Followers and leaders, known knowns and unknown unknowns:
The Two Innovation Economies by William Janeway: For 250 years, technological innovation has driven economic development. But the economics of innovation are very different for those at the frontier versus those who are followers striving to catch up. At the frontier, the innovation economy begins with discovery and culminates in speculation… progress has been achieved through trial and error. The strategic technologies that have repeatedly transformed the market economy – from railroads to the Internet – required the construction of networks whose value in use could not be known when they were first deployed.
Consequently, innovation at the frontier depends on funding sources that are decoupled from concern for economic value… cannot be reduced to the optimal allocation of resources. The conventional production function of neoclassical economics offers a dangerously misleading lens through which to interpret the processes of frontier innovation.
Financial speculation has been, and remains, one required source of funding. Financial bubbles emerge wherever liquid asset markets exist. Indeed, the objects of such speculation astound the imagination: tulip bulbs, gold and silver mines, real estate, the debt of new nations, corporate securities. Occasionally, the object of speculation has been one of those fundamental technologies – canals, railroads, electrification, radio, automobiles, microelectronics, computing, the Internet – for which financial speculators have mobilized capital on a scale far beyond what “rational” investors would provide. From the wreckage that has inevitably followed, a succession of new economies has emerged. Complementing the role of speculation, activist states have played several roles… transcend[ing] narrow economic calculation: social development, national security, conquering disease….
The great, neglected German economist Friedrich List, a student of Hamilton’s work, laid out an innovation roadmap for his own country in 1841, in his National System of Political Economy. It has been used repeatedly: by Japan beginning in the last decades of the nineteenth century; by the Asian Tigers in the second half of the twentieth century; and now by China. List noted how Britain’s emergence as “the first industrial nation” at the end of the eighteenth century depended on prior state policies to promote British industry….
It is not yet clear whether East Asia’s economic powerhouses will succeed in making the transition from follower to frontier. To begin, the “national champions” of the catch-up phase must be rendered accessible to competitive assault. More generally, the state’s role must shift from executing well-defined programs to supporting trial-and-error experimentation and tolerating entrepreneurial failure. And the debilitating “corruption tax” that seems inevitably to accompany economic revolutions must be curbed…. Here is the moment of strategic uncertainty…. Can China manage the economic, cultural, and political transitions necessary to assume the leadership role now up for grabs?…. England in 1820 was governed by a corrupt oligarchy that exercised power in intimate collaboration with a national religious establishment. Political legitimacy was validated by fear of anarchy, the terrifying reality of which had been observable across the Channel within living memory. Arbitrary, draconian repression was the rule: under the “Bloody Code” of criminal justice, more than 100 felonies were punishable by death or transportation. The patent system was notoriously expensive and inaccessible…. [Yet] Britain [then] pursued its unique path toward a relatively stable and sustainable democratic capitalism.
No doubt China’s own path will be as distinctive as the processes by which it has reached its current moment of opportunity. Whether or not its path proves to be as progressive as England’s may determine who assumes the mantle of global economic leadership.