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Creating a Learning Society

Creating a Learning Society: A New Approach to Growth, Development, and Social Progress

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    Creating a Learning Society
    Book Description:

    It has long been recognized that most standard of living increases are associated with advances in technology, not the accumulation of capital. Yet it has also become clear that what truly separates developed from less developed countries is not just a gap in resources or output but a gap in knowledge. In fact, the pace at which developing countries grow is largely determined by the pace at which they close that gap.

    Therefore, how countries learn and become more productive is key to understanding how they grow and develop, especially over the long term. InCreating a Learning Society, Joseph E. Stiglitz and Bruce C. Greenwald spell out the implications of this insight for both economic theory and policy. Taking as a starting point Kenneth J. Arrow's 1962 paper "Learning by Doing," they explain why the production of knowledge differs from that of other goods and why market economies alone are typically not efficient in the production and transmission of knowledge. Closing knowledge gaps, or helping laggards learn, is central to growth and development.

    Combining technical economic analysis with accessible prose, Stiglitz and Greenwald provide new models of "endogenous growth," upending the received thinking about global policy and trade regimes. They show how well-designed government trade and industrial policies can help create a learning society; explain how poorly designed intellectual property regimes can retard learning; demonstrate how virtually every government policy has effects, both positive and negative, on learning; and they argue that policymakers need to be cognizant of these effects. They provocatively show why many standard policy prescriptions, especially associated with "neoliberal" doctrines focusing on static resource allocations, impede learning and explain why free trade may lead to stagnation, while broad based industrial protection and exchange rate interventions may bring benefits, not just to the industrial sector, but to the entire economy.

    The volume concludes with brief commentaries from Philippe Aghion and Michael Woodford, as well as from Nobel Laureates Kenneth J. Arrow and Robert M. Solow.

    eISBN: 978-0-231-52554-1
    Subjects: Economics, Business

Table of Contents

  1. Front Matter
    (pp. I-IV)
  2. Table of Contents
    (pp. V-VIII)
  3. Preface
    (pp. IX-XII)
    Joseph E. Stiglitz
  4. Acknowledgments
    (pp. XIII-XVI)
    Joseph Stiglitz
  5. Introduction
    (pp. 1-10)

    IT WAS a real pleasure for us to deliver the First Annual Kenneth J. Arrow Lecture at Columbia University—to honor our teacher, someone who has had a lifelong influence on our thinking, as he has had on an entire generation of economists.

    There is, in fact, a sense in which everyone in our generation was a student of Kenneth Arrow—even those who were not fortunate enough to take his class. His ideas influenced us, as did his style of research and his breadth of vision. He is a true model of a scientist. He could provide the definitive...

  6. PART ONE Creating a Learning Society:: A New Approach to Growth, Development, and Social Progress: Basic Concepts

    • CHAPTER ONE The Learning Revolution
      (pp. 13-28)

      FROM ROMAN times, when the first data on per-capita output are available, until 1800, average human standards of living increased only imperceptibly if at all (see, e.g., Maddison 2001). Consumption for the great majority of human beings consisted predominantly of food, and food was largely limited to staples—rice, wheat, and other grains. Housing entailed barnlike living conditions with no privacy, and climate control consisted only of necessary heat in winter. Clothing was utilitarian and rarely involved more than single outfits with the seasonal addition of overclothes. Medical care was almost nonexistent. Travel was rare, largely local, difficult, and uncomfortable....

    • CHAPTER TWO On the Importance of Learning
      (pp. 29-46)

      THE CENTRAL thesis advanced in chapter 1 was that what distinguishes the modern era of the last two hundred years from the millennia that preceded islearning—we have learned how to increase productivity, the outputs that can be produced with any inputs. There are two aspects of learning that we can distinguish: an improvement in best practices, reflected in increases in productivity of firms that marshal all available knowledge and technology, and improvements in the productivity of firms as they catch up to best practices. In fact, the distinction may be somewhat artificial; there may be no firm that...

