Principles of NeoSchumpeterian Economics Theory and application

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Principles of Neo-Schumpeterian Economics-
Theory and application -

• Horst Hanusch
• September 2009

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References

• Horst Hanusch und Andreas Pyka,
• Principles of Neo-Schumpeterian Economics,
• in Cambridge Journal of Economics, 31, 2007,
• S. 275 289.
• Horst Hanusch und Andreas Pyka,
• Manifesto for Comprehensive Neo-
• Schumpeterian Economics,
• in History of Economic Ideas, 15, 2007,
• S. 11 29.

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Outline

• I. Theory The concept of CNSE
• Which economic approach is best suited to deal
  with the future?
• Intellectual roots of Neo-Schumpeterian-Economics
  (NSE)
• From NSE to Comprehensive Neo-Schumpeterian-Econom
  ics (CNSE)
• Three pillars as central elements of CNSE
• 4.1 Industry development current and future
  challenges for CNSE
• 4.2 The role of finance in CNSE
• 4.3. The public sector in CNSE
• Interphases and intersections between the three
  pillars
• Economic co-evolution The concept of the
  Neo-Schumpeterian Corridor

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Outline

• II. Application The Future Orientation of
  OECD-countries
• The analytical procedure
• The indicators used
• Cluster analysis
• Results Appropriate number of clusters
• Results Cluster composition
• Results Intra cluster ranking
• Results Correlation with growth
• III. Conclusion

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I. Theory The Concept of CNSE

• Which economic approach is best suited to deal
  with the future?
• Economic development and transformation processes
  have become much more important in the last 25
  years than ever before.
• Economic analysis is dominantly confronted with
  the difficulties to tackle the future orientation
  of these processes.
• Which of the standard economic approaches is best
  suited for that purpose?

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1. Economic approaches

• Neoclassical Economics Rational individuals and
  the price mechanism are responsible for an
  efficient allocation of resources within a set of
  constraints.
• Neo-Keynesian Economics
• Demand oriented macro approach based primarily
  on short term processes occurring in non perfect
  markets.

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1. Economic approaches

• Orthodox Neo-Schumpeterian Economics
• - Entrepreneurship and technological innovation
  are the basic principles and are responsible for
  development of economies by removing and
  overcoming limiting constraints.
• - Innovation competition takes the place of
  price competition as the coordination mechanism
  of interest.
• - True uncertainty in the sense of Frank Knight
  enters the scene.

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2. Intellectual roots of NSE

• Schumpeters work
• Evolutionary economics
• Complexity economics
• Approaches focusing on change and development
• Approaches focusing on collective innovation
  processes

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2. Intellectual roots of NSE

• Schumpeters Work
• Entrepreneurial driven economic development
  (Schumpeter, 1911)SCHUMPETER MARK I
• Industry driven economic development (routinized
  innovation, Schumpeter, 1942)SCHUMPETER MARK II

Joseph A. Schumpeter, 1883 - 1950
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2. Intellectual roots of NSE

• Evolutionary Economics
• dynamic developments
• historical time
• emergence and diffusion of novelties
• driven by creation, imitation and selection
• true uncertainty
• micro-macro feedback effects
• aggregate phenomena are emergent properties of
  interactions on the lower levels

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2. Intellectual roots of NSE

• Learning is central
• bounded rational actors learn and search in
  uncertain environments
• as a cumulative process (path dependencies)
• as a social and interactive process (collective
  innovation heterogeneity as a source of novelty)

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2. Intellectual roots of NSE

• Complexity Economics
• Social systems share many commonalities with
  complex systems. Within the last 20 years
  complexity sciences have developed many tools to
  describe and analyse complex systems which are
  increasingly applied on socio-economic phenomena
  (e.g. Kirman, 2002, Arthur, 2002 ).

Marseille fish market
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2. Intellectual roots of NSE

• Long run development (e.g. Schumpeter, Kuznets,
  Clark)
• Middle-term development (Industry Life Cycles
  e.g. Utterback, 1994)
• ? Laws of motion and dynamics (stylized facts)

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2. Intellectual roots of NSE
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2. Intellectual roots of NSE

• Descriptive approaches e.g. the experimentally
  organized economy (Eliasson, 2003), sectoral
  systems of innovation (Malerba, 2002)
• Systemic approaches e.g. national innovation
  systems (Lundvall, 1993), regional innovation
  systems (Cooke, 1995)

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3. From NSE to CNSE

• NSE is still far from offering an integral theory
  of economic development.
• Most research is primarily concentrated on the
  real economic sphere.
• Development, however, is also influenced by the
  monetary and the public sector.
• CNSE has to offer a consistent theory to
  understand change and development.

