The Failure of Innovation in the Anglo-Saxon Economies

1 The Role of Innovation in Economic Development

Among 20th century economists, the works of John Maynard Keynes are by far the most significant. Keynes not only provided what turned out to be a temporary answer to the economic difficulties of under-consumption during the great depression but also proposed an answer to other depression problems (like the current one) for those who understand the investment and innovation funding implications of his observations. Not for nothing did Keynes call his major work “The General Theory of Employment, Interest and Money,” not “A general Theory…” because he covered all the bases.

Keynes stressed the role of the economist as hero, the man with the answers to economic difficulties, and during the last three quarters of a century there probably have been several outstanding examples of the economist as hero. My two main nominations are Dr Osamu Shimomura, the “father of the Japanese Miracle”, and Kenneth Kenkichi Kurihara, the explainer of the central bank investment-credit-creating procedure which accelerates economic growth. Perhaps the names of the Chinese economists and businessmen who investigated the Japanese economic miracle and carried their growth-accelerating knowledge back to Beijing in the mid-1970s are also economic heroes but their names are known only to the Chinese.

But there is another 20th century contender for consideration as economic hero – Joseph A Schumpeter, who in his own judgement was the outstanding candidate for consideration.

2 Joseph Alois Shumpeter (8 February 1883 – 8 January 1950)

Joseph A Schumpeter was, as Wikipedia comments, an “Austrian American economist and political scientist.” Born in the Austro-Hungarian Empire, and according to one of his biographers (Swedberg,1991), he was not shy about his life’s three main objectives – to become the world’s greatest economist, Austria’s greatest horseman and Vienna’s greatest lover. In his later years he suggested he had failed in one of these objectives because he was not the greatest horseman, but he must have realised he wasn’t the greatest economist in the world either after the publication of Keynes’ 1930 “A Treatise on Money”. See

http://en.wikipedia.org/wiki/Joseph_Schumpeter#Schumpeter_and_Keynesianism

Schumpeter’s classic book is “Capitalism, Socialism, and Democracy.” The Prologue begins with the words “Can capitalism survive? No, I do not think it can.”

Schumpeter thought that capitalism would succeed enough to create a large detached intellectual class which would act against the interests of growth and destroy economic progress through their arguments. That hasn’t happened so far, although it could. And I suppose it might be argued that the fossilisation of Western economics is the destruction of part of any possible economic progress.

Schumpeter did not apparently recognise what others now see as the major significance of his own works, which are complementary to Keynesism rather then competitive to it. He identified the innovator as the key actor on the economic stage, and distinguished clearly between the inventor who first came up with the new ideas and inventions, and the entrepreneur as innovator, who embodied new inventions and understandings into new production methods, new final products, new organisations and new businesses. As one source comments:

“These innovations, he argued, take just as much skill and daring as does the process of invention.” See

http://www.econlib.org/library/Enc/bios/Schumpeter.html

Schumpeter’s main rival was Keynes, but when Keynes died in 1946, Schumpeter’s obituary of Keynes was grudging: he

‘gave Keynes the same off-key, perfunctory treatment he would later give Adam Smith in the History of Economic Analysis, the “discredit of not adding a single innovation to the techniques of economic analysis”‘

http://www.princeton.edu/~tleonard/papers/McCraw.pdf

That comment is very sharply focused on the techniques of economic analysis but it isn’t valid. Keynes provided many insights into the economic process which Shumpeter didn’t, and many economic analyses – dealing with the propensity to consume and the multiplier, for example – are only possible using a Keynesian framework. Furthermore, Keynes provided the two observations which are the foundation for investment credit economics, as I remark in “Shimomuran Economics: The No-Debt Investment Credit Creation Path to More Rapid Economic Growth”:

“Keynes made two towering observations about investment credit creation. The first is in what is usually called the General Theory.
“While there are intrinsic reasons for the shortage of land, there are no intrinsic reasons for the shortage of capital” (Book 6, Chapter 24, Section 2, p. 376).

The second great insight was his statement that savings can be created to fund investment prior to the returns which justify them.
These Keynesian observations have been applied in turn in all of the three historically important economies: in the USA from 1938-44 in order to ensure that American industry could supply everything required by the war effort; in post-war Japan in order to recover from wartime devastation and to establish Japan as a leading industrial and mercantile nation; and in China to ensure Deng Xiao-P’ing’s objective of making China the pre-eminent industrial and military world power.”

See http://londonprogressivejournal.com/article/view/1497

Schumpeter thought that the most significant innovations were these that not only produced improvements in the production processes but also threatened the very existence of previous industries and their associated ways of life. As The Concise Encyclopedia of Economics and Liberty notes, Schumpeter wrote:

“[What counts is] competition from the new commodity, the new technology, the new source of supply, the new type of organization … competition which … strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives.”

See http://www.econlib.org/library/Enc/bios/Schumpeter.html

Investment credit creation is just such an innovation, because it has collapsed industries in the Anglo-Saxon countries not practising it. In the UK it has largely destroyed the motorcycle, shipping, steel, motor car and electronic goods production industries (to name but a few) and the livelihoods of the entrepreneurs and skilled workers who worked in these industries. ICC as practised in Asia continues to threaten to reduce the future prosperity of the UK through buying up many of the smaller innovative UK SMEs which are the seedbed of future UK growth.

