A Kaleckian Approach to Innovation and Investment Policy in the context of Sustainable Development

1. A Kaleckian Approach to Innovation and Investment Policy in the context of Sustainable Development Jerry Courvisanos Centre for Regional Innovation and Competitiveness and the School of Business Kalecki Seminar Robinson College, Cambridge 1 March 2011

2. Human knowledge and human power meet in one; for where the cause is not known the effect cannot be produced. Nature to be commanded must be obeyed; and that which in contemplation is as the cause is in operation as the rule. Francis Bacon (1620), Novum Organum (Book I, Aphorism III), The Works of Francis Bacon, Volume IV, New York, Elibron Classics, 2000,p. 47

3. Kaleckian Approach: A Political Economy Perspective • Kurt Rothschild (1989) in ‘Political economy or economics?’ identifies Kalecki classic article ‘Political Aspects of Full Employment’ (1943) as a classic example of political economy (PE) • By writing ‘Political Aspects of Innovation’, nailing my mast to PE

4. Definition I: Political Economy Adam Smith: production, buying & selling, and their relations with law, custom & government, impact on distribution of income and wealth – first clear link between capital accumulation and technical ‘progress’ via innovation For this talk: The above, in the context of the institutions of power related to the conduct of innovation and its implementation via investment as reflected by cycles and crises.

5. Political Economy: A Critical Realist Perspective • Rejection of atomistic individual perspective • Alternative perspective is ‘critical realism’ (CR) - where the real social world is an open system of social structures and agents, not a closed system of atoms • Causation not found in event regularity • Found in underlying causal mechanisms inherent in structures and powers which have tendencies that may or not be evident in observable data – real dimension (e.g. stars observed in the sky)

6. Critical Realist view of Causation(Source: Sayer, 2000, p. 15)

7. Definition II: Innovation • Application of knowledge by enterprise in a new form to increase the set of techniques (or processes) & products commercially available in the region or economy specified (new only to firm: imitation which is crucial for diffusion of innovation) • Technological or organisational (human resource, including networks, learning) - cooperative mode • Forms of innovation can dovetail into higher order innovation, becoming increasingly more important to society

8. Forms of Innovation • Continuous incremental (or ‘Kaizen’) • Radical discontinuous based on research and development (R&D) • Technological systems change based on a cluster of innovations • Techno-economic paradigm shift due to major structural change (e.g. thesteam engine, information technology) (Freeman and Perez, 1988)

9. Innovation Dynamics • Traverse: Tracing out a structural change human agency path of affirmative innovation specified and employed in a policy-planning framework (private and/or public) • Observed traverse: Sequence of short-term irreversible events within the structure of production that evolves into structural change • Transformative innovation: Innovation as spur to alter significantly current general purpose technologies (GPTs) path • Evasive innovation: Innovation that supports & enhances current GPTs path, even if the innovation is radical, e.g. (i) hybrid cars, (ii) carbon capture electricity

10. Definition III: Investment • Tangible investment - by enterprise in capital accumulation • Intangible investment - in codified and tacit knowledge, e.g. R&D, design, in-house training, experimental time, organisational architecture, networks • Public investment in knowledge-based infrastructure and support for building innovation capacity, e.g. education and training, internet access, technology parks and incubators, protection and incentives

11. Definition III: Investment • Total investment – all three add up to form aggregate investment cycles • Investment (Juglar) cycles ‘to a considerable extent’ is the proximate cause of business cycles (empirical dimension) • Instability is the outcome: booms and busts. • Long boom encouraged much incremental innovation, lower investment effectiveness from about 2004 (once the boom was under way), feeds boom with financial instability growing towards “Ponzi”

