Capabilities, Innovation and Economic Growth

Policymaking for Freedom and Efficiency

Michele Capriati, Helen Bekele Lemma

• Publisher: Routledge
• Year: 2017
• Print ISBN: 9780367872434
• eBook ISBN: 9781317512912
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The question of whether we can foster growth and innovation while promoting individual freedoms poses a challenge for everyone studying and working on innovation and development policies. Whilst innovation literature is largely dominated by a focus on efficiency, development literature tends to focus on equality and pays less attention to mechanisms fostering economic and social change. This book aims to move beyond these barriers and to identify development policies that foster both efficiency and equality, exploring the connection between innovation policies and the improvement of individual freedoms.

Capabilities, Innovation and Economic Growth argues that we can answer these questions by focusing on the relation between Amartya Sen's human development approach and the Neo-Schumpeterian analysis of innovation systems. After considering the connections between the two schools of thought and the way they enrich each other's perspectives, chapters go on to show how policy can support virtuous circles in which innovation, human development and economic growth interact and mutually reinforce each other. This is undertaken through the descriptive analysis and the empirical testing of a sample of nations and European regions. The volume concludes with an exploration of the contribution that the capabilities approach can give to the design of innovation policy, and with the analysis of macroeconomic policies favorable to innovation and human development.

This will be essential reading for: students and academic economists interested in development, growth and innovation; policy makers and officers in charge of defining development and innovation plans at national and regional level; and consultants and managers in development agencies implementing innovation and development projects.

1  Introduction

Capabilities, innovation and economic growth

This book is born out of a doubt and a dissatisfaction. The doubt comes from the existing interpretations of the efficiency/equity nexus. The prevailing opinions consider these two goals in terms of trade-off and prioritise efficiency over equity. Many believe that a better distribution of resources and opportunities among people may reduce efficiency. At the same time, many advocate that a concerted focus on efficiency will bring about the necessary resources for equity. What if the opposite were true? I suspect (along with many other authors, as we shall see) that this isn’t a one-way relationship and that efficiency can also benefit from equity.

My dissatisfaction arises from having seen, in recent decades, governments (advised by economists) operate following the previous idea that puts efficiency at the top of the political and economic agenda. For many years, the issue of equity was not part of the vocabulary and concrete actions of those who govern and those who provide ideas to govern. This long epoch has led many economies to deepen inequalities among their citizens and at the same time, appears to have been unable to make the best use of all available resources. In fact, many economies are struggling to find a path to long-lasting and sustainable growth. Many resources are used for financial speculation, unnecessary expenditure and consumption, while only a few are directed to productive activities and collective needs. The choice to ignore a fair distribution of the opportunities to live a life worth living seems to have led many countries on the path of a slow decline, and the global economy towards a state of perpetual instability and uncertainty.

This doubt and dissatisfaction led me to investigate the interconnections between two major schools of economic thought: the innovation economy and the capability approach.

These two schools of thought follow different intellectual and practical paths. The first focused mainly on the operation of the most advanced economies, the second, since its inception, on developing countries. Both nevertheless have a common starting point, i.e., the dissatisfaction with the neo-classical paradigm and with the idea that, as noted by Hirschman (1981), there is only one economy (just as there is one physics) and that in a market economy the benefits are proportionally distributed among all the participants in the economic activities as per their contribution.

The overall guiding objectives of the two approaches, however, are different. The capability approach has as its objective the expansion of the achievements and freedoms of individuals, and therefore, the ensuing normative apparatus has equity at its core; the studies on innovation, on the other hand, have focused on increasing the efficiency of companies and of the whole economy. However, it is precisely because of this complementarity, as we shall see, that the two approaches have a strong potential for integration. Thus, comparing these two schools of economic thought on the common grounds of growth and development strategies seemed to me a way of satisfying my curiosity and ease my discomfort.

This book can be seen as an attempt to respond to the following questions.

1. 1  Can the process of innovation benefit from a more general expansion of the capabilities of individuals?
2. 2  Can the process of innovation contribute to human development?
3. 3  How are processes of innovation, expansion of human development and economic growth linked together?
4. 4  Is there any empirical evidence at the national and regional levels that confirms the importance of these interrelations?
5. 5  How can innovation policies be redirected to benefit capabilities?
6. 6  How can macroeconomic and welfare policies be redirected to benefit capabilities and innovation?

