Macro Innovation Dynamics and the Golden Age: New Insights into Schumpeterian Dynamics, Inequality and Economic Growth PDF
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Paul J. J. Welfens Macro Innovation Dynamics and the Golden Age New Insights into Schumpeterian Dynamics, Inequality and Economic Growth Macro Innovation Dynamics and the Golden Age Paul J. J. Welfens Macro Innovation Dynamics and the Golden Age New Insights into Schumpeterian Dynamics, Inequality and Economic Growth PaulJ.J.Welfens JeanMonnetChairforEuropeanEconomicIntegrationandChairforMacroeconomics PresidentofEuropeanInstituteforInternationalEconomicRelations(EIIW)atthe UniversityofWuppertal Wuppertal,Germany Non-residentSeniorResearchFellow AICGS/JohnsHopkinsUniversity Washington,DC USA ResearchFellow IZA Bonn,Germany ISBN978-3-319-50366-0 ISBN978-3-319-50367-7 (eBook) DOI10.1007/978-3-319-50367-7 LibraryofCongressControlNumber:2017930939 #SpringerInternationalPublishingAG2017 Thisworkissubjecttocopyright.AllrightsarereservedbythePublisher,whetherthewholeorpartof the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilarmethodologynowknownorhereafterdeveloped. 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Printedonacid-freepaper ThisSpringerimprintispublishedbySpringerNature TheregisteredcompanyisSpringerInternationalPublishingAG Theregisteredcompanyaddressis:Gewerbestrasse11,6330Cham,Switzerland Preface InnovationswereresponsiblefordrivingtheIndustrialRevolutionintheeighteenth and nineteenth centuries. The twentieth century has witnessed the combination of multinational companies’ foreign direct investment dynamics and productas well as process innovations; and the early twenty-first century is shaped largely by digital innovation dynamics. While innovations have been analyzed by many economists—beginning,inparticular,withSchumpeter—thereissurprisinglylim- ited research carried out on the role of innovations in Macroeconomics (as a textbook, Aghion/Howitt’s Endogenous Growth Theory summarizes many approaches). With my book, “Innovations in Macroeconomics”, I have tried to contributetoclosingsomeoftheknowledgegapsandemphasishasbeengivento theroleofforeigndirectinvestment(FDI),innovationsandtrade.TheroleofFDIis growing in the context of economic globalization and it requires the making of a distinctionbetween GDP andgross national product—typicallyneglected inopen economy macroeconomics so far. This point has already been emphasized in InnovationsinMacroeconomics.ConsumptioninaneconomywithtradeandFDI isproportionatetoGNP,nottoGDP;andimportsarealsoproportionatetodomestic GNP.TheexportvolumeisproportionatetoforeignGNP—nottoGDP.Formany countriesthereisaconsiderabledifferencebetweenGNPandGDP. Inthiscomplementarybook,IpresentmypapersfortheBrisbaneconferenceof the Schumpeter Society, the paper for the Jena conference of the Schumpeter Society as well as my paper on innovation and growth for a Sino-German proj- ect—here funding from the German National Science Foundation is gratefully acknowledged—plusanewapproachtothegoldenageinthepresenceofaresearch sector. Moreover, the last chapter—my paper for the Montreal conference of the InternationalJosephA.SchumpeterSociety—suggestsaninnovativeapproachthat uses a knowledge production function that can be plugged directly into a macro- economic production function and hence enables a straightforward way for new endogenousgrowthapproachesfrombothatheoretical andempiricalperspective. The main ideas in this book are to include innovations into the Mundell-Fleming model and to take a broad, fresh look at the golden age in neoclassical growth theory. In a broader view that includes environmental aspects, the question of a goldenrulethatmaximizespercapitaconsumptionisevenmoreimportantthanthe classical contributions in this field: An economy that has a capital intensity v vi Preface exceedingthatwhichisrequiredbythegoldenruleisnotachievingthemaximum percapitaconsumptionontheonehand,ontheotherhand,inthecaseofaclosed economy, one may emphasize that the amount of physical capital produced and employed—this is associated with the use of resources and energy (leading to higher CO emissions)—is too high: the environmental quality is thus worse than 2 asituationinwhichthegoldenrulewasobservedwouldimply. Thegoldenage,characterizedbymaximumpercapitaconsumptioninthesteady state, has, in the original contribution of Edmund Phelps (1961), been dubbed “a fable for growthmen” and indeed the golden rule has not been considered as a serious element of economic policy—it was rather discussed as a very theoretical point of neoclassical growth analysis; with the adoption of endogenous growth theory thegoldenruleseemed tobecomearemotecornerofanalysis.The contri- butionofPhelpshademphasized,initsapplicationtoasetupwithaCobb-Douglas