Creating a Learning