    • CHAPTER THREE A Learning Economy
      (pp. 47-87)

      A “LEARNING society” perspective takes a very different view of growth and development strategies from the standard neoclassical approach in several respects. It begins, as the last chapter explained, by focusing on the knowledge embedded in individuals, firms, and in society more generally—and how that knowledge changes, is transmitted, and is put to use. It recognizes that the state of knowledge of each individual in the economy can be (and typically is) markedly different. Knowledge, like information, isasymmetric. Each individual knows things that others don’t. From the perspective of the individual, an advance in his or her knowledge...

    • CHAPTER FOUR Creating a Learning Firm and a Learning Environment
      (pp. 88-100)

      THE PREVIOUS chapter described many of the ingredients of a “learning society”: what is to be learned, how learning occurs, and the central determinants of learning, including the role played by learning spillovers and appropriability. Among our central objectives was to describe some of the components of an economic architecture (including all the attendant institutions and laws, such as intellectual property rights) which would best facilitate learning.

      This chapter focuses on two critical aspects of this learning architecture: creating a learning firm and a learning macro-environment.

      A subproblem within the systemic problem of creating a learning economy is the design...

    • CHAPTER FIVE Market Structure, Welfare, and Learning
      (pp. 101-130)

      ADVOCATES OF free market economies often stress the virtues of a market economy in promoting innovation. Remarkably, in spite of the constant praise of the market system’s “innovativeness,” there appear to be no general theorems on the efficiency of markets with respect to the pace and direction of innovation.

      Joseph Schumpeter (1912, 1943), who argued for the centrality of innovation, cast aspersions on standard economic theory and its policy prescriptions, which had lauded the virtues of competition and castigated monopolies as the “supreme evil.”¹ To Schumpeter, not only was the heart of capitalism innovation, but innovation required some degree of...

    • CHAPTER SIX The Welfare Economics of Schumpeterian Competition
      (pp. 131-262)

      SCHUMPETER AND his latter-day followers were clearly more optimistic about the effectiveness of “Schumpeterian” competition—that competition for the market could replace competition in the market to ensure economic efficiency—than the analysis of chapter 5 would suggest. We have seen that dominant market power can persist and that the threat of competition may lead to neither high levels of innovation or low levels of profits.

      As we remarked at the beginning of the last chapter, there are no general proofs of the efficiency of the market economy in producing innovation. And as we commented in chapter 1, the dominant...

  7. PART TWO Analytics

    • CHAPTER SEVEN Learning in a Closed Economy—the Basic Model
      (pp. 265-285)

      WHILE ONE of the major impetuses for our writing this book was to develop theinfant-economy argument for protection—which claims, in part, that some degree of protection can facilitate learning—learning is important in all economies and societies, including “closed” economies. To understand fully the role of learning in an open economy, one has to understand how public policy can be used to enhance learning even in a closed economy.

      When there is learning by doing, today’s production has benefits for the future. We must ask whether firms will take that into account, and what the consequences are of...

    • CHAPTER EIGHT A Two-Period, N-Good Model with Endogenous Labor Supply
      (pp. 286-309)

      THE PREVIOUS chapter used a simple two-sector model to explain why markets by themselves are not in general efficient: if markets are competitive, there will be underproduction in the sector generating learning externalities, and thus less learning and innovation than is socially efficient. If the learning sector is monopolistic, monopoly power will result in worsening the problem of underproduction; but the fact that the monopolist internalizes the within-sector learning externality will lead to increased production. Which of these two effects predominates depends on an array of parameters, including the elasticity of demand in the learning sector, the discount factor, and...

    • CHAPTER NINE Learning with Monopolistic Competition
      (pp. 310-318)

      EARLIER CHAPTERS explained the dilemma facing learning economies: While in competitive markets, there are likely to be large learning spillovers, and thus underinvestment in R & D, in models with monopoly or monopolistic competition, the extent of learning spillovers may be reduced—the learning externalities are more internalized. Thus, a monopolist will produce beyond the point of maximizing marginal revenue—but monopoly itself can lead to lower welfare from reduced output, and the reduced output itself reduces the incentive to innovate (relative to what it would have been in the first best). Our earlier discussion showed how, in some very simplified...