The book is divided into three parts. In the first (Chapters 2 and 3), I attempt to answer the first two questions and explore the ideas and concepts related to the two schools of thought that this book focuses on: innovation and human development. In the second (Chapters 4, 5, 6), I attempt to answer the next two questions, analysing data from two data sets, a national and a regional one. In the third (Chapters 7, 8, 9), I address the subject of policies in order to answer the last two questions. Here is a more detailed overview of the book chapters.

In Chapter 2, I summarise the core concepts developed by the literature on innovation systems and the main characteristics of the capability approach. Given the vastness of these two strands of the economic literature, I focus on concepts that I consider important for my analysis and useful for my ‘toolbox’.

In Chapter 3, I build on the ideas introduced in the previous chapter with the aim of identifying similarities and links between innovation and capabilities. The chapter addresses issues that affect technologies and inclusive innovation, learning and human capabilities, inequality, social capital, democracy and social security. In my view, these issues constitute an interesting ground for an integrated approach. The chapter ends with a graph illustrating the interconnection between the three dimensions of innovation, human development and economic growth, as an attempt to summarise the discussion.

Chapter 4 focuses on the main analyses and models that examined the relationships between innovation and growth, growth and human development, and innovation and human development. While the literature is particularly exhaustive on the first of the three relationships, it is less so on the other two. Early empirical evidence confirms the links between these processes. In particular, within the relationship between economic growth and human development, it is important to distinguish short-term links, which appear to be weak, from the long-term links, which instead seem to be more significant.

In Chapters 5 and 6, I try to collect empirical evidence around these three relationships through an analysis based on two datasets, a national and a regional one. In Chapter 5, I focus on growth, human development and innovation indicators trying to verify whether there are any regularities in their respective levels and variations, and whether it is possible to identify groups of countries/ regions with similar behaviour. In Chapter 6, the focus shifts to the links between the three dimensions mentioned above, exploring the degree of correlation and interdependence between them. In particular, the tests aim at verifying the existence of simultaneous relationships between innovation, growth and human development, both at the level of nations and region. Within the regional analysis, I take into consideration the role of geographical proximity.

The last part of the book is devoted to policies. In Chapter 7, I address the basic ideas that justify current public decision making, highlighting how the concepts of market and system failures are not sufficient to motivate innovation policies. Innovation policies assume economic growth as an implicit objective and tend to ignore the ethical dimension of the public choices in this field.

In Chapter 8, I propose a different approach to the formulation of innovation policies that takes into account people’s freedoms and capabilities. I will focus, in particular, on how a more inclusive and democratic approach can direct policy instruments for innovation at the level of individual projects and large mission-oriented programmes, and for the evaluation and forecasting of long-term impacts of technologies.

Chapter 9 focuses on macroeconomic issues. I begin by discussing the centrality of employment in the three processes of innovation, growth and human development. I then address the policies of cycle stabilisation and their importance for employment and innovation processes. The final part of the chapter is devoted to expenditure policies that, I believe, are consistent with the expansion of individuals’ freedom, and to some proposals encouraging greater equity in tax collection.

Chapter 10 draws the final conclusions.

In his latest book, Atkinson (2015) observes ‘When President George W. Bush announced in 2006 the American Competitiveness Initiative, doubling US spending on innovation-enabling research, the policy paper stated that “research pays off our economy”. But did any journalist ask him “for-whom?” ’ (p. 120). And to this question, we may add, “For what?”

Questions like these would help people to form a more complete opinion on their rulers’ political choices. And this may prompt the rulers to pay more attention to the views of citizens. But usually this does not happen. Why? Because, probably, it is believed that research, technology and innovation have a life and an autonomy of their own, that they belong to a system difficult to understand by the ‘non-experts’. Yet, much of innovation and change observed in our lives over the last decades depended on the resources the state invested in research (Mazzucato, 2013) and thus, on public money. It is therefore completely legitimate to hope that a higher and more widespread awareness is achieved, allowing every citizen to ask with persistence and conviction these two simple and insidious questions, “For whom?” and “For what?”

This work is essentially an exploration of ideas, issues, data and proposals. As such, it is exposed to some risk of inaccuracy and incompleteness. The fuzziness finds a partial justification in an observation made by Sen, that ‘it is better to be vaguely right than precisely wrong’. Obviously I hope that, despite its vagueness, the proposed reasoning has some elements of good sense. It is up to the reader to establish it. The incompleteness has its justification in the vastness of the addressed topics that can only be discussed by making some choices, which always leads to some simplifications.

