Other scientists across the centuries have been similarly inspired by creative imaginations of their own. Professor Stephen Hawking, famed for his work on gravity and black holes, is known for urging us to “remember to look up at the stars, and not down at our feet”. But these quotations, while they pertain to the natural sciences, can just as easily be applied to the social science of economics – which is the science that I have chosen to discuss in this article. Without constantly “raising new questions, new possibilities, and regarding old problems from a new angle”, the study of economics, and indeed the world’s economies, would not be where they are today.
From Keynes to Communism
One of the most important characteristics of economics is the ability to learn from its mistakes. In fact, many mainstream theories in today’s textbooks were only adopted as a result of historical events, such as the 1930s Great Depression and a number of financial crises over the years. After such occurrences, there would be bursts of creativity as experts across the world searched for new ways to model the economy, to accommodate problems that had surfaced. These events have been – and still are – what mark a real advance in economics as a subject.
A perfect example is the so-called “Keynesian Revolution”, which followed the publication of John Maynard Keynes’ 1936 book, ‘The General Theory of Employment, Interest and Money’. In this influential work, his suggestion that government policy could be used to influence levels of aggregate demand, and therefore rates of unemployment, became the dominant school of thought at the time. This, accompanied by an array of Keynes’ other ideas, formed an “intellectual monopoly” in the field of economics in the aftermath of the Great Depression. As the major western economies emerged from the Second World War, his propositions formed the basis for governmental monetary and fiscal policy, proving to be very effective during the period of financial recovery. Inspired by what had happened after the Wall Street Crash in 1929, Keynes contributed to the advance of economics by raising new questions and suggesting creative alternatives to the prevailing solutions of the day.
However, this new paradigm was short-lived. In the 1970s, the world experienced “stagflation” for the first time (high unemployment in a time of high inflation), a phenomenon unexplainable using Keynes’ theories. This led to another explosion of creativity, as economists were forced to rework many of the principles they had adopted over the past four decades. Since then, with contributions from other great minds, the discipline of economics has advanced and reached a new level of understanding, adapting and equipping itself with the tools to analyse and tackle future issues.
But positive advancements are not always the case, as creative thoughts and theories can sometimes result in unintended and potentially catastrophic consequences. When Marx and Engels were commissioned to produce ‘The Communist Manifesto’, their influence spread universally at an unprecedented rate. It was interpreted in various (and sometimes questionable) ways, but was ultimately the inspiration behind waves of revolution that gave rise to autocracy and dictatorship in the Soviet Union and China. Thankfully, today we can look in hindsight upon Leninism, Stalinism and Maoism, and learn from their effects in the same way as we have learnt from stock market crashes, oil shocks, ineffective government policies and many more socio-economic disasters.
So, over time, creativity has inspired new thinking and advancement in the field of economics. But has such creativity brought about advancement in individual economies themselves? The answer is clearly that it has. Just as creativity encourages new economic approaches, so too does it bring about economic progress – as evidenced by periods throughout history which have seen rapid increases in GDP, industrialisation and economic development.
Take, for example, the First Industrial Revolution, beginning in 1760. A series of technological innovations fortuitously led to dramatic acceleration in the growth of the world economy. One of these inventions was the “Spinning Jenny”, a mechanised cotton-producing loom which resulted in huge gains in efficiency and productivity. Yet this was only created to respond to an increased demand from textile workers, who had adopted the “Flying Shuttle”, a device which allowed better quality weaving to be carried out at a much faster rate. So arose a chain of creative inventions, leading to a prolonged period of growth.
Sometimes, these inventions and new approaches not only have direct economic effects, but also present other advantages. This was the case with the printing press in 1440, which opened up new possibilities for knowledge to be spread. It represented one of the most important intellectual innovations of all time, to which students, academics and professionals across the world owe their education and success. The printing press has also provided the tools for many industries today to succeed, and has been a fundamental part of labour all over the world for the past six centuries. However, we are now seeing it being superseded by digital technology, with the rise of electronic media likely to have an impact of similar magnitude to the transition from the handwritten to the printed page.
