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Introduction1
Andreas Pyka and Hans-Peter Burghof
The first two decades of the twenty-first century are characterized by ongoing critical developments in the financial realms of economies, and a continuous financial crisis which strongly affects the highly developed countries. Contrary to the previous financial crises of the final 30 years of the twentieth century, which had their origins in less developed regions and stemmed from an imbalanced integration within the world economy, the recent crisis originated in the core of the capitalistic organized world. The European Union is one of the centres of these developments.
The cutting loose of public debts in several European economies has become a major originator and intensifier of the crisis, potentially threatening the future of the common currency. Obviously, a solution has to include the re-organization of global financial transactions and the implementation of strict rules concerning public debt and new indebtedness. These instruments might help to mitigate the crisis, at least in the short run. In order to reach a sustainable solution, we will most likely have to change the institutional set-up of the European Union in order to create a solid basis for economic development which is in accord with the European welfare states.
One deep reason for the current critical developments is the mediocre innovative performance of some European economies, which is accompanied by a decreasing international competitiveness. In a global environment with rapidly emerging actors such as the BRIC economies, slow development (or even a decrease) is relatively equivalent to falling behind in competitiveness terms. Simultaneously, growing public tasks and inefficiencies in the public sector will imperatively lead to the collapse of the economy.
Given these obvious interrelations, it is even more surprising that, so far, the relationship between innovation and finance has not had a prominent place on the agenda of economics research. Without a severe and sustainable improvement of the innovative performance, the fundamentals for the sound future economic development of Europe become very weak. A conditio-sine-qua-non for stimulating innovative processes, however, is the provision of a financial environment which supports innovative entrepreneurial activities and is capable of dealing with the strong uncertainties of innovation.
Of course, innovation and entrepreneurial activities are not restricted to the industrial pillars of the economies, but also encompass their financial and public pillars (Hanusch and Pyka 2007a). Public sector innovation, public entrepreneur-ship, social innovation, and innovation and venture financing are some keywords which express the comprehensive nature of the required approach to design the future-orientation of economic systems. This important issue is dealt with in another volume of the Lisbon Civic Forum series (Riuz and Parra 2013).
This volume addresses issues relating to the financial pillar as well as its interfaces with the industrial and public pillars of an economy. Basically, we try to give various answers to the following question: What characterizes the symbiotic and twin-track relationship between innovation and finance? On the one hand, a well-functioning financial system spurs innovation by identifying and funding stimulating entrepreneurial activities which trigger economic growth. On the other hand, innovations open up profitable opportunities for the financial system. These mutual dynamics cause and require innovative adaptations not only in the technological realm, but also in the financial system in order to better deal with the changing requirements of a knowledge-based economy. These mutual relationships are also the root of strong co-evolutionary dynamics between the three pillars of an economy, which encompass positive feedbacks on the micro-, meso-and macro-levels of an economy and are a rich source of complexity. Consequently, no simple answer can be expected, but rather a strong sensitivity towards initial conditions, unexpected delays and unexpected pattern changes in economic development.
The issue of innovation and finance has to be considered to be a strong research gap. The relationship and mutual dependence between financial markets and innovation – which, in Schumpeter’s (1911) theory of economic development, is crucial for the understanding of economic dynamics – was barely in the focus of economists throughout the twentieth century. Both the literatures on finance and on innovation have developed prolifically over the last 50 years, yet the interfaces between these two pillars of the economic system remain almost unexplored. One of the reasons for this is the different time horizon in the two literatures: whereas in Neo-Schumpeterian (evolutionary) innovation economics, long-time horizons are essential to grasp the structural changing power of technological development, the finance literature remained stuck in the neoclassical paradigm, with its extreme short-term orientation.
Without doubt, the closing of this research gap will allow for creative impulses to emerge from the scientific and political discussions concerning the future-orientation of economies. This research gap was our major inspiration for organizing a symposium of the Lisbon Civic Forum in Stuttgart on 21 October 2010 at the University of Hohenheim. Distinguished scholars from all over the world were invited to connect the two realms of innovation and finance and to develop innovative approaches suited to the analysis of the co-evolutionary relationship between innovation and finance.
The Lisbon Civic Forum 2
The Lisbon Civic Forum eV (LCF) for Growth and Jobs was founded in Lisbon in February 2005 by a small group of distinguished scholars and professionals from both old and new EU member states. The LCF aims to provide a platform for the exchange of ideas and opinions between academics, policymakers, diplomats, journalists and practitioners. It also serves as a forum for an intense dialogue with civil societies in Europe, spurring knowledge transfer from academia to policy and society.
The activities of the Forum concentrate on the social and economic progress of the European Union in terms of creating jobs, fostering economic growth and best practices in government, society and business, and dissolving economic crises. These objectives comprise the central elements of the Lisbon Strategy, in which the European Union has expressed its great ambition “to become the most competitive and dynamic knowledge-based economic region in the world”. The Lisbon Strategy and the multiple, interdependent conditions and hidden impediments to its realization are central topics of the Lisbon Civic Forum agenda.
From the very beginning, the Lisbon Civic Forum (LCF) has followed a comprehensive and interdisciplinary approach: new ways of thinking, innovative and problem-solving approaches to cooperation, and a higher level of social creativity and solidarity are needed to cope with the main social, economic and institutional challenges that Europe faces in the context of globalization and the transformation of societies and economies. Such approaches are developed by the interdisciplinary and international expert groups of the LCF. The LCF also extends to and include experts from candidate countries as well as from other countries with an EU perspective.
Europe is both the agent and the subject of unprecedented rapid and fundamental social, economic, environmental and institutional transformation. This formidable and robust change undermines conventional wisdom and knowledge, endangers economic development, and jeopardizes job security. At the same time, it provides unprecedented opportunities for larger chains of cross-border cooperation, social innovation involving new players to meet the new challenges, and prolific conditions for a peaceful and economically viable future for the continent.
For the Lisbon Civic Forum, the main strengths of the EU lie in:
- the single, internal market across the Union and the common European institutions, including the common currency in the Euro countries. The transition towards knowledge-based societies, which advances as rapidly as the process of globalization, requires large investments in education, research and development activities. Neither national firms of normal size nor smaller countries will be able to make such large investments. Only the larger regions will be able to successfully make such great changes. The argument of size, therefore, especially with regard to the number of customers in an internal market, will affect the capabilities of regions to compete in global markets. Only recently, and as a result of its various enlargements, has the EU emerged with the necessary population size and the necessary production and market capacities to compete with other globally oriented economic regions at the international level. Due to its new size, the EU offers greater opportunities to businesses in its member countries to act and succeed as global and responsible players on international markets.
- the diversity of economic structures at national and regional levels. The existence of diversity is an essential precondition for growth and for the augmentation of welfare and job creation in capitalist economies. This applies to firms, nations and large economic regions. Diversity builds the basis for the successful division of labour and for the introduction of innovations in society and the economy. Nurturing diversity, therefore, is fundamental to change and progress in all fields of human life. The distinctive regional diversity of the EU is one of its main advantages, offering the best opportunities for the creation of regional clusters as the driving force behind economic development.
- intensive cooperation and solidary responsibility, which offers new social and ecological responses to globalization. Since the beginning of the process of European integration, economic cooperation has been remarkably successful. Nations, regions and civil societies have developed a stable and peaceful culture of cooperation. This new culture of complex cooperation and interdependence constitutes a major strength of the EU and has to be continuously expanded and enriched.
Comprehensive Neo-Schumpeterian economics
Since the 1980s, questions of economic growth and economic development have experienced a renaissance in economics, after almost 25 years of silence around this topic. The seemingly unsolvable problems of overcoming decreasing rates of marginal capital productivity and the methodological problems of an aggregate production function (e.g. Sraffa 1960) put economic growth theory offside after Solow’s promising start in the 1950s (Solow 1956). In the revived discussion on economic growth the major drivers of quantitative growth, as well as – as some protagonists of Neo-Schumpeterian economics claim – of qualitative growth (e.g. Saviotti 1996), are technological, organizational and institutional innovations. Economists widely agree on this today.
Despite this general agreement on the important role of innovations, two different schools of thought occupy this research program:
- Neoclassical growth theory experienced a proper rejuvenation with the so-called New Growth Theory (see, among others, Romer 1987; Lucas 1988). New Growth theoretical approaches allow getting rid of the major problems of decreasing marginal capital productivity and the convergence of growth rates by considering positive feedback effects (e.g. the so-called technological spillovers or the explicit consideration of human capital) emerging in innovation processes. Although theoretical inconsistencies cannot be denied – in particular, the concept of positively interpreted spillovers on a macro-economic level cannot be complemented on a micro-economic level, where technological spillovers generally find a negative interpretation (see Pyka et al. 2009) – New Growth Theory is considered to fit well within the theoretical framework of neoclassical theory, which considerably supported its diffusion.
- The alternative approach in Neo-Schumpeterian economics, which started almost at the same time, has chosen a radically different approach, without trying to integrate into the body of theory of neoclassical economics (e.g. Nelson and Winter 1982). Referring to the Schumpeter’s (1911) Theory of Economic Development, the contradictoriness of economic development driven by innovation with concepts such as Olympic rationality and economic equilibria is emphasized. Economic growth driven by innovation is compulsorily accompanied by structural change endogenously caused by the purposeful and sometimes erroneous actions and interactions of economic agents, i.e. knowledge generation and diffusion processes. Increasing efficiency on a sectoral level (i.e. process innovation) raises resources which are used for explorative purposes (i.e. product innovation), which might lead to the emergence of new industries supporting long-run economic growth by simultaneously triggering qualitative development (Saviotti and Pyka 2004). These dynamics are to be observed on a micro-economic level (entrepreneurship) and, in the case of success, manifest themselves on the sectoral level (industry life cycles). However, what is measured on the macro-economic level as economic growth is only the average of an economy from structural dynamics on the meso-level, and very likely does not tell anything on the causes of development.
Today, Neo-Schumpeterian economics has become an independent and widely recognized research programme (e.g. Dosi et al. 1988; Fagerberg et al. 2005; Dopfer 2005; Hanusch and Pyka 2007a) which has considerable influence upon the design of innovation and technology policy, particularly by international organizations such as the OECD (OECD 1991), the World Bank (World Bank 1999) and the European Commission. Since the mid-1990s, technology and innovation policy cannot be analysed without Neo-Schumpeterian concepts such as technological clusters (e.g. Braunerhjelm and Feldman 2007), innovation networks (e.g. Pyka 2002), and entrepreneurship (e.g. Grebel et al. 2003).
Until recently, however, the innovation-orientation of the Neo-Schumpeterian approach was applied almost exclusively to manufacturing and service industries. In Hanusch and Pyka (2007b) we show that the innovation-orientation of the industrial sector is only one prerequisite for economic growth and development. The growth success of an economy similarly depends upon the innovation-orientation or respective future-orientation of financial markets as well as upon the public sector. Economic growth and development are carried by these three pillars of economic systems, which are encompassed by the bracket of true uncertainty (Knight 1921), which is inseparably connected to all kinds of innovative development processes. The intrinsic uncertainty of innovation processes is the major reason why, when it comes to true innovation, mainstream economic approaches cannot be applied either for analysing industries or financial markets or for the activities of the public sector. The concept of rationality as applied in neoclassical economics is not applicable in uncertain situations. The Olympic rationality of neoclassical economics leads to a pathological pessimism (Erdmann 1993) concerning any kind of innovation. Without a general willingness to innovate (i.e. a willingness to deal with the ex-ante non-predictable possibility of failure and economic losses), any innovative behaviour becomes impossible.
From this, one can easily see that for an economic analysis of the potentials for growth and development of economies one cannot apply the idea of innovation to industrial sectors only. The innovation-orientation has to be transferred to the financial markets and the public sector, as well as to the important mutual influences between these three realms of economic development. With this transfer of innovation – respectively, future-orientation and the accompanying uncertainty – we can roughly outline the scope of the contributions to this volume.
The contributions
In her chapter – “Financial bubbles, crises, and the role of government in unleashing golden ages” – Carlota Perez gives a precise classification of the current global economic crisis in long-run economic development. She argues that the recent financial crisis is not an ordinary one, but a once-in-a-half-century event, with a major impact upon the real economy and a role in the pendular dynamics of capitalism. The crisis is endogenously generated by the way in which technological revolutions are assimilated into economic developm...
