Planning and the modern economy

But there will come a point when the labour and capital have been fully mobilised and the technological frontier more or less reached. And the question is: then what?

Historically speaking, the answer is clear—growth slows to 2-3% per year. Because faster growth can\’t be achieved from more intensive use of inputs (thanks to diminishing returns) it has to come from innovation, that is, new and better uses of existing resources.

And there, the top down, planning-heavy method of growth is nearly hopeless. The American government has at times generated some nice bits of innovation—the internet is the classic example—but it has taken the distributed ecosystem of the market to figure out what to do with it. Top down leadership will stomp promising developments out of existence before they have time to flourish.

Yes, quite….

Once you\’re at the technological frontier (which western Europe, the US etc is) then you want less, not more planning from the centre.

As, once again, we find the Nordics doing. Yes, they\’ve high tax rates and high rates of redistribution. But government tells business what it may or may not do a great deal less than happens here.

Which, of course, is why they can still have that economic growth with the high tax rates and the high rates of redistribution.

All of which leads us to an amusing point for British lefties. You have to make a choice here.

1) High tax, high redistribution, yes, you can have this, but only if you\’re willing to give up the micromanagement of the economy. Fuck off and leave us all to a classically liberal society and yes, you can skim to moolah off the top for your pet projects.

2) Keep your fingers in the economic pies, continue to insist that the Man in Whitehall really does know best how to create income and wealth. In which case you need to have a low tax, low redistribution society. For there just won\’t be the moolah for you to cream off for your pet projects.

Over to you folks, which do you want?

And no, there isn\’t a third way to get what you claim to want.

7 thoughts on “Planning and the modern economy”

  1. I think perhaps you have too narrow a view of what forms of state economic interventions are possible.

    for example, it may be possible to subsidize experimentation, which is under supplied by the private market because entrepreneurs do not internalize the externalities of discovering new markets, goods, processes etc.

    it may also be possible to identify complementary inputs that are under supplied by the private market for various reasons.

    these are different from “top down planning” but they do point to ways in which the state can potentially still contribute to growth

  2. I think subsidising invention is not efficient. All you do is fund one group with the hope they will come up with an answer.

    The Ansari X Prize mechanism to me is the way to go, much as the Longitude Prize did in the C18th.

    Even though I am Libertarian, I think if one were to spend £10m, spend it on a prize for achieving, say, net fusion power without harmful radiation, then insure the prize, so only costs £1m (as Ansari did -the USD1m prize only cost them USD100,000). Far better than sinking money into the TOKAMAK. DARPA are using this for their unmanned vehicle races – they know this is a good way to develop generic technology that has no clear path, so the need for plurality.

    So, for things seen as “national interest”, like energy non-dependence or defence, use prizes and let battle commence. Universities would love it, I am sure.

  3. All you do is fund one group with the hope they will come up with an answer.

    erm, what? no, that’s not what you’d do at all. You’d subsidize entrants.

  4. luis enrique said: “for example, it may be possible to subsidize experimentation, which is under supplied by the private market …”

    How has this been determined?

  5. it may be possible to subsidize experimentation

    Where do the subsidies come from in this case?
    What I am thinking is that nearly everyone can experiment, certainly everyone fit enough to be earning a living, so wouldn’t you just be taking taxes from people and giving them money back? Once you add in the dead-weight losses, I don’t see how this is a net gain.

    it may also be possible to identify complementary inputs that are under supplied by the private market for various reasons

    It may also be possible for people to falsely claim that the products they make are undersupplied by the private market for various reasons, and thus get their products subsidised beyond what could be justified, and thus make us all worse off overall.

  6. and:

    There is common sense among economists that business enterprises in advanced economies
    conduct too little R&D. This conviction can be substantiated by noting that the social
    rate of return to business enterprise R&D is far above the private rate of return. The
    empirical productivity literature has identified social rates of return to R&D between
    70 percent and more than 100 percent (e.g., Scherer, 1982; Griliches and Lichtenberg,
    1984). Jones and Williams (1998) argue that, due to methodical shortcomings, these
    estimates should indeed be viewed as lower bounds. Hall (1996) reports that estimates
    of the private rate of return to R&D cluster around 10 percent to 15 percent. It is also
    widely believed that this R&D underinvestment bias is likely to cause a substantial
    loss in economic efficiency and social welfare. Moreover, there is now strong evidence
    showing that fiscal incentives are effective in increasing the economy-wide R&D intensity
    (e.g., Bloom, Griffith and van Reenen, 2002).

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