3 A discussion about Shimomuran Economics with Dr Hilde Behrend

On 6th November 1971, after I graduated from the great University of Edinburgh for the second time, then with a Diploma in Business Administration with distinction, I met with John Christopher Carrington and we agreed to research jointly on the policies and procedures that had produced the explosive economic growth of Japan. After six months of intensive research, much of it conducted in the LSE library, in the spring of 1972 I met with my Edinburgh mentor, the late, great Dr Hilde Behrend, to discuss the progress I thought we had made. Hilde spoke and wrote more precisely than anyone else I have ever met, and encouraged her students to do that. It was a privilege to be taught by her. One of Hilde’s obituaries is in the Guardian at:

http://www.theguardian.com/news/2000/feb/16/guardianobituaries4

After the brief usual preliminary pleasantries, Hilde got down to business. Her first question about the Shimomuran growth-accelerating economics that we had written to her about, and that I had verbally explained to her, was
“Why do you seem to have found what no-one else appears to have noted?”

I further described our attitude, that John and I both believed that something about the Japanese economic experience was so peculiar that we had started from the presumption that maybe something different was happening and there was perhaps a uniqueness to be found. Hilde found the weakness in that argument immediately and responded

“If you start with that belief, you might find the shadow rather than the substance. Why do you think you haven’t?”

I explained at some length the detailed depth of our research, and Hilde observed

“I have tried to refer your research to other economists, but it may be difficult to peer-review your research. Very few people appear to have the necessary relevant knowledge to review adequately the detailed results you seem to have arrived at.”

Hilde also commented

“Your research is so excellently written that it may mislead people into believing that you and John are both professional economists and that these results are the product of decades of research.”

Hilde had taught us how to write in the highly qualified academic style upon which she was now commenting, so I said nothing.

Hilde then produced the two H G Wells probes about any innovation. The first of these was

“Consider the possibility that you may be wrong.”

I again explained the thoroughness with which we had investigated the subject, and restated my belief in the validity of our findings.

Hilde then produced the second Wells fire-cracker:

“Consider the disastrous possibility that you may be right. The world’s international system may not be stable if very high economic growth is available to many nations. It may be tolerable for one large nation, like Japan, to grow very rapidly but the international system might become quite unstable if many such nations grew rapidly.”

That seemed possible, but at that time I had not researched that avenue. I did not think it could be disastrous if we were right, so I gave no competent reply.

Hilde then asked “Where will it all end?” Hilde then rested her eyes as if she had found our conversation a bit exhausting. A few moments later she snapped her eyes open and said

“You perhaps need to think deeply about whether you wish to do these things you may be capable of doing. If you succeeded in your objectives and this economics worked, the results might possibly reverberate for centuries!”

I nodded. I thought the effects might reverberate longer than that. I thought it might be millenia.

But in retrospect the most significant observation made by Hilde was that there could be no easy peer-review of our findings because no peers (in the sense of academics trained to evaluate this area of Japanese growth from a knowledge of comparative financial-industrial structures) seemed then to exist.

4 The Evaluation of Innovations

Any major innovation always faces great hurdles in most academic disciplines. The peer review mechanism (which is central to the acceptance and publication of fresh research) operates by knowledgeable professionals testing any new theory or new development against the body of existing and accepted knowledge within their discipline. This is readily done when new discoveries are incremental and completely consistent with prevailing wisdom, when that process resembles adding a new area to the existing understanding. But that procedure does not work at all when there is a major paradigm shift in theory or practice, which is like adding a different world.

You cannot peer-review or validate Einsteinian physics by referring it to the touchstone of Newtonian physics. You cannot validate the usefulness of simplified economic theories by reference to the real world because by their very nature these theories are not based on real world assumptions. There is a marked tendency for some branches of economics to lose contact with reality and to develop into a specialised subset of advanced mathematics. As Keynes remarked about Fredrich Hayek’s “Prices and Production”

“The book, as it stands, seems to me to be one of the most frightful muddles I have ever read, with scarcely a sound proposition in it beginning with page 45 [Hayek provided historical background up to page 45; after that came his theoretical model], and yet it remains a book of some interest, which is likely to leave its mark on the mind of the reader. It is an extraordinary example of how, starting with a mistake, a remorseless logician can end up in bedlam.”

On Friedrich Hayek’s “Prices and Production”, in Collected Writings, vol. XII, p. 252

But economists can still “validate” various kinds of inapplicable economic theory by reference to previous economic theories. The university system can check through examination whether university students have accepted and internalised various and different economic theories whether they are right or wrong, and award degrees in the accepted faith of either monetarism or Keynesianism as the professors understand it. But the usefulness of an economic education that has nothing to say about the central problem in economics (that is, about how to make a nation and its people truly prosperous within an acceptably brief timescale) must be somewhat limited.

So major and enormous shifts in economic understanding, such as those arising from Shimomura, cannot be peer reviewed in the West because the reviewers do not understand Shimomuran economics and they cannot review and validate what they do not understand.