productionfunction,thatthegoldenrulerequiresthatthesavingsrateisequaltothe incomeshareofcapitalandtheoutputelasticityofcapital.Thisinterpretationisnot fully consistent to the extent that it is understood to imply that all profits must be investedifpercapitaconsumptionistobemaximized;ratheracertaincombination of the savings rate of capital owners and of workers is also compatible with the goldenage.Analternativeconditionforthegoldenruleistorequirethatthegrowth rateofoutputshouldbeequaltotherealinterestrateandonemayarguethatprofit maximizationandcompetitionwillbringaboutthisequality.Hencetheonlytaskof government then is to implement competition and to encourage profit maximiza- tion.Thereare,however,threedifficultproblemsforcompetitionpolicy:(1)Com- petition policy in small open economies is not easy to implement effectively in a worldeconomywithmultinationalcompaniesplayinganincreasingrole;whilein thetradablessectorfreetradepolicyeffectivelyiscompetitionpolicy,theproblem in the non-tradables sector is much more difficult—often the presence of just one multinational company already covers the entire domestic market so that there is little room for actual or potential competition (the non-tradables sector could represent between 20% and 40% of output in OECD countries and Newly IndustrializedCountries;andevenmoreindevelopingcountries).(2)Profitmaxi- mization is not always the natural behavior of relevant economic actors; the government sector itself and government-owned firms should be considered as a potentialproblemortoputitdifferently:here,lookingatthesectoralimplicationof the golden rule would be particularly useful, but no minister of finance and no councilofeconomicadvisershassofarseriouslyemphasizedthegoldenruleasa policyelement.Thispointwillberatherneglectedinthesubsequentanalysis:There is(3)thequestionofnegativeexternaleffectsfromproduction.Howcannegative external environmental effects—related to production—be integrated in a simple growthmodel?Finally,thereistheproblemthatthemoreinnovativetheeconomy is,thelesslikelyoneshouldexpectfullcompetitiontocharacterizetheeconomy: Whenever there are product innovations or patents—the latter giving an effective monopoly over several years to the innovator—one may face the problem that production factors are not simply rewarded in line with marginal productivity: Market power could play a crucial role in factor markets, possibly less so in smallopeneconomiesthaninbigeconomies. Preface vii Moreover, deviations from the golden age are not in practice an irrelevant problem of reality and economic policy, respectively. It should be rather obvious thatinratherpoorcountriesalackofgrowth-enhancingeconomicpolicywillbring about starvation, so that pushing governments to consider the implications of the goldenruleshouldbeanaturalelementofmoderndevelopmentpolicyandUNor World Bank projects for stimulating economic development in the South of the worldeconomy. Thisbookhasbeencompletedin2015and2016inBeijingandWashingtonDC, respectively.InChinaanotherprojectfinancedbytheGermanNationalFoundation hascommenced.Again,wearegratefultoMuRongpingandReinhardMecklwho haveinitiatedtheprojectsthathaveabroadfocusoninnovationdynamics,includ- ing green innovation dynamics (the first book edited by Rongping/Meckl was InnovationforGreenGrowth;Beijing:SciencePress:2014).InWashingtonDCI presented at both the Congressional Research Service and at the IMF (on June 27and28,2016,respectively)atheoreticalandempiricalpaperontheknowledge production function—a joint paper with Andre Jungmittag in which we have conducted an empirical analysis covering 20 EU countries between 2002 and 2014 and also suggested ways of plugging the empirical results into a macroeco- nomicproductionfunction.Thispaper,whichlooksatthecreationofnewknowl- edge,isnotincludedhere,however,partofthetheoreticalbasisisshowninthelast chapterofthisbook(thoseinterestedcanfindtheEIIWpaperNo.212onthewebsite oftheEuropeanInstituteforInternationalEconomicRelations:www.eiiw.eu). IamgratefulfortheresearchsupportofJensPerretandTonyIrawan(EIIWand the Schumpeter School of Business and Economics, respectively). I am also gratefulfor theeditorialsupportofDavidHanrahan,Samir Kadiric andEvgeniya Yushkova (EIIW). As regards our China research projects, I would also like to thank Mu Rongping (Chinese Academy of Sciences), Rainer Walz (Fraunhofer Institut ISI, Karlsruhe), Klaus Rennings (ZEW) and Reinhard Meckl (Universita¨t Bayreuth) for discussions on the subject matter, as well Raimund Bleischwitz (UniversityCollege,London)and,inthefieldofinnovationandgrowth,colleagues at the International Joseph A. Schumpeter Society—the bi-annual meeting in Denmark was particularly stimulating (unfortunately I was unable to attend the Brisbane meeting but Tony Irawan has presented mypaper). Special thanks go to AndreJungmittagfromtheFrankfurtAppliedUniversity;discussionsabouttrade, innovationandeconomicstabilitywithIMFcolleaguesarealsoacknowledged,as isthehospitalityofAICGS/TheJohnsHopkinsUniversity,Washington,DC,over manyyears.Theresponsibilitylies,however,withtheauthoronly. Wuppertal,WashingtonandBeijing PaulJ.J.Welfens保罗.