12. Proportion of Investment in the World GDP, 1965-2005Source: Korotayev and Tsirel (2010, p. 42)

13. World Investment Effectiveness 1965-2005Source: Korotayev and Tsirel (2010, p. 42)

14. World GDP Annual Growth Rates 1871-2007 (5-year averages)Source: Korotayev and Tsirel (2010, p. 43)

15. Definition IV: Kaleckian • Michał Kalecki? Polish autodidact - ‘[i]n my view, Kalecki has a strong claim to be regarded as the greatest all-round economist of the twentieth century.’ (Harcourt, 2006, p. 163) • Kaleckian? Based on Marx-Keynes-Kalecki model • PAFE: political economy of full employment policy • Innovation context: profit levels as generating the ability (equity & debt) to invest in capital goods and in innovation knowledge enhancement at macroeconomic level (complements meso-EE) • Investment decision (I) for profits expected – allows extension of innovation (short-term)

16. Kaleckian investment& innovation I = f (animal spirits/degree of confidence) = F (profits, change in profits, gearing ratio, capacity utilisation) assuming no technical progress • Income distribution struggle + effective demand • Capital accumulation is embedded in the endogenous (or induced) innovation generated from within the organisations (via R&D expenditure and knowledge spillovers) • Kalecki calls innovation the most significant ‘development effect’ (long-term)

17. Kaleckian Theory of Investment Three endogenous variables: - profits and the mark-up - financial constraints/gearing (increasing risk) - excess capacity and accumulation Institutional (convention-based) elements to be considered within context specific nation/region: - competition between firms - role of agents in the firm - financial behaviour of firms - role of innovation - role of the state

18. Investment Framework • From Kaleckian perspective, causes of investment is the essential dynamic of business cycles and trend growth • Three aspects to this investment dynamic: • Time lag in ex ante decision (orders) and in ex post implementation (expenditure) • Feedback loop from profits to investment • Instability from exposure to risk and fundamental uncertainty

19. Kaleckian Innovation • Innovations prevent system from settling to a static position, engenders long-run upward trend if rate is above depreciation level • Amplitude of investment cycles creates the long-term trends (interconnected) • Two reasons for cumulative cyclical growth • Increased productivity out of process innovation • New level of demand from product innovation

20. Definition V: Evolutionary • EE - Economic development as an evolutionary process in which innovation working at the micro-level (as technology, knowledge, entrepreneurship)…Schumpeter inspired • Path-dependent trajectory that evolves (changes) over time due to dynamic meso-economic forces of competition (at novelty level, less on price) at industry/sectoral levels…Richard Nelson inspired • Has a vast research literature on innovation • CR: ‘meso’ real dimension of behaviour • Link via CR to Kaleckian approach

21. Evolutionary and Kaleckian Themes Compared

22. Innovation-Investment Framework Evolutionary-Kaleckian approach Dynamic circular flow link b/w innovation () and investment (I)

23. Innovation: Schumpeter & Kalecki • Schumpeter (1939) - clustering of innovation • Rothbarth (1942) - need ‘adaptation mechanism’ that enables clustering to become investment bunching: the innovation impulse • Kalecki provides this mechanism through profit link to investment (in capital stock) • Both S & K identify explicitly the innovation factor that determines the new investment’s ability to capture profit increments • In K, this process is set in historical time

24. Innovation: Schumpeter Vs Kalecki • S: supply-side long-run approach, driven by the entrepreneur (1912) or R&D (1942) • K: demand-side short-run approach where effective demand determines the speed and strength of innovation diffusion • at micro level, based on the ability of firms to invest in innovation out of profits • R: Uncertainty created by innovation process leads to strong dependence of physical investment (equity or debt) on current profits

25. Cycles & Crises: Causal Mechanisms • Bhaduri (1986) ‘systematic contradictory pulls" between pt and p in real time • Non-linear feedback mechanisms from p to I • In expansion phase investment orders build up leads to increase in susceptibility (tension) for an investment downturn, even though pt strong • Because p starts to decline towards top of expansion – capacity & gearing build up (fragile) • RD continues its endogenous innovation push • Monopoly control of innovation systems by conservative entrepreneur-managers intensifies susceptibility – encourages evasive innovation

26. Political Aspects of Innovation • Apply the PAFE approach to innovation [PAI] • With contractionary political trend in force, capitalist need for public stimulation of private investment through technological innovation • Shift economic public policy from direct public investment to stimulate employment; to indirect via innovation policies (replace protection) • Propose to identify three fears with innovation in a boom that result in public innovation policies to sustain evasive innovation, delaying renewal • In contraction, support mounts for significant new innovation initiatives

