a new techno-economic paradigm is that it is provides almost infinitely externalities on the global economy. The ICT has been widely used in the whole society. The nanotechnology can for decades be the major catalyst of growth, since its commercialization[11]. A new GPT or a techno-economic paradigm is highly rewarding for people with mobility, adaptability, and creativity[12]. The ICT revolution contributed to the economic growth during the past decades. The differential rewards of mobility, adaptability, and creativity in terms of the ICT explain a major part of the huge growth of the GDP in China, India, etc. since the 1990s.

2. Economic growth theories on focus

In the global economy, there are at least a billion educated people out of the economic system. Most of them are young and they are living in Asia, Africa and Latin America. The current financial crisis in the US and EU will have extremely serious implications. The downsizing of jobs will further accelerate and billions of people are marginalized. The implication is that the trend cannot continue for ever without violating the institutional foundations of democratic nations and IIGOs[13], such as the UN or the WTO. Mobility, adaptability, and creativity are the best characteristics of school children all around the world. In our globe, there are at least one billion young, education people without jobs. The best resource is unused. There must be some systematic failure in the economic growth theories. Robert Solow from the MIT, the Nobel-prize winner, is the developer of the neoclassical or exogenous growth theory[14] that dominates public policies. In Solow’s model (Formula 1), the economic growth is caused by capital accumulation and autonomous technological change.

Y = F(K, L)


K = the capital stock and
L = the labor force

Formula 1: Solow’ model

Solow postulated that the production function displays constant returns to scale, so that doubling all inputs would double output. This kind of a simplifying assumption is the major weakness, since holding one input constant (labor) and doubling capital will yield less than double the amount of output. This is the law of diminishing marginal returns. Solow’s model is an example of the exogenous growth theories that are no more capable to explain the global economic growth. Solow received his main result through the residual analysis. Solow broke down changes in labor productivity into two parts: (1) increase in the amount of capital per unit of labor and (2) technological progress. Solow found that the technology progress has in western countries been the most important input factor allowing long-run growth in real wages and the standard of living. In his Nobel Prize lecture, Solow referred to the rivalry (or complementarities) as the catalyst of innovations. Solow highly appreciated Schumpeter’s thinking. Solow admitted in his lecture[15].

The new or endogenous growth theory was initiated by Paul Romer[16] who found that an economy’s increased openness use to raise domestic productivity, and hence must have a positive effect on the living standards of a nation. The new growth theory is based on the idea that the long-run growth is determined by economic incentives. These incentives created by the markets affect profoundly on the pace and direction of economic progress. In Romer's view, the global economy is not defined by scarcity and limits on growth. Instead, there are huge opportunities for new ideas to create wealth. The neoclassical theory of how to allocate scarce resources among alternative uses through price systems is not good enough. This was known since the 1950s, when Solow reported that technological changes accounted for about 80% of economic growth. An educated work force plays a special role in determining the rate of long-run growth. Still neoclassical economics dominates all around the world. Romer constructed a model in which he splitted the world into tow parts: physical objects and ideas. Physical objects are scarce and subject to the law of diminishing returns. They cannot drive economic growth as ideas.

Human beings possess a nearly infinite capacity to reconfigure physical objects. Humans can boost productivity, spawn new opportunities for profit, and ultimately drive economic growth. When humans do set to work in an unexplored area, important new discoveries will emerge. Mobility, adaptability, and creativity of school children all around the world need to be accounted that is the mission of the HopeEconomics. The key in the growth process is the market system, supported by the hybrid institutions like universities or R&D labs and by other informal networks like technology parks. Romer maintains that inventions are intentional and generate technological spillovers that lower the cost of future innovations. Schumpeter used the concept of innovation chain to describe the same. The new growth theory has become popular during the two last decades in the USA and, later, in newly industrialized countries like China and India that invest in innovations.