    • CHAPTER TEN Long-Term Growth and Innovation
      (pp. 319-330)

      FINITE-PERIOD MODELS, such as that which we have employed in the previous two chapters, have gone out of fashion in economics in favor of infinite-period models. To make such models tractable, however, requires very special parameterizations, so that in practice neither model is really more general than the other. If there is to be a steady state with learning, since the output per unit of labor is increasing steadily, for the labor supply to any sector to be constant, either (a) the labor supply must be inelastic and relative prices must be constant or (b) utility of consumption must be...

    • CHAPTER ELEVEN The Infant-Economy Argument for Protection: Trade Policy in a Learning Environment
      (pp. 331-366)

      CONVENTIONAL ECONOMIC wisdom is that free trade enhances economic efficiency and this promotes growth. Indeed, there are few propositions in economics about which there is greater consensus among conventional economists than those which assert the benefits of free trade.1,2

      However, in the “learning” context upon which we focus here, spill-overs (both technological and institutional) within countries but across industries may be fundamental to the process of growth. As we have already noted, there will be trade-offs between static (in)efficiencies and dynamic benefits. In the last set of chapters, we saw how production in earlier periods (especially in sectors with high...

  8. PART THREE Policies for a Learning Society

    • CHAPTER TWELVE The Role of Industrial and Trade Policy in Creating a Learning Society
      (pp. 369-400)

      INDUSTRIAL POLICIES—meaning policies by which governments attempt to shape the structure of the economy, including the choice of technique and the sectoral allocation of the economy—are back in fashion, and rightly so. The major insight of welfare economics of the past fifty years is that markets by themselves in general do not result in (constrained) Pareto efficient outcomes (Greenwald and Stiglitz 1986).

      By now, there is a rich catalog of market failures, circumstances in which the markets may produce too little of some commodity or another, too much of another, or may result in too little employment, and...

    • CHAPTER THIRTEEN Financial Policy and Creating a Learning Society
      (pp. 401-413)

      IF THERE are powerful arguments for broad barriers to imported industrial goods, those apply equally to restrictions on capital movements. Capital and financial serviceswithina country can support learning; in contrast, financial services provided by foreigners can lead to a redirection of investment and learningout of the country, impeding the creation of a learning society. By the same token, the availability within a country of low-cost capital can encourage learning investments in the country. We saw in earlier chapters that complements to learning activities ought to be encouraged, and lowering the domestic cost of capital (by restricting capital...

    • CHAPTER FOURTEEN Macroeconomic and Investment Policies for a Learning Society
      (pp. 414-428)

      CHAPTER 4 explained the key reasons that macroeconomic volatility is bad for a learning economy, and accordingly, why policies which exposed countries to more volatility can have adverse effects on learning—quite apart from whatever other positive or negative effects are associated with such policies.

      This chapter looks at four broad issues regarding how government macroeconomic and investment policies can help create a learning economy. The first looks at financial and capital market liberalization. The last chapter explained why such policies may not be desirable, as a result of their impact on thestructureof the economy—they change the...

    • CHAPTER FIFTEEN Intellectual Property
      (pp. 429-456)

      INTELLECTUAL PROPERTY provides a final application of the general ideas we have attempted to develop in this book. Intellectual property rights (IPR) are supposed to provide incentives to encourage innovation. As such, a discussion of IPR fits squarely into any analysis of policies centered on creating a learning society. Our concern here is that the provisions of the intellectual property regime that has become dominant around the world (reflected in the TRIPS provisions of the Uruguay Round global trade agreement) do not maximize learning. This was evident even at the moment of their creation. They were explicitly not driven by...

    • CHAPTER SIXTEEN Social Transformation and the Creation of a Learning Society
      (pp. 457-472)

      WHILE WE have been discussing theeconomicsof learning and creating a learning economy, that subject cannot be separated from broader aspects of societal transformation. Much of this book, for instance, has focused on policies that change sectoral composition in ways that would promote learning. But at the root of success is changing mindsets (see Stiglitz 1998c). Change has to be viewed as both possible and desirable, and there has to be an understanding that underneath change islearning.

      In many ways, understanding how to change mindsets is more difficult than coming to an understanding of what economic policies would...