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4. Three pillars as central elements of CNSE
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4. Three pillars as central elements of CNSE
Definition of CNSE

• CNSE has to offer a consistent theory dealing
  with dynamic processes causing qualitative
  transformation of economies driven by the
  introduction of novelties in their various and
  multifaceted forms (technological, institutional,
  organisational, social dimensions) and the
  related co-evolutionary processes.

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4. Three pillars as central elements of CNSE

• Relevance of future orientation in the single
  pillars as well as the interrelated processes
  between them.
• Many points of contacts between the pillars,
  which occur as interphases and as intersections.
• In this way the social economic system is driven
  or hindered in a non-deterministic and
  co-evolutionary way.

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4.1 Industry Development
Biotech laboratory in Munich 2005
Locomotive factory in Munich 1872
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4.1 Industry Development

• Current and Future Challenges
• Increased importance of knowledge and
  internationalization
• Qualitative changes on the sectoral level
• Catching up and leapfrogging processes affecting
  international competitiveness

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4.1 Industry Development

• Current and Future Challenges
• Coexistence of large (old) and small (new) firms
  in knowledge based industries with competitive
  and cooperative strategies
• Broad networks of actors (firms, universities,
  laboratories etc.) in knowledge intensive
  industries
• Increased complexity of the economic system

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4.2 Finance in CNSE
Stock market Tokio, 2004
Stock market Hamburg, 1875
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4.2 Finance in CNSE

• Schumpeter himself had strongly emphasised the
  role of both the creative entrepreneur and the
  risk-friendly banker in his Theory of Economic
  Development of 1912. They have to be considered
  in a symbiotic relationship.
• The major task for the financial sector has to be
  seen in the acquisition and supply of capital for
  firm actors.
• E.g. J.P. Morgan often did not only play the
  bankers role but actively huddled on a creative
  role in the railway companies.

J. P. Morgan, 1837 - 1913
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4.2 Finance in CNSE

• Besides banks - yet historically later - the
  stock market plays an outstanding role for firms
  in their processes of acquiring capital.
• Only recently, venture capitalists, a blend of
  financial and technological knowledge, enter the
  scene with a major focus on acquiring capital for
  risky innovative start-ups.

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4.2 Finance in CNSE

• In a Neo-Schumpeterian perspective, again the
  future orientation of the finance sector is
  essential. Besides uncertainty, a major feature
  of knowledge creation and innovation is the
  extreme time consuming nature of these processes.
  i.e. a long term orientation is necessary.
• Two potential threads arise from this intrinsic
  alliance between uncertainty and long-term
  orientation

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4.2 Finance in CNSE

• a) In order to reduce uncertainty, the time
  horizon is shortened
• Recent developments (e.g. quarterly reporting
  procedures, immense activities of equity funds
  and insurance companies offering their members a
  guaranteed minimum income ) are severely
  damaging the possibilities of long term planning
  of the actors on the financial markets.
• b) Signals from the real economy are
  misinterpreted
• Bubble effects like the ICT-Hype in 2000 are
  examples for a particularity of financial markets
  which stems from positive feedback effects
  between potential extraordinary profits (greed)
  and exorbitant expectations fed by technological
  development.

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4.2 Finance in CNSE

• The orientation towards future developmental
  potentials of economies obviously necessitates
  the inspection of monetary policy and the role of
  central banks.
• Price stability as the only benchmark for
  evaluating central bank policy might not be
  sufficient in a Neo-Schumpeterian economy,
  instead an additional orientation towards growth
  and development is necessary.

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4.3 The Public Sector in CNSE
Education, Hegel lecturing 1828
Modern lecture hall
Traffic, early 20th century
Traffic, late 20th century
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4.3 The Public Sector in CNSE

• The necessity for a public sector
• Normative perspective Defining tasks for
  public activities
• Positive-empirical approaches Explaining the
  real developments

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4.3 The Public Sector in CNSE

• The necessity for a public sector
• Uncertainty is a key feature accompanying every
  kind of innovation.
• Schumpeters notion of creative destruction
  emphasizes the two sides of the coin in every
  innovation process we will find winners and
  losers.

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4.3 The Public Sector in CNSE

• A society can agree on a social contract to
  deal with the peculiarities and imponderables of
  innovation processes which is executed by the
  state in the sense of John D. Rawls. Uncertainty
  is tightly connected to Rawls veil of ignorance.
  