威尔芬斯 Summer2016 Reference PhelpsES(1961)Thegoldenruleofcapitalaccumulation.AmEconRev51:638–643 About the Book This book is organized in five chapters: Following a short introduction, Chap. 1 suggestssomenew ideas on innovation, growthandincome inequality.The inno- vativeapproachpresentedintroducesamodifiedneoclassicalgrowthmodelwhich includesanewbiasoftechnologicalprogressinaquasi-endogenousgrowthmodel inwhichpartoflaborisusedintheresearch&developmentsector.Thecombina- tionofamacroeconomicproductionfunctionandanewprogressfunction,plusthe assumptionthattheoutputelasticityofcapitalispositivelyinfluencedbythesizeof the R&D sector, sheds new light on innovation and growth as well as on income inequality:ThusthereisanewapproachforexplainingPiketty’shistoricalfindings ofamediumtermriseofthecapitalincomeshareinindustrializedcountries—both in the earlier and later part of the nineteenth century and in 1990–2010 (this contribution has been published originally in the Journal International Economics andEconomicPolicy).Arisingshareofcapitalincomecanbeexplainedwithinthis approach bythe increase inthe outputelasticityofcapital,which has been devel- oped in a new way, namely in the context of R&D. In the approach presented herein,thegoldenruleissuesarealsohighlightedanditisshownthatchoosingthe right size of the R&D sector will bring about maximum sustainable per capita consumption. While the basic new model is presented for the case of a closed economy,onecouldeasilyaccommodatebothtradeandforeigndirectinvestment and thereby get a better understanding of complex international investment, trade and FDI dynamics—including with respect to the envisaged Transatlantic Trade andInvestmentPartnershipbetweentheUSandtheEU. The second chapter is my revised contribution from the first Sino-German project. The analysis links R&D, foreign direct investment, output and CO 2 emissions in a simple growth model. Based on the modified neoclassical growth model, key issues can be raised with respect to sustainable growth and several conclusionscanbedrawnwithrespecttoeconomicwelfareandoptimumconsump- tion per capita, respectively. It may be argued that in several industrialized countries—and China—investment-GDP ratios in certain periods are above the levelthatisconsistentwithoptimumpercapitaconsumption;thecapitalintensity exceedstheratioofcapitaltoworkers(inefficiencyunits)thatisconsistentwitha maximumlong-runpercapitaconsumption.CO emissionlevelscouldbereduced 2 in an efficient manner on the basis of a broad approach that emphasizes ix x AbouttheBook Schumpeterian dynamics: Taxing emissions and giving subsidies for innovations could be useful elements of innovation-enhancing policy. Promoting green innovations—including the sustainability design of products-, renewable energy andrealizingadequategenuinesavingscouldbekeypolicyelementsforaconsis- tentstrategytoachievesustainablegrowth.Moreover,greenratingsforcompanies listedonthestockmarketcouldbecrucialoptionsforcombiningsustainedgrowth, modernizationandinnovation.PartoftheanalysisisbasedontheEIIW-vitaglobal sustainabilityindicator. AfurtheranalyticalcontributionispresentedinChap.3.Economicgrowthis,in reality, not a smooth process and it is not clear why economic growth is rather unstable across OECD countries and the global economy. Economic growth is certainlyinfluencedbymanyfactors,including innovation dynamicsandtechnol- ogy, respectively.Technologicalprogress can have domestic sources and is, then, largelyrelatedtotheinnovationsystem,butinopeneconomiesthesubsidiariesof foreign MNCs can also play a role in the host country. Moreover, there could be internationaltechnologyspillovers,partofwhicharerelatedtointernationaltrade and FDI dynamics. Foreign direct investment has rarely been included in the analysis of economic growth, despite the fact that economic globalization has clearly reinforced the role of multinational companies in world investment. From amacroeconomicperspective,thepresenceofMNCs’subsidiariesshouldnotonly bringeffectsoncapitalaccumulationandtechnologytransfer;ratheritisimportant to consider that a distinction has to be made between GDP and GNP. This distinction, which concerns the specification of the savings function as well as other functions, has been much neglected in the literature; it is relevant both in medium term macro models and in long run growth models. In