To reduce these risks, some colleagues and friends lent their hand by critically reading preliminary parts of the work. Special thanks are extended to Franco Botta, for his insightful contribution of ideas, to Marialuisa Divella, who helped me in the preparation of the empirical part of the book, and to Marinella Capriati and Lloyd Chapman, for their careful revision of the text. Suggestions also came from Nicola Coniglio, Francesco Prota, Marco Sanfilippo, Gianfranco Viesti and other researchers who participated in internal seminars at the Department of Political Science of the University of Bari, where some chapters of this book were presented. Preliminary works on some issues addressed in this book were presented at the XXX Italian Conference of Regional Science (Florence, 2009), at the Human Development and Capability Association Conference (The Hague, 2011), the European Association for Evolutionary Political Economy Conference (Vienna, 2011), the Geography of Innovation Conference (Utrecht University, 2014). I want to thank the discussants and the participants at the presentation sessions for their useful suggestions. Naturally, the inaccuracies and mistakes that could still be present in the book are to be attributed entirely to me.

References

Atkinson, A.B. 2015. Inequality: What Can Be Done? Cambridge MA; London, UK, Harvard University Press.

Hirschman, A.O. 1981. Essays in Trespassing: Economics to Politics and Beyond, Cambridge, Cambridge University Press.

Mazzucato, M. 2013. The Entrepreneurial State: Debunking the Public vs. Private Myth in Risk and Innovation, London, Anthem.

Part 1

Ideas

2 The toolbox

In concluding her book “The Economics of Imperfect Competition”, Joan Robinson (1969) apologised to her readers for the excessive abstractness of the discussion, hoping that “the economist, who is prepared to work stage by stage towards the still far-distant ideal of constructing an analysis which will be capable of solving the problems presented by the real world, may perhaps find in this tool-box some implements which will serve his turn” (p. 327).

I find it very inspiring to think of the work of each economist as a toolbox from which we may draw in order to further knowledge and tackle real-world problems. This allows us to conceive of economic science as a constantly evolving collective effort to which scholars contribute by recombining existing insights as well as by adding something new.

In this chapter I focus on some of the concepts and ideas presented in the innovation literature and the human development literature. To continue with Robinson’s metaphor, I will take out from each of the two boxes only the instruments that are most helpful for my purpose. I present these tools in this chapter. These concepts will be then further explored in Chapter 3, with the aim of highlighting the relations between these two literatures.

2.1 Innovation, growth and development

a. Innovation and structural change

Innovation is the introduction of new activities related to the production and exchange of products and processes. It is relevant to all human activity, at all stages of development. Interpreted this way, it is not only restricted to the business of highly advanced economies but also constitutes the driving force behind the growth of less-developed countries (Fagerberg and Godinho, 2005).

The concept of innovation is understood by some authors in a very narrow sense, namely as “new to the world” innovations (Furman et al., 2002; Furman and Hayes, 2004), which restricts the boundaries of the innovation phenomenon to “a first world activity” (Fagerberg et al., 2010a, 2010b).¹ It follows that this approach disregards innovations that may represent a change for the market in which they have been launched or for the individual firm by which they have been introduced or adopted, thus neglecting the notion of innovation as put forward by Schumpeter (1939). Indeed, according to the Austrian economist and political scientist, the concept of innovation should include the introduction of new products, the changes in technology to produce products already launched in the market, the opening of new markets or of new sources of supply, new forms of work organisation, or a better use of input materials, and the start-up of new commercial organisations. In sum, Schumpeter thinks of innovation as “ ‘doing things differently’ in the realm of economic life” (Schumpeter, 1939, p. 84).

The study of innovation started from analysis of the most developed countries, as scholars aimed to understand the mechanisms underlying the multiple changes experienced by these countries. In this respect, a contribution of paramount importance was made by the so-called evolutionary framework. This approach draws not only on Schumpeter’s work, but also on...

Table of contents

• Cover
• Title
• Copyright
• Dedication
• Contents
• List of figures
• List of tables
• List of maps
• 1 Introduction: capabilities, innovation and economic growth
• Part I Ideas
• Part II Empirics
• Part III Policy
• Appendices
• Index