• For firm actors this social contract entails
  both, support for uncertain innovation and social
  responsibilities in the case of innovative
  success.

John D. Rawls, 1921 - 2002
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4.3 The Public Sector in CNSE

• Public responsibilities when uncertainties
  distort individual decisions, e.g.
• education,
• basic research,
• infrastructure,
• health,

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4.3 The Public Sector in CNSE

• Normative Perspective
• Basically all public interventions have to be
  chiefly scrutinized whether they support or
  hinder the potential for economic development. An
  orientation of public activities towards the
  future is postulated.
• Gunnar Eliasson (2001) has negatively formulated
  this claim by emphasizing the two cardinal errors
  to be observed in economies
• To discard promising opportunities too early, and
  
• to stay on exhausted trajectories too long.
• In both cases resources for future development
  are wasted.

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4.3 The Public Sector in CNSE

• Example 1) Complexity
• With respect to education, science and research
  an important hint can be found in Richard
  Musgraves theory of meritoric goods.
• Due to their future orientation, their complex
  character as well as their potential positive
  spillovers individuals tend to undervalue these
  goods.

Richard Musgrave, 1910 - 2007
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4.3 The Public Sector in CNSE

• Example 2) Different speeds of development
• Creative destruction in a Schumpeterian sense is
  closely connected to the obsolescence of
  qualifications which causes severe problems on
  the labour markets (mismatch unemployment).
• From a dynamic Neo-Schumpeterian perspective this
  mismatch demands not only for an administrative
  design of labour policy, but for an active future
  oriented namely knowledge-based design (e.g. the
  Danish model).

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4.3 The Public Sector in CNSE

• Example 3) Complexity and different speeds of
  development
• Health and demographic change are two key issues
  in almost all industrialized countries. A future
  oriented policy design in these areas has to
  consider the changing framework conditions for
  demand development, labour markets and health
  expenditures.
• new qualifications (service orientation)
• medical technical progress
• new models of health and pension systems

Population pyramid for Germany 2001
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4.3 The Public Sector in CNSE
Example 4) International coordination Newly
emerging economic areas challenge the inter- and
supranational coordination of policy in order to
benefit from the developmental potentials
stemming from globalisation (economies of scale)
and regionalisation (variety creativity).
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4.3 The Public Sector in CNSE

• The Positive-Empirical Approach
• Wagners Law states that the development of an
  industrial economy will be accompanied by an
  increased share of public expenditure in GNP.
• ? connecting Schumpeterian dynamics with public
  dynamics
• - with growing incomes more public goods are
  consumed (?yx gt 1),
• - and the quality of the public goods is changing.

Adolph Wagner, 1835 - 1917
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4.3 The Public Sector in CNSE

• Three possible outcomes
• No limits for the growth of the public sector
  (Capitalism, Socialism and
• Democracy, 1942)
• Privatisation of public goods (health, education
  ) ? uneven distribution of services
• Increasing importance of the qualitative
  dimension of the supply of
• public goods (the quantitative dimension of
  Wagners Law is
• complemented by a qualitative dimension) ?
  strengthening the
• consumer absorptive capacities for superior
  (meritoric) goods.

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to summarize CNSE

• Comprehensive Neo-Schumpeterian Economics
  focussing on innovation driven qualitative
  development has to offer theoretical concepts to
  analyze the various issues of all three pillars
  Industry, Finance and Public Sector.
• Innovation and uncertainty are ubiquitous
  phenomena characteristic for each of the three
  pillars and intrinsically interrelated.
• In particular, an improved understanding of the
  development processes can only be expected when
  additionally the co-evolutionary dimension
  between the three pillars is taken into account
  adequately.
• In a Neo-Schumpeterian economics perspective
  there exists only a narrow corridor for the
  prolific development of socio-economic systems.

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5. Interphases and Intersections between the
pillars

• The industrial-public-pillar intersection
• Importance of collective innovation processes
• (? engagement of private firms in basic
  research
• ? public private reserach partnerships)
• International and interregional competition for
  industrial settlements

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5. Interphases and Intersections between the
pillars

• The public-financial-pillar intersection
• Cooperation of financial and political actors
  when it comes to the
• implementation and application of policy
  programs to further
• innovation and entrepreneurship.

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5. Interphases and Intersections between the
pillars

• The financial-industrial pillar intersection
• Symbiotic relationship between the industrial
  and the financial sector.
• Supply with risk-capital for startups.

