Are we being stupid? – Part 3: Ideas on how to be less stupid.

In the previous parts of this blog I have talked about two things: firstly, about how most advanced economies are heavily dependent on innovation for sustained growth and, secondly, I’ve presented some macroeconomic figures and anecdotal evidence regarding the importance of innovation in Europe. In case I was not explicit enough throughout this series: I don’t believe Europe is doing enough to be and become the dynamic and innovative economic zone we could be. What do I think needs to change?

I think public and private expenditure on R&D and higher education is important, but I also believe that how much good it does depends a lot on what we use this money for and that some of our problems are structural: There are two points I want to stress in particular:

  1. Reforming our educational system

I believe that we need new concepts for education. Our education system plays a fundamental role in shaping the citizens that determine the (political) future of our nations and in forming the work force that ensures that our economies and societies remain dynamic and innovative and create the employment needed. However, this is the 21st century and yet, we are relying on a schooling system that largely stems from the industrialization era! We want people to generate innovation, to think out of the box and to tackle economic and social issues? We want them to learn, because they want to and not because we are legally forcing them to sit in school until they turn 15? Well, then maybe it is time we adapt the way we teach and also what we teach in our schools to modern life, families and children! (sounds radical rather than pragmatic, but sometimes incremental is just not enough)

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ZIB 2 mit Schwerpunkt Wirtschaftsstandort Österreich/ Europa

Passend zur Blog-Reihe “Are we being stupid?” gab es gestern in der ZIB 2 eine Diskussion über den Wirtschaftsstandort Österreich/ Europa und die tatsächliche und mögliche Abwanderung von Industrieunternehmen.

Are we being stupid? – Part 2: Strategic Foresight

In part 1 we have established that growth in the West relies on innovation and technology much more than growth in developing countries. We are the ones at the technology frontier, so if we want to grow, we need to be more innovative. In this blog I’ll mainly cover government policies regarding R&D and higher education, focusing a lot on expenditure (1). If you’re interested in broader measures, you could start here, with the Innovation Union Scoreboard 2014.

For those of you who like the big numbers, let me introduce you to GERD. GERD is the Gross Domestic Expenditure on R&D, which includes expenditure by business enterprises, governments and foreigners. In 2010 GERD stood at 245 673 million in absolute terms in the EU-27. Given that this does not really tell us much, GERD is normally calculated relative to GDP. Between 2000 and 2010 the ratio has roughly been flat at around 1.80-2% of GDP. This means that internationally the EU-27 figures are below those in other countries: Japan (3.45%), US (2.80%).2 There are also substantial differences within the EU. The highest expenditures in 2010 were reported from (how could it be different) Finland (3.87 %), Sweden (3.42 %) and Denmark (3.06 %).

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Are we being stupid? – Part 1: Growth Economics 101

Over the past couple of months a number of things have been happening, which made me want to start writing a blog. So, when I finally sat down and started writing on one of them I realised that the topics are all linked and can be wonderfully put together under one question: „Are we being stupid?“ If I had to give this series a more technical title then it would be something along the lines of „Are Europe’s efforts to stay competitive appropriate to ensure the future growth of the region“, but, let’s face it, „are we being stupid?“ is a much more catchy title and regarding some of the things I’ll be talking about also way more appropriate. I wanted to jump right in, but some of you may have very little background in economics or economic growth, so I’ll use part I to put the whole debate into context (by heavily oversimplifying things!!!). By the end of this blog you should know why Western economies are innovation-driven and why that matters. In part 2 we’re getting more to the core of the issue about how innovative Europe is in comparison to other developed countries. Part 3 is a proposal for the changes I consider necessary. Let’s get started…

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New structural economics – A framework for a growth miracle

Once upon a time there were a number of Asian countries. They had scarce natural resources, hardly any notable capital accumulation, were heavily overpopulated and most of their people lived in extreme poverty. In fact, the situation of these Asian countries was so miserable, that development economists were betting on South America and Africa for rapid development. But then, one day, came the economic growth fairy and blessed the Asian countries with decade-long, (close to) double-digit growth rates and all was good and everyone was happy – except for the development economists, who didn’t know how this could possibly have happened. And after decades of research, … we still don’t really know. However, there are some new interesting approaches at the frontier of development economics. Justin Yifu Lin’s idea of the new structural economics is one of the ground-breaking ideas that shed some light on how economies develop. In this blog I will outline the main ideas and some personal points of criticism, but if you’re interested in more, you can look at the following paper or, if you need a more integrated perspective, at his newest book: Demystifying the Chinese Economy. Both are highly recommended readings.

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Measuring Development II – Living Standards and GDP per capita

In the first blog entry I wrote about the meaning of the word “development” and it led us to an interesting discussion of whether our definitions of development are normative or positive. In the second part of the “Measuring Development” series I would like to talk a bit about an indicator of development: living standards.