27. Three Fears with Innovation • Loss of economic control: for incumbents by threat on new entrants - leads to public innovation policies to support incumbents (with IPR and R&D subsidies) that limit innovation • Loss of policy control: as public support of national innovation system becomes distributed broadly - leads to neo-liberalism via privatisation, public-private partnerships, public contracting • Loss of industrial control: with FE-based industrial relations - need ‘flexibility’ with technical change to cut labour costs

28. PAI Cycle Framework • PAI framework tracks innovation over the period of a business cycle • Identifies role government policy plays in innovation in the context of the cycle • Top of expansion - evasive innovation reinforces prior innovation with relatively lower investment– public support policies • Contraction: little innovation despite much patenting and R&D activity – public stimulatory package

29. Implications of PAI • PBC-political trend has led public economic policy to be limited to pro-business strategy: tax cuts, armaments, R&D, entrepreneurship support • All aimed to support private accumulation process directly • Empirical evidence on the success of this pro-business strategy is mixed, with lower working conditions, significant monopoly power and much downsizing/outsourcing to small business • Much rent-seeking behaviour in the cyclical PAI process, constraining transformative innovation

30. Current GPTs Technology Path

31. Current GPTs Technology Path: Peak Oil

34. Definition VI: Sustainable Development • ‘Bruntland Report’ (1987) - economic development which ‘…meets the needs of the present without compromising the ability of future generations to meet their own needs” • Vercelli (1998) specifies a viable policy definition - economic development can be ‘…considered sustainable only when future generations are guaranteed a set of options at least as wide as that possessed by the current generation’… • Strong sustainability definition

35. Sustainable Development :Challenge and Opportunities-strategy required by the state to counter PAI

36. Examples of PAI preventing Sustainable Development • Collapse of Copenhagen Summit 2009 - inability to agree on implementing greenhouse gas pricing of ‘free good’ (Courvisanos et al., 2009) • Slow take up of renewable energy in both stationary and transport sectors (see film “Who Killed the Electric Car?”, current PhD study on Barriers to Australian Stationary Renewable Energy) • Current large project team studying the New Zealand and Australian Dairy industries, control by Fonterra preventing transformative SD options from small farmers & producers

37. Sustainable Development Framework- four elements of innovation policy • Agreed ecological sustainable rules (or conventions)…precautionary principle • Perspective planning – flexible, local-based democratic motivation and local voluntary conformity towards regional ecologically appropriate goals…social learning • Cumulative effective demand with strong local niche market share for environmental-based goods & services…stimulus support • Investment and finance planning underpinning above

38. Sustainable Development Investment Planning Criteria • Investment planning and infrastructure underpinning an innovation strategy • Resource-saving on new capital stock – low real depreciation and high utilisation of productive capacity • Iterative planning with “bottom-up” regional monitoring and evaluation (based in social learning)

39. Sustainable Development Implementation Strategy Instrumental Analysis (Adolph Lowe) Begin with pre-analytic economia vision: • elicit public motivation and conformity at local level through regional networks • working backwards to develop an investment framework • incorporating an innovation policy along a ecologically sustainable path

40. Sustainable Development Implementation Strategy Need for Perspective Planning (Kaleckian) • Iterative planning with bounded rationality • Procedural (or designing) rationality in the context of the “precautionary principle” – reject optimal rationality approach • Goal of sustainable development: strong sustainability - guarantee future generations at least a set of options as wide as current generation possesses

47. Bensalem

49. The Sixth Wave: How to succeed in a resource-limited world “Bold, timely and inspiring … this book could change your thinking about innovation and the future” – Dr Geoff Garrett, CSIRO Chief Executive “Moody, from CSIRO, and science writer Nogrady assert that this latest wave will be about natural resources, human resources and information. Responding to the challenges of sustainability and rapid population growth, humanity will finally break away from resource dependence.” – What’s New in Book Reviews, Boss Magazine (Financial Review).

50. Thank you for listeningQuestions and comments please