Economic growth – and the need to go beyond the laissez-faire view

The Economist recently published a special report on the world economy — specifically a look at how to restart economic growth. In the concluding piece in the report, they lay out the bottom line:

If the rich world really wants to go for growth, it must get away from its narrow focus on public debt and embark on a broader economic overhaul.

The nature of that economic overhaul is discussed in greater detail in an earlier piece in the report on productivity entitled “Smart work”. In that piece they make an important point:

More important, the politicians’ current focus on fostering productivity growth via exciting high-tech breakthroughs misses a big part of what really drives innovation: the diffusion of better business processes and management methods.

Right on!
Unfortunately, their policy solution to make this come about is simply laissez-faire deregulation of the service sector:

The best thing that governments can do to foster new ideas is to get out of the way.
. . .
All this suggests that for many rich countries the quickest route to faster productivity growth will be to use the crisis to deregulate the service sector.

I won’t argue that part of the service sector in some countries need reforming. But it is absurd to argue that in light of the recent crisis of a key service sector — the financial sector — the best thing to do is “get out of the way.”
In fact, “getting out of the way” will not transform the service sector. Much of actions that the Economist would tout as the benefits of reform are in fact left over from the industrial age. When they talk about the need to open up European economic boundaries to greater cross-national competition, they are talking about the industrial age idea of consolidation and economies of scale. Take for example their praise for Sweden’s retail sector: “Large stores and vertically integrated chains rapidly gained market share.” That is straight out of Commodore Vanderbilt’s playbook on the railroads in the 1870’s.
There is so much more to the transformation that extending economies of scale and scope to certain service sectors. Rather than get out of the way, the government needs to actively promote the transformation. It mean changing the regulations to foster innovation — not eliminating them. As I’ve noted before, regulations can spur innovation as well as retard them.
Governments can also increase support for broad knowledge creation (what we often call in a limited way “R&D”) and mechanism to diffuse that knowledge. The UK’s NESTA has done path breaking work on “hidden innovation.” Where are the tax and investment policies to support business invests in that type of innovation?
I have long promoted the idea of a knowledge tax credit. We have long understood that increased private investment in plant and equipment is necessary for continued economic growth. As a result, there are various tax incentives for investment in equipment. So why would we treat our people — which everyone says are companies’ most important asset — worse than equipment? If a tax incentive for investment in machinery is appropriate, so is a tax incentive for investment in workers. It is as simple as that.
We need to do more to understand the transformation and the development of high performance work organizations. This means a greater understanding of how to create a high road strategy — includes helping companies better manage and utilize their intangible assets. It also means developing a better understanding of the service-manufacturing linkage.
We need to find creative ways to help companies utilize that understanding. We especially need to help the smaller supplier move up the value-chain to take advantage of this shift. Here we have a valuable tool in the Manufacturing Extension Partnerships. The MEPs were on the front lines helping small and medium size companies during the quality revolution. They need to be on the front lines of the intangible asset, innovation and “customer solution” revolution.
We should expand the National Science Foundation’s (NSF) Engineering Research Centers program to support the creation of Design Research Centers as well as promote research and teaching of integrated design thinking. Innovation success is heavily reliant on design as a key component but not simply involving the physical appearance of products. A new approach to applied problem solving and innovation is emerging under the rubric of design thinking. Successful models include the Stanford Design School and the Institute of Design at the Illinois Institute of Technology (IIT), among others.
These are a few of the positive actions government could take. I’m sure there are thousands of others we could think of if we all tried.

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