the standard neoclassical growth model with exogenous technological progress a rise of the progressrateleadstoafallofthelevelofthegrowthpathandahigherpermanent growth rate ofoutput.This suggests thata technology shock should bringabout a quasi-growthcycleandsuchaphenomenon—withatemporaryfallofoutput—is, however,notobservedinnewlyindustrializedcountries.Theempiricalpatternsof growthandinnovationdynamicsdonotshowsuchaparadoxicaltemporaryfallof incomeandincomepercapita,respectively.Theparadoxicalresultofthestandard growthmodelisavoidedinamodelinwhichtheoutputelasticityofcapitaldepends on the progress rate; certain parameter restrictions apply which are highlighted in theanalysis;furthermore,wegetadditionalinsightsintotheissueofthegoldenrule andmaximizationofpercapitaconsumption,respectively.Moreover,itisinterest- ingtoconsidertheroleofforeigndirectinvestmentforthegrowthmodelofanopen economyandtechnologicalprogress,respectively.Inthissemi-endogenousset-up, the focus is mainly on asymmetrical foreign investment, namely inward FDI inflows. Foreign direct investment inflows have a direct impact on the steady state solution, namely both on the level of the growth path and the permanent growth rate—the latter to the extent that we consider a technological progress functionin which both the foreign progress rateand the share of the capital stock owned by foreign investors are considered. The relative impact of domestic AbouttheBook xi progress and internationally induced progress is discussed. Finally, the issue of a consistentinvestmentfunctionwhichtakesintoaccountboththeshorttermandthe longrunconsistencyisconsideredandtheimpactofchangesintheprogressrateare pointed out—along with broader policy conclusions of the analysis presented. At thebottomlineitisshownthatapositiveimpactoftheprogressrateontheoutput elasticityofthecapitalstockcanbringasmoothtransitiontobothahigherlevelof thegrowthpathandahigherpermanentgrowthrate.Theperspectivesontheroleof FDIinflowsinatwo-countrymodelwithsymmetricalflowshavetobeexploredin further analysis. Key policy conclusions concern the question of to what extent government should try to achieve a golden state while adequately taking into account the role of foreign direct investment inflows. Within a broader group of countries it would also be useful to consider options for cooperation in growth policies—certainlytotheextentthattherearesymmetricalorasymmetricinterna- tionaltechnologyspillovereffects. Chapter 4 presents a new multiplier analysis for a Schumpeterian Mundell- Fleming model. Traditional open economy macro models have focused on the mix of fiscal and monetary policy while completely neglecting innovation policy. Thenewmodelpresentedisthefirstmacromodelthatexplicitlyconsidersproduct innovationsinanopeneconomymodel.Productinnovationsareconsideredinthe consumption function, the investment function, the export function, the import functionaswellasthemoneydemandfunction;plusthenetcapitalinflowfunction. Thepolicymultipliersarederivedforfiscalpolicy,monetarypolicyandinnovation policy.Inanextendedversionofthemodel,theroleofforeigndirectinvestmentis considered, in an approach for a small open economy. Domestic and foreign product innovations are considered and their impact on policy multipliers is analyzed. Finally, the role of supply-oriented, innovation-enhancing fiscal policy isdiscussed.Moreover,theempiricalevidenceforproductinnovationdynamicsis considered. Chapter 5 can be summarized as follows: The macroeconomic production function is a traditional key element of modern macroeconomics, as is the more recentknowledgeproductionfunctionwhichexplainsknowledge/patentsbycertain inputfactorssuchasresearch,foreigndirectinvestmentorinternationaltechnology spillovers.Thisstudyisamajorcontributiontoinnovation,trade,FDIandgrowth analysis,namelyintheformofacombinationofanempiricallyrelevantknowledge productionfunctionforopeneconomies—withbothtradeandinwardFDIaswell asoutwardforeigndirectinvestmentplusresearchinput—withamacroproduction function. Plugging the open economy knowledge production function into a stan- dard macroeconomic production function yields important new insights for many fields: The estimation of the production potential in an open economy, growth decomposition analysis in the context of economic globalization and the demand forlaboraswellaslongruninternationaloutputinterdependencyofbigcountries; and this includes a view at the asymmetric case of a simple two country world in which one country is at full employment while the other is facing underutilized capacities.Finally,therearecrucialimplicationsfortheanalysisofbroadregional integrationschemessuchasTTIPorTPPandamorerealisticandcomprehensive empiricalanalysis.
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