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Production • Competitiveness • Growth

Prospering through innovation economics

Robert D. Atkinson - 16 April 2013

Europe faces a quandary:  The difficult fiscal straits most European nations face precludes “Keynesian” stimulus policies to spur demand.  Yet austerity is a recipe for stagnation, even decline.  But without austerity, budget deficits threaten the trust in financial institutions

Europe has gotten itself into this conundrum because of three problems: firstly, Europeans work too few hours, in part because of generous welfare and pension systems; secondly, European global competitiveness, especially for western and southern European nations, has faltered; and, finally, European productivity growth, especially in non-traded sectors, lagged behind other nations, including the United States. Solving Europe’s fiscal problems will ultimately require addressing these problems.  To do that, European progressives require new approach to economic governance.

1. Embrace “innovation economics”
If there is a guiding economic philosophy for European progressives it is Neo-Keynesian economics, which is based on the notion that the market largely takes care of growth and that it is governments’ job to ensure full employment (in part through generous government spending), limit market excesses, and ensure a fairer distribution of the fruits of capitalism.  However, while Keynesian economics may have been suited to the realities of the postwar European economy when growth generally took care of itself and European business faced little international competition, today it is a fundamentally flawed guide to economic policy.

European progressives need to instead embrace “innovation economics,” which is based on the premise that markets acting alone will under-produce innovation, productivity and competitiveness and that smart government policies are needed to help companies maximise innovation, productivity, and global competitiveness. Helping companies does not mean helping the wealthy. Progressives can and should ensure that taxation and spending are progressive. But European governments need to provide stronger incentives for companies to invest in new equipment, software, R&D and workforce training. Doing so will drive higher productivity (and in turn higher wages), rapid innovation (so that consumers benefit from new products and services), and greater competitiveness (so that firms can grow and employ Europeans).

2. Embrace Schumpeter
Perhaps the greatest 20th century economist was Joseph Schumpeter.  Unlike Keynes, Schumpeter put innovation first and in doing so articulated the idea that capitalist economies advance on the basis of “creative destruction.”  Yet, while Schumpeter may have been European (Austrian), too few European policymakers are Schumpeterians.

In other words, when most European leaders refer to innovation, they mean tech-based industries, not the constant transformation of an economy and its institutions, including public institutions. Real innovation is disruptive, often painful, but almost always good. Unless Europe can accept that innovation and productivity entail plant closures and job losses and also embraces, rather than resists or regulates, new technologies and business models with uncertain social or environmental impacts, it is not likely that Europe will be able to keep up in the race for global innovation advantage.  One way to do this is to embrace the Nordic flexicurity (a combined term for “flexible security”). Flexicurity is based on the reality that employment security is decreasing. To help workers manage, they will need new kinds of security – not to help them stay at a particular job, but to help them effectively transition into new employment through viable skills.

3. Embrace high productivity in all sectors
Without robust productivity growth, Europe will find it even more difficult to afford its generous welfare state. Raising productivity is a challenge for Europe, particularly in the non-traded service sectors.  Between 1999 and 2009, the productivity of European services industries lagged significantly behind the United States: German services sector productivity grew at just 65 per cent the US rate; France at half; and Italy at just 15 per cent.  This is a recipe for stagnation.  

One reason for America’s advantage is its firms invest more in information and communication technologies and get more “bang for the buck” from those investments.  There is a greater willingness and ability among US firms to use ICT to fundamentally reengineer work and business models. Progressives need to:

4. Embrace work
Compared to many other nations, Europeans work less. To be sure, long vacations are nice, but 35 hour work weeks and early retirement are simply a cost that Europe can no longer afford, not if it wants to be able to be fiscally solvent while also expanding key public investments in areas like research, infrastructure and skills. The French notion that cutting the work week from 40 to 35 hours was based on a fallacious notion that workers would not cut back spending.  The notion that some workers can retire at age 57 or 58 (my age) and get a partial state pension simply means that either workers will consume less or the state will invest less. By addressing reasonable entitlement reforms now, progressives can ensure that Europe will be able to invest in its future.

5. Embrace an anti-mercantilist alliance with America
If the European economy is to thrive all of its economies, including France, Italy, Spain, and the UK, will have to be globally competitive. One reason they are not is because many nations, especially China, but increasingly its copycat followers, such as India and Brazil, are engaging systemic “innovation mercantilism”.  Practices like turning a blind eye to intellectual property theft, discriminating against foreign companies, requiring foreign companies to transfer technology in exchange for market access, massive subsidies and protections to state-owned enterprises, discriminatory standards, restrictive government procurement and of course currency manipulation and high tariffs are the core of their development strategies.

These beggar-thy-neighbour policies seek to attract or to grow the very industries (advanced manufacturing and services) in which Europe has a competitive advantage. Unfortunately the WTO and other international organisations have proven themselves unwilling and unable to confront this threat.  As such it is up to Europe and the United States to form a new partnership dedicated to rolling back innovation mercantilism and helping these nations find a different and less destructive path to development.  This should start with an EU-US trade agreement, but should go beyond that to European and US leaders insisting that its time other nations play by the rules.

Robert D. Atkinson is president and founder of the Information Technology and Innovation Foundation, a Washington DC-based innovation policy thinktank

This article forms part of a series of 30 'Memos to the Left' entitled 'Progressive Governance: The Politics of Growth, Stability and Reform'.

Tags: Copenhagen , Denmark , Progressive Governance: Towards Growth and Shared Prosperity , Progressive Governance , Growth , Social stability , Living standards , Policy Network , Global Progress , Robert D. Atkinson , Robert Atkinson , Rob Atkinson , Opinion , Innovation , Innovation Economics , Keynesian , Keynesianism , Austerity , Growth , EU , European Union , US , United States , Joseph Schumpeter , Schumpeterians , Austrian , Free Market , Liberalism , Laissez Faire , Flexicurity , Productivity , Production , Germany , France , Italy , Spain , , United Kingdom , UK , Competitiveness , China , India , Brazil , WTO , World Trade Organisation , Fiscal Constraints ,

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The Policy Network Observatory promotes critical debate and reflection on progressive politics. It is centre-left orientated but determinedly challenges social democracy. It is pro-European but restlessly questions EU institutions and practices.

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