Friday, April 03, 2009

Innovation and current economic crisis (II)

Schumpeter said ,behind every economic crisis ,there is also historical forces explaining them , such that a better understanding of its causes, requires models more complex than those based on a partial equilibrium , which do not includes qualitative variables . Thus, in the current situation, of global economic crisis , the historical factor it might be related to the anticipated transition from the post industrial economies, to the global economy. Alvin Toffler ,Lester Thurow Robert Reich ,Guy Sorman,Paul Krugman , explained quite well where the post industrial economy was moving to. However perhaps the missing point (as far as I can recall) ,was the fact that the risk tolerance were different ,as the global economy replaced the post industrial economy order. Therefore a key difference between them ,aside from the market size, and the regulations requirement , is the risk preferences underlying market decisions . While post industrial economies had an higher risk propensity, global economy has a lower risk propensity. Just to mention three areas where these differences stand quite clear, and has moved the global economy away from its initial equlibrium :
a.- Environment protection .The post industrial economy did not give too much attention to the Kyoto protocol, and others call for better environment polices, quite the opposite to the importance that global warming has on the global economy agenda a new arrangement for global environment protection.-
b.- Automobile industry technological profile. The collapse of traditional automobile industry, goes side by side with the old standard for environment protection, as a constraint for technological purposes. As the constraint has changed at the global scale, so it changed the technological profile, which the Big three were not sufficiently prepared for.-
c.- Global Financial flows. The current global economic crisis is the result of a perverse mix of variables, policies and events ,but it has a single element behind : The preference for risky behaviour ,essential to the traditional post industrial economy, which is the path the western industrialized economies, chose to make its way to the era of economic prosperity in the XX century. There was not constraint on energy sources, human capital resources ,raw material resources, and environment resources. The global economy which means the virtuous mix of different economic policies, to support global markets, take unregulated financial flows , as a threat for growth rather than a blessing . The argument that such flows act like a filter for bad domestic polices design, goes against empirical evidence since the late nineties ,which shows that bad economic policies effects, might stay quite a while with unregulated financial flows, without preventing its correction .-
Aside form these historical factors ,there are industrial variables related to business decisions to innovate production process , within the framework of the so called “creative destruction” ,which imply a downward shift in the production fucntion. Economic cycles are related to specific development on the industry , such that when a new technology is applied ,it destroy the old one; and it allow the arising of a new cycle. initiating the next cycle. The implication for policy makers, goes on the side of not interfering these process ,but supporting them with polices aimed at keeping the right incentives working within a flexible framework.-