Living standards are obviously of utmost importance to economics. Sen (1988, p.11), for instance, points out that “the enhancement of living conditions must clearly be an essential – if not the essential object of the entire economic exercise”. Clearly, we can mean different things when we talk about living standards. To start with a rather simple differentiation, I distinguish between material living standards (MLS) and a broader notion of living conditions (LC), which includes aspects of life that go beyond the material component (i.e. education, health, job satisfaction,… ). The following paragraphs discuss whether GDP per capita successfully measures MLS.

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A Financial Times Special Report and Some Thoughts on the Ineffectiveness of Monetary Policy

Let me start this by saying that I am reluctant to post about monetary policy. I read Florian’s posts with great interest and some reverence, due to his enormous knowledge on the issue. However, at the moment there is an interesting special report series going on in the Financial Times Video section. John Authers is interviewing a number of interesting people and showing different charts that support his hypothesis that the current US “recovery” is the direct result of monetary policy and, more importantly, completely unstable. I found his figures so interesting, that I decided to share them with you. Unfortunately the ft content is restricted to subscribers (you could get a four weeks for 4€ digital test-subscription though), which is why I’ll give you a brief summary of what he is showing. [Edit: I just saw that the ft has made the videos available on youtube. I added the links below]

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Measuring Development I – On the impossibility of being developed

There have been some recent changes on the blog and so it seems like a good time to become a bit more active as well. I’m a former KF student who left Graz a while ago and I’m now in the final year of a MSc program that specializes on Economic Development and Growth. This will also be the focus of my blog entries.

On the impossibility of being developed

As a profession we, economists, like clear concepts. When we use a term such as “market”, “capital” or “inflation” we tend to define these terms to get a clear understanding of what we are talking about. Studying a masters in development economics I’ve started to realize that the term “development” has become such a common word in our everyday language that hardly anybody pauses to think about what we actually mean by it.

This blog entry is the first one of a series I am going to write over the next couple of weeks that will deal with the questions of what development is and how we can measure it over time and space. These are obviously important questions, because without a clear idea of what we mean by “development”, “progress” and how we can measure and compare them, most of the things we can say in development economics become quite meaningless.1 In this first part of the series, I focus on discussing “development” and its relation to “progress”.

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Conspicuous Consumption and Poverty

For something new, here’s a guest post by Katharina Allinger, currently studying at the University of Warwick. Developmental economics is definitely something I would want to cover more on this blog.

The first time I heard the term „conspicuous consumption“ was in a lecture given by Omer Moav at Warwick. He was presenting one of his papers on the topic.  For the non-native speakers among you, the term „conspicuous consumption“ describes the purchase of a good or service that is mainly motivated by showing off one’s wealth. We could take the example of buying a car. Maybe I need the car, because my home and my work place are far away from each other and so I determine what characteristics are important and buy a sensibly priced car to drive to work everyday. On the other hand, I might already have a car, but I want to show off to my friends that I earn a lot of money and therefore buy a luxurious and expensive sports car. The latter would be a definite case of conspicuous consumption.

While this is definitely an interesting topic related to developed countries and maybe elites in poor countries (see article below) a lot of research recently focused on „conspicuous consumption“  of „the poor“. (I’m putting „the poor“ in brackets because certain academics tend to like to talk about „the poor“ as if they were some kind of different and mysterious species of humans) Researchers have put a lot of effort into showing that “the poor” do not spend their money rationally. Instead of spending everything they have on food or health care or the education of their children they ACTUALLY go to weddings and festivals. And drink alcohol. In BARS! – How conspicuous! To go to a bar to show off that you can afford having a beer out instead of just having a beer at home…

Maybe some of you have the reaction I was hoping for. How did we get from sports cars to beers?

What exactly is “conspicuous” about having a beer with friends? Isn’t that just “normal” consumption? Of course, what constitutes a „luxury“ depends on your income, but at the same time, we shouldn’t DEFINE people by their income. Taking a more psychology or sociology based view of human beings, there is nothing weird about the poor not spending all their income on things with high future return (like education or a new agricultural machine). Like everyone else, poor people also want to enjoy life a little bit – and go to a bar to have drink. Should we really worry about this and try to encourage them to save more and enjoy less? Personally, I doubt that this is a very great approach to development. (Please note, that I’m not trying to say that we should not help the poor to save more and more effectively at all!)

I also think that, except for some very extreme cases like stories about a poor Indian guy winning money in the lottery and spending it all on a helicopter ride, we should be very careful when applying the term „conspicuous consumption“ to poor countries and people.

In his article Why Pay More? Peter Singer  writes about the origins of the term „conspicuous consumption“:

 “Thorstein Veblen knew the answer. In his classic The Theory of the Leisure Classpublished in 1899, he argued that once the basis of social status became wealth itself – rather than, say, wisdom, knowledge, moral integrity, or skill in battle – the rich needed to find ways of spending money that had no other objective than the display of wealth itself. He termed this “conspicuous consumption.”

Thus, unless we want to argue that for poor households the „basis of social status is wealth itself“ we should maybe think twice about applying Thorstein Veblen’s concept to „the poor“.

If you are curious about a very interesting and appropriate use of the phrase, please read Peter Singer’s article, which deals with corruption among Ukrainian officials.