This article was first published in Aenorm 89
The general consensus between economists, politicians and many others is that economic development, and specifically economic growth, are caused by innovation. Joseph Schumpeter (1883-1950) was one of the first economists to profoundly analyse innovation. He introduced the term ‘creative destruction’.1 This term signifies the process of constant technical innovation, causing old production techniques and products to be traded for better and cheaper alternatives. Successful innovations must be combined with temporary market power, or else R&D is not cost-effective, and as a consequence cause the rise and fall of companies. The government can play an important role in this process by stimulating innovations, but Schumpeter did not believe in aimlessly pumping money into an economy.2 Schumpeter did see a role for government in stimulating entrepreneurship. He believed that the entrepreneurial spirit keeps the economy going. In his later work the focus shifted more and more to the influence of large companies: they possess the means for research and development of new product in ever more expensive times.
The Dutch government tries to stimulate innovation by encouraging free entrepreneurship, aiming investments at top sectors and building the infrastructure of innovation: education. The enormous growth in the number of small businesses can be seen as a success, but it is very much the question whether small businesses have any relation to innovation. Specifically aimed investments are mostly not very cost-effective. It is very difficult to estimate which sectors will be important in economic development in the near future. An example with regard to the Netherlands is how the government mishandled the wind energy industry. This sector is controlled by Denmark and Germany, despite the historical importance of wind in the Netherlands. Another anecdotal piece of evidence is found in the Back to the Future films of the 80s, of which the second part took place in our time. The complete lack of mobile phones is remarkable, to say the least. The stormy development of this industry wasn’t even predictable at the time when the first mobile phones were already developed! Investment in education can be seen as a non-specific investment in innovation and is therefore an important driving factor in innovation. Scientific education plays a crucial role because students are encouraged to develop their creativity and to take the road less travelled. In this case, the government-mandated focus on return on investment is certainly an obstacle. Judging education by focussing on the returns results in spectacular jumps through mandated hoops but also causes indecision when there are no obvious hoops and students have to come up with their own solutions.
1. Schumpeter was certainly not an econometrician, but was chairman of the Econometric Society in 1940-1941
2. Schumpeter and his contemporary John Maynard Keynes obviously disagreed with each other