This process of new technologies replacing those that already exist is called “creative destruction”, according to the economist Joseph Schumpeter. In his book, ‘Capitalism, Socialism and Democracy’ he declares that innovation, and not competition, is the key to growth in a capitalist economy. In this way, as new products enter the market, monopolies form and others fall away, contributing towards an advance in GDP. Some economists believe that this forms a repetitive cycle of fast-paced and slow-paced growth, which can be represented on a diagram like this:
There has been much dispute among academics as to whether this “periodic growth” has happened in reality, as there is little evidence to show regular, systematic fluctuations between economic boom and bust. However, if we apply the same idea to the bursts of creativity in the field of economics that arise after particular events, the theory is much more convincing:
Therefore, creativity both plays a large role in the field of economics and is vital to economic development. Looking back at innovative periods of history, we can see huge increases in GDP, living standards and infrastructure resulting from inventions and new ways of thinking. So, if these times throughout history have led to such prosperity, then how can governments encourage them to happen again in the future?
Calculated or coincidence?
The answer to this question is not as simple as it seems. The Industrial Revolution in Great Britain was the result of a confluence of factors, including natural resources, an abundant supply of labour, the recent unification of England and Scotland, and a stable political situation. When all of these elements came together, the Revolution arose serendipitously. But would an economic advancement of the same scale have occurred if this period of growth had been planned?
We can see a strong example of a coordinated, calculated approach to creativity in the Japanese economic agent, the Ministry of International Trade and Industry (MITI). Within a mixed market economy, Japan approached industrial policy from a different angle to other governments at the time, and sought to catch up economically after a devastating World War. By targeting certain industries and granting subsidies to smaller companies (one of which was the technology giant Sony), MITI encouraged competition, entrepreneurship, innovation and research for over forty years. This level of competition meant that Japan’s economy could harness new ideas and technologies at great speeds, resulting in high productivity, high efficiency and access to the international market. Shown on the diagram below is the rapid period of growth from 1945-1990 in the Japanese economy:
The academic author Chalmers Johnson has labelled it the “Japanese Economic Miracle”, and although the organisation was disbanded in 2001, there are some valuable lessons to be learnt. Japan is not the only major economy to have taken this approach.
Looking at the example of Germany, as an innovation-led economy, it spent 2.84% of its GDP on research and development in 2011. This correlated with a €2.5 trillion figure for GDP in the same year (European Commission, 2013), suggesting that German growth did not happen by chance. Organised and routine spending on creative research, combined with an advanced vocational education system, has helped Germany become the largest economy in Europe. However, many economists have attributed a large proportion of the country’s success to its large, dynamic manufacturing and automobile industry that remains competitive today on a global scale.
These two examples lead us to the conclusion that creativity, albeit an important attribute, cannot be relied on alone. Whether spontaneous or planned, economic growth can only occur under certain conditions. This suggests that government policymakers should seek advice from experts across a variety of disciplines, in order to satisfy the criteria for a healthy and prosperous economy.
But should we trust the experts?
As an interesting aside, during the campaign in the UK to leave the European Union, the former Conservative justice secretary Michael Gove, said that “people in this country have had enough of experts”. Although he faced a backlash, it was perhaps the most effective statement he could have said in the run up to the vote in June. It rendered all advice from economists redundant, as the public began to ignore many of the economic arguments of the Remain camp. But was Gove right?
Some believe that experts, whether they like it or not, are strongly influenced by existing knowledge of their field, and their preconceptions prevent them from acting creatively. On the other hand, they argue that those who do not have the same expertise might be capable of developing more creative solutions to problems, with the only limit being their imagination. Although this is an interesting view, in the field of economics it is deeply flawed. As explored throughout this article, an inventive imagination alone is very unlikely to be conducive to development and progress. And, as William Golding’s political novel, ‘Lord of the Flies’ shows, leaving governance to the inexperienced can have a devastating impact.
It is for these reasons that creativity cannot be our only resource. In fact, even in the academic discipline of economics, as problems become harder to solve, working together to perfect solutions will be most important. We must dispel the image of Archimedes, sitting solitarily in his bathtub, exclaiming “Eureka!” after his discovery of displacement in water. Instead, as proven by examples throughout this article, collaboration across disciplines will be the best way forward. We need not wait for a “Eureka!” moment, when we can encourage pluralistic approaches in the sciences, whether natural or social, to bring a deliberate advance.
Contributed by Greg Tucker, Economics Editor