MNCs are as a group the winners of globalization[17]. Their role is to maintain the static efficiency in markets. They are actively renewing their structures. The HopeEconomics has much to do with the dynamics, relying on people networks as the Linux community. The hope economics provides the human agency of how to educate school children to cope and even win with globalization. Innovativeness, the scope economies, is the (only) positive strategy that people networks have for competition against the scale economies of MNCs. As Frank Knigth[18], we strongly believe that entrepreneurial profit resulting from an exercise of ultimate responsibility which in its very nature cannot be insured nor capitalized or salaried. Knight’s risk theory distinguishes between: the objective probability that an event will happen, and, the immeasurable unknown, such as the inability to predict the demand of a new product.

3. Summary

The HopeEconomics have huge expectations since 'true uncertainty’ is the contingency that school children have to tackle in all nations or continents. School children all around the world need entrepreneurship. A pessimistic view, arguing that, in the long run, economic growth is limited by progress in physics, biology, and engineering, rather than by incentives is impossible to accept since its means continous lost of jobs. Some writers, such as Tom Peters[19], have advanced Romer’s ideas. They believe that the global economy can solve or is obliged to solve many complex problems with collaboration over old barriers. This is the key notion in the HopeEeconomics.

[1] Lintunen, Liisa (2000) Who Is the Winner Entrepreneur? An Epistemological Study of the Schumpeterian Entrepreneur (dissertation), Helsinki School of Economics, series A-180, Helsinki.
[2]Schumpeter, Joseph (1934) The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle, Cambridge: Harvard University Press.
[3] William Baumol has remarked, that the study of business without understanding of the real entrepreneurship is biased Baumol, William (1990) Entrepreneurship: productive, unproductive, and destructive. Journal of Political Economy, 98(5), pp. 893-921.
Baumol, William (1993) Entrepreneurship, management, and the structure of payoffs, Cambridge and London: MIT Press.
[4]Schumpeter, Joseph (1939) Business Cycles: A Theoretical, Historical and Statistical Analysis of the Capitalist Process, (New York: McGraw-Hill, 2 vols
[5] Lazonick, William (1991) Business Organization and the Mynth of the Market Economy, Cambridge University Press, p. 126.
[6]Kuhn, Thomas (1970) The Structure of Scientific Revolutions, University of Chicago Press, Chicago.
[7] Freeman, Christopher and Carlota, Perez (1988) Structural Crises of Adjustment, Business Cycles and Investment Behaviour, in Dosi, Giovanni, Christopher Freeman, Richard Nelson, Gerald Silverberg and Luc Soete, eds. (1988) Technical Change and Economic Theory, Pinter, London, pp.38-66.
[8] Wonglimpiyara Jarunee (2004) The nano-revolution of Schumpeter's Kondratieff cycle. The Ministry of Science and Technology, Thailand
[9]For example, nanoparticles are used to develop fabrication of new materials, carbon nanotubes in automobiles, field emission display (FED), transistors, fuel cells, high-performance battery.
[10] Katzman, Natan (2006) The Impact of Communication Technology: Promises and Prospects Journal of Communication, Volume 24 Issue 4, pp. 47 – 58.
[11]Aghion, Philippe, and Howitt, Peter (1998) On the Macroeconomic Effects of Major Technological Change in General Purpose Technologies and Economic Growth, edited by Elhanan Helpman. Cambridge, MA: MIT Press.
[12]Aghion, Philippe, Dewatripont, Mathias and Rey, Patrick (1999) Competition, Financial Discipline and Growth, Review of Economic Studies, vol. 64, n. 4, 1999, pp. 825-852.
[13]IIGO = International Inter-Governmental Organization
[14]Solow, Robert (2000) Growth Theory, An Exposition. Oxford, Oxford University Press.
[15]Solow, Robert (1987) Lecture to the memory of Alfred Nobel, December 8, 1987: Growth Theory and After.
[16] Romer, Paul (1989) Increasing Returns and New Developments in The Theory of Growth, University of Chicago, Chicago.
[17] It was Harvard’s professor Theodor Levitt who firstly discussed of the theme. His view is multionationals that operate in all continents, and in all markets (goods, sevices, financing, IPRs etc). Levitt, Theodore (1983) The Globalization of Markets, Harvard Business Review, May-June.
[18] Knigth, Frank (1920) Risk, Uncertainty, and Profit, Chicago, Universitiy of Chicago Press.
[19]Peters, Thomas (1990) Thriving on Chaos, Harper & Row, New York.

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