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6. Economic co-evolution
The Neo-Schumpeterian Corridor
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II. Application The future orientation of
OECD-countries

• Starting point
• Lisbon Agenda
• Europe should become the most competitive
  and dynamic knowledge-based economic region in
  the world.
• In this context
• knowledge is the driving force of growth and
  development.
• competitiveness then is based on knowledge
  generation and diffusion processes i.e. what
  counts is no longer only price- but also
  innovation-competition.
• the underlying dynamics no longer focuses solely
  on quantitative aspects but prominently on
  qualitative features based on evolutionary
  processes.
• these processes are fed by multiple sources
  (industry, science, public infrastructure,
  venture capital ) which mutually influence each
  other (co-evolution).

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7. The analytical procedure

• Our study applies the 3-pillar concept to 18
  countries entailing 16 European countries, Japan
  and US. The European countries include the old
  member states of the EU (besides Luxemburg). The
  new accession countries are not included.
• In order to stress orientation towards the
  future, as it is common to our 3-pillar concept
  of CNSE and the Lisbon agenda, each pillar
  empirically has to be characterized by indicators
  representing the future orientation
  (innovativeness) for each country under study.
• In a first step we focus on dissimilarities and
  similarities of the various economies and their
  pillars in the OECD area, using data from the
  period 1996 to 2000. This analysis allows to
  detect whether there is a variety in the
  composition of the three pillars for the
  different countries, or whether one finds a
  convergent structure of groups of countries
  especially in Europe. This would allow to get a
  first hint on the convergence and divergence of
  structures in geographic areas in Europe and
  outside of Europe. This is done by a cluster
  analysis.

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7. The analytical procedure

• After having discovered patterns for the pillars
  and having grouped the countries to clusters with
  similar pillars, in a second step we perform a
  ranking analysis within the cluster, i.e. only
  comparable countries are compared according to
  their pillar performance. This is done by a
  linear benchmarking program.
• In a third step as a crude representation of
  macro-economic success the cluster composition is
  sorted by the average growth rates of the
  economies. This allows a first correlation of
  pillar composition and growth success.

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8. The indicators used Industrial Pillar
BERD (Business Expenditure on RD) in percent of
value added of industry, 2000 BERD, average 1991
to 2000 Indirect labour costs in Euros
(reciprocal values), 2000 Number of researchers
per 1,000 labour force, 2000 USPTO patents per
million population, 1999 EPO patents per million
population, 1999 RD personnel per 1,000 labour
force, 1999 Triadic patent families per million
population, 1999 Percentage of patents with
foreign co-inventors, 1995-1997 Students going
abroad in percent of all students, 2001 FDI in
percent of gross domestic capital formation,
average 1997-1999 FDI inward stock in percent of
GDP, 1999 FDI inflows in percent of global total
FDI inflows, average share between 1996 and
2000 Share in total OECD high- and
medium-high-technology exports, 2001 Growth of
high- and medium-high-technology exports (based
on the corresponding OECD classification),
1992-2001, average growth rate per annum Number
of patents in biotechnology per million
population, 2001 Number of co-patents in
biotechnology per million population, 2001 Number
of firms in biotechnology-based industries,
2003 Number of ICT patents per million
population, 2001. Exports of services in percent
of GDP, 2001 Imports of services percent of GDP,
2001 Employment in ICT sectors, in percent of
total national employment, 2001 Balance of trade
in communications equipment, 2001
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8. The indicators used Public Pillar
GOVERD (Government Expenditure on RD) in percent
of GDP, 2000 GOVERD, average 1991 to 2000 GERD
(Gross Domestic Expenditure on RD) in percent of
GDP, 2000 GERD, average 1991 to 2000 Tax burden
for companies (corporate income tax, highest
level, on non-distributed gains, reciprocal
values), 2001 Tax burden for households (highest
level of income tax, reciprocal values),
2001 Index of political stability, 2002 Index of
regulatory quality (higher values indicating
lower regulatory burden), 2002 Average annual
real GDP growth, 1996-2000 Quality of internet
access, broadband penetration rate, 2001 Number
of personal computers per 100 inhabitants,
2001 Internet users per 100 inhabitants,
2001 Business internet penetration, number of
internet hosts per 10,000 inhabitants,
2001 Number of secure internet servers per
million inhabitants, July 2001 Employment rate of
university graduates, 2001 Employment rate of the
population that has attained tertiary education
and is aged 25-64, 1999 Perceived RD subsidies,
2001 Perceived RD tax credits, 2001 Tax
treatment of RD for large manufacturing firms,
1999-2000 Tax treatment of RD for small
manufacturing firms, 1999-2000 Number of
scientific publications per million population,
1999 Percentage of scientific publications with a
foreign co-author, 1995-1997 Percentage of the
population of 25- to 34- year-olds that has
attained tertiary education, average
1993-2000 Total expenditure on non-tertiary
education in of GDP as of 2000 Total
expenditure on tertiary education in of GDP,
2000 HERD in of GDP, 2000 Teaching staff per
1,000 students in primary and secondary
educational establishments, 2001 Graduation rates
at PhD level, 2001 Total public expenditure on
education, all educational levels combined,
2000 Change in expenditure on educational
institutions (1995, 2002) Public Expenditure on
tertiary educational institutions as a percentage
of GDP 2002 Mathematical abilities, two upper
quarters 2003 Teacher salaries in upper secondary
education, 2003 Wage differential (tertiary-upper
secondary), 2003 Classroom size, 2003
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8. The indicators used Financial Pillar
Soundness of banks, 2001 Sophistication of the
national financial market, 2001 Average level of
short-term interest rates 1997-2001 Average level
of long-term interest rates 1997-2001 Local
equity market access, 2001 VC investment
(founding phase) in percent of GDP, 1995-1999 VC
investment expansion phase in percent of GDP,
1995-1999 Perceived VC availability, 2001 Locals
access to foreign capital markets, 2001 Access of
foreigners to the local capital market, 2001
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9. Cluster analysis