    • CHAPTER SEVENTEEN Concluding Remarks
      (pp. 473-482)

      IT HAS been more than sixty years since our teacher Robert Solow showed persuasively that most of the increases in standards of living were due to technological progress and learning, and since Kenneth Arrow began the analysis of endogenous learning. If we were to evaluate the impact of their work by the number of citations—and even more, on the scholarly work that their papers inspired—the influence of their path-breaking insights has been staggering.

      But at another level, the impact on the evolution of economics has been disappointing. True, everyone speaks today of the innovation economy or the knowledge...

  9. PART FOUR Commentary and Afterword

    • CHAPTER EIGHTEEN Introductory Remarks for the First Annual Arrow Lecture
      (pp. 485-487)
      MICHAEL WOODFORD and John Bates Clark

      THE INTENTION of this lecture series is to showcase new ideas in economics. It is named in honor of Kenneth Arrow, one of the most distinguished alumni of our PhD program in economics. Ken Arrow is, of course, one of the founders of modern economic theory, with fundamental contributions in many areas. When the Noble Prize in Economic Sciences was established several decades ago, Ken was one of the first people to be honored with the new prize, and I think this was hardly a surprise. One of his groundbreaking accomplishments, of which we are especially proud at Columbia, was...

    • CHAPTER NINETEEN Further Considerations
      (pp. 488-491)

      Joseph Stiglitz: The main point of this lecture is to pose the question that Ken emphasizes (in chapter 22), which is, How do we create societies that are better at learning? How do we solve these problems of moving people, firms, and societies to the “frontier”? Maximizing the value of output in the short run, as is conventional in static analysis, does not necessarily optimize learning, does not necessarily move firms or countries rapidly to the frontier, and therefore does not necessarily maximize growth or societal welfare. We use tariffs as a way of trying to dramatize this point, but...

    • CHAPTER TWENTY Commentary: The Case for Industrial Policy
      (pp. 492-498)
      PHILIPPE AGHION and Robert C. Waggoner

      USUALLY IN such times, I would say it is a great honor to be here, but in this case the wordintimidatingmay be equally appropriate: to be asked to discuss a paper by Joe stiglitz and Bruce Greenwald, in the first Arrow Lecture at Columbia University, with Ken Arrow next to me, and with the other discussant being Bob Solow!

      The task was all the more challenging that there was no paper to read in advance, no slides. I am just told that I will receive a 3:00 a.m. phone call at some point, and Joe will be on...

    • CHAPTER TWENTY-ONE Commentary
      (pp. 499-503)

      THERE WILL be an inevitable change of pace because, unlike Philippe Aghion, I am not the Energizer Bunny. Even when I was Philippe’s age, I was not the Energizer Bunny. I do share one handicap with Philippe, perhaps a little bit worse. I too had a three- or four-minute conversation with Joe about the content of the lecture I would be discussing, as a result of which I was totally misled. I thought that the focus would be on industrial policy aimed specifically at sectors that are fast learners or big “spillers over” if that is a noun. That may...

    • CHAPTER TWENTY-TWO Commentary
      (pp. 504-508)

      THIS IS a very moving occasion. I have been identified as a product of Columbia University. I started my university studies many years ago in the fall of 1940, and I don’t know how many generations of professors have come and gone since then. There are obviously probably not many people in this room who were born at that point, except Bob. [Robert solow interjects, “I was a freshman in September 1940.”]

      But this is not the time for reminiscing, because what was taught under the heading of economics was so very, very different from what is taught today in...

  10. Afterword: Rethinking Industrial Policy
    (pp. 509-522)
    PHILIPPE AGHION and Robert C. Waggoner

    INDUSTRIAL POLICIES were implemented after World War II in a number of countries, with the purpose of promoting new infant industries and of protecting local traditional activities against competition by products from more advanced foreign countries. Thus, several Latin American countries advocated import substitution policies whereby local industries would more fully benefit from domestic demand. East Asian countries like Korea and Japan, rather than advocate import substitution policies, favored export promotion, which was achieved partly through tariffs and nontariff barriers and partly through maintaining undervalued exchange rates. And in Europe, France engaged in a so-called colbertist policy of targeted subsidies...

  11. Notes
    (pp. 523-586)
  12. References
    (pp. 587-624)
  13. Notes on Contributors
    (pp. 625-628)
  14. Index
    (pp. 629-660)