In my view there is one simple question which separates a hero economist from the rest: Did he create a tide of prosperity which lifted all boats and raised the living standards of all social groups? Keynes and Shimomura both past that test easily. Friedman fails that test utterly.

From that viewpoint, Milton Friedman, who is feted in some quarters as perhaps “the most important economist in the second half of the 20th century – perhaps all of it” is not useful. Friedman has absolutely nothing to say about how to accelerate economic growth, is silent on the importance of innovation, and is only an economic hero to the monied class who have benefitted from the freedoms he advocates. Friedman is not a hero economist, because the answers he provides do not increase national prosperity.

5 The Failure of the Implementation of Invention in the Anglo-Saxon Economies

It is a commonplace observation that Britain is the home of many inventions but the conversion of these inventions by British entrepreneurs into mass produced goods in British factories has not happened in Britain. Dyson, for example, does his redesigning of consumer goods in Malmesbury in Wiltshire in Britain, but they are produced abroad, where investment credit is available. The same observation applies to the USA. The Apple iPads have been designed in Silicon Valley, at 1-6 Infinite Loop, Cupertino, California, but have been produced by Foxconn in Shenzhan, China. These are but two examples of a general trend.

The loss of old industries combined with the location of new production facilities for items designed in the UK and the USA means that these countries, which have lost many of their industries in the recent past, are in some cases likely to lose their future industries too, if current circumstances continue.

6 The Relevance of Shimomuran Economics

Keynes’s view of the economist as the hero of the piece is absolutely valid once that economist understands Shimomuran economics, because the creative conversion of invention into the production of goods and services happens within a given financial-industrial framework which the economist-hero can help bring about. The actions of the entrepreneur are less successful, and often impossible to achieve, if the financial-industrial system (within which both the inventor and the entrepreneur are operating) is obsolete or unhelpful, as it is in all of the Anglo-Saxon economies. Entrepreneurs may see the productive possibilities but they can’t finance them in their own country without a supportive financial-industrial system.

So while Schumpeter’s entrepreneur stands in the middle of the system, the economist as hero helps set the positive framework within which the entrepreneur can operate more successfully.

Shimomuran economics can replace the periodic capitalist crises forecast by Marx with continual economic growth as the investment credit fills the downturn with innovative developments and the system employs nearly all of the people in a constantly changing cycle of rising economic development. It replaces the dismal forecast of Schumpeter – that intellectuals will ultimately cause the downfall of capitalism – with a potentially better outcome involving the implementation of all the benefits of endless human ingenuity through the continual investment in the unending innovation which Schumpeter championed. Investment credit economics acts as a counterweight to the continual withdrawal of money from the banks due to the high liquidity preference of the rich. It provides the national government with the power to restore manufacturing industry by tapping directly into the innovative power of business men entrepreneurs and not relying on foreign funding.

All of that is now happening in Shinzo Abe’s Japan and in China. There is no good reason why it should not happen in the UK, the EU, the USA, India and all the other Western democracies.

One of the key points in Shinzo Abe’s speech is the removal of obstacles to investment funding and the acceleration of major health innovations.

The most accurate forecast of the future – which is now our recent past – inevitably comes from Keynes, who believed that the capability of clever-stupid opinion manipulators could play on human cupidity and thus destroy the stability of the financial system. Keynes forecast this could occur through large scale gambling on the casino of the stock exchange, but in fact any large speculative bubble can produce a major downturn, as the Japanese property bubble and the transatlantic credit crunch has demonstrated. Even in that desperate situation, the destruction of credit by the banks can be and has been partly reversed by financial credit creation – it is just a pity that the £375 bn Bank of England credit (or “quantitative easing”) has been entirely aimed at improving the British Clearing Banks’ liquidity and not at all focused on improving industrial productivity. More recently, £80bn has been created as BoE investment credit, but as the BoE and other returns show, the terms and conditions of bank loans in the UK are too short and too poisonous properly to fund an industrial recovery. The Coalition government has no idea about how to run a modern industrial economy, and it shows. The EU activity is no better – about 2 trillion credit-created (unsupported by foreign borrowing) euros to enable the overspending of several southern EU states – without the essential massive flows of investment credit creation which would actually solve the problem.

7 Conclusions

Investment credit economics (that is, Shimomuran Economics) is not simply a much better way of producing the goods (although it is all that) but it is an innovation which threatens the way of life of entire countries. Obsolete financial-industrial systems currently prevent the implementation of invention and inhibit prosperity and the full flowering of human ingenuity in many nations.

This fresh major economic understanding is the most effective way of producing the continually improving consumer goods, supporting better capital-intensive services and continually upgrading the infrastructure of an advanced economy. Those nations which do not practice this new economic understanding will inevitably become increasingly impoverished, unable to compete in world markets, unable to keep their people employed and unable to balance their budgets.

The failure of innovation in Western economies is an investment failure, a failure to re-arrange the financial-industrial system to provide domestic entrepreneurs with the same access to the vast flows of low-cost investment credit funds that their Asian competitors can access.

That need not continue.

© George Tait Edwards 2013

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This post was written by George Tait Edwards