• Multivariate data analysis (clustering
  techniques) (agglomerative, disjunctive,
  exhaustive analytical procedure)
• Similarity between the studied country pillars
• squared Euklidean distance
• Cluster composition and optimal number of
  clusters
• application of the elbow criterion according to
  
• average linkage values between groups

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10. Results Appropriate number of clusters
Elbow criterion to determine the appropriate
number of clusters by addressing the percentage
of variance which is explained.

• four different groups of financial pillars
• six different groups of public pillars
• six different groups of industrial pillars

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11. Results Cluster composition
Core European industrial pillar group
establishing financial pillars
established financial pillars
Central European public pillars group
Scandinavian public pillars group
Mediterrenian public pillar group

• Geographically non-european countries (J, US)
  always establish own clusters
• Finland and Ireland play a special role in the
  industrial pillar group

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12. Results Intra Cluster Ranking
e.g. Germany ranked second in its public pillar
and industrial pillar group, but on position
five only in its financial pillar group. -gt the
financial system seems to be the bottleneck of
development in Germany. e.g. similarly, Denmark
ranked on place three in its public pillar and
industrial pillar group but only on position nine
in its financial pillar group -gt lowest
performance within Scandinavian countries. e.g.
UK Good performance of its financial (2) and
public pillar (3), but only average performance
of its industrial pillar (5) e.g. the Netherlands
vs. Italy whereas NL holds the first ranks in
all of its pillar clusters, Italy is placed on
the final ranks. This shows the future
orientation in the Dutch economy and the missing
future-orientation in Italy
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13. Results Correlation with Growth
dangerous hyper dynamics?
countries within the Neo-Schumpeterian corridor
stagnation?
Similarities in cluster-composition does not mean
to have similar performances
Similar pillar composition, but different growth
performances -gt significant complementary and
co-evolutionary effects. Germany is performing
worst in this group. Within all pillars France is
ranked behind Germany. However, the growth rates
of France are almost 1 percent above those of
Germany from 1996 2000. This may be explained
by a better balance between the 3-pillars in
France compared to Germany.
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III. Conclusion

• Innovativeness and orientation towards the future
  are central elements of the Lisbon Agenda.
• CSNE offers an appropriate theoretical approach
  to the enforcement of the Lisbon Agenda.
• Our methodology allows for a fine-grained pattern
  of the composition of the main institutional and
  structural components of an economy (the
  3-pillars industry, finance and public sector)
  in the various countries with a particular
  orientation towards the future.
• There is no single and unique solution with
  respect to sound macro-economic growth and
  development, i.e. the same compositions of the
  3-pillars allow for high as well as low growth
  rates.
• It seems that the pillar performance within a
  cluster is influencing also macro-economic
  success, at least bottlenecks or weak points for
  growth can be identified.
• Furthermore, our methodology also highlights the
  importance of the interrelatedness between the
  3-pillars. That concerns not only the composition
  but also the qualitative amalgamation of the
  3-pillars at the organizational, institutional
  and political levels of an economy.

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Thank you for your attention!