Can Innovation Solve the Economic Crisis?
Major shock has caused turbulence within the once stable European Union, a recession continues to create a decline in economic activity across the United States, and militarism is leaving immense debts that only create a larger burden around the globe. These factors point to the creation of an economic crisis where major financial institutions are losing portions of their value. Fewer resources are leading to greater debt and causing increasing resistance to the capitalistic system that Karl Marx was such a critic and admirer of. While economist John Maynard Keynes had nothing positive to say about Joseph Schumpeter's idea of creative destruction, his cycle of innovation may be able to solve the current economic crisis.
Amidst economic downturn, the general business cycle will experience considerable decline. This affects all companies, industries, and countries in some way, as macroeconomic shock leads to a drop in domestic and export demand. The result is the decision to continue business as usual, reduce costs, or search for new opportunities.
This search for new opportunities is what Chris Freeman and the Sussex School have coined as a way out. It is Freeman's belief that Schumpeter's idea of creative destruction and emerging technologies can lead to a collection of new clusters of innovation, which help the economy regain prosperity. Not only does this contradict Keynes’ belief that nothing good can come from creative destruction, but it also illustrates a process that allows some new businesses to interject their own expense in an attempt to create such innovation. These new businesses and competition will lead to financial and technological innovation.
Technological innovation is a process that does not happen overnight, but may be in development for decades during an economic crisis or the result of a business cycle. A crisis creates a high mobility of finances and allows funds to be reallocated from established technologies to emerging ones. As new innovators step into the forefront of the economic arena, confrontation occurs between previous leaders and those that are attempting to take control. As economist Carlota Perez has argued, “from the confrontation between them will emerge the novel leaders and the industries that will serve as engines of growth of the economy,” (Perez 2009, page 781. )This process results in a techno-economic paradigm that can lead to increased productivity, more efficient equipment, and better organizational models. Additionally, there is a much wider market and outreach for the new technologies.
Throughout this process, financial innovation is working behind the scenes to pioneer the new techno-paradigm. As new leaders emerge, the financial sector invents and diffuses new ways to acquire capital. In part, this new capital is acquired through new investors that are able to leverage and spread risk within this paradigm. Within this innovation, positive results can be seen in regards to the domestic and export demands for this new product, thus indicating that the economic demand or desire may have been somewhat related to the economic decline.
While periods of financial and technological innovation have been observed cyclically throughout the past two centuries, Keynes, an economist whose ideas have been used to form Keynesian economics, held fast to the belief that nothing good could come from “creative destruction. ”One such example is the liberalization from the 1980s and 1990s, which boosted competition amongst companies, and created increased choices and flexibility for consumers, all while increasing the financial development. But certain flaws remained hidden. These flaws led to negative results, including misrepresented products. Keynes also thought that the desires of new investors with available capital would spawn more delinquencies, bankruptcies, and inadequately managed products. Additionally, these new innovators may not effectively know how to manage the risks that they are taking in an attempt to become successful entrepreneurs. Keynes believed that economic crisis could not rely on innovation, but needed to stimulate the economy using alternative methods, such as increased government investment and the reduction of interest rates.
The recent economic downturn has prompted the United Kingdom to take actions mimicking those outlined by Keynes, asserting that innovation may not be the solution to economic crisis. Less than four years ago, in 2008, the Bank of England slashed interest rates to 4. 5%. This reduction came after the British government announced a plan to rescue Britain's banking sector to the tune of £500bn in government assistance.
Similarly, in 2008, the United States government participated in the largest bailout of any government. Officially known as the Emergency Economic Stabilization Act of 2008, the United States government supplied over $700 billion dollars to assist with risky and nonperforming debt, including mortgages, auto loans, college loans, and other ambiguous types of debt. The largest bailout in history, this is one of six major times that the government has attempted to boost the economy through such activity. Others include the Great Depression, where unemployment was at 25%. Additionally, government assistance was used in the Savings and Loan bailout of 1989; when Bear Stearns collapsed; and to assist with AIG, an insurance company that is recognizable around the globe. Also, in 2008 the United States government, committed up to $200 billion dollars to save mortgage giants Fannie Mae and Freddie Mac.
Joseph Schumpeter and John Maynard Keynes had two very different views regarding a solution to the economic crisis. Both viewed the economic crisis as inevitable and the stimulation of the economy as necessary, but that is where their agreement ends. Schumpeter believed that people's disgruntlement and desire for more would lead them to finding new ways, new approaches, and thus new innovations that would spawn economic activity, resulting in strengthened economic activity. Contrary, to this, Keynes thought that ending an economic crisis would not come through innovation, but rather through government interventions.
When looking back, it seems that neither Schumpeter’s innovation nor Keynesian models offers a perfect solution, but that the true key to solving economic crisis lies in a combination of the two. There are times that the actions of the government to reduce interest rates and provide government investments is ideal, while at other times it is periods of technological and financial innovation that propel economies out of crisis and into significant economic surges.
Chris Freeman and the Sussex School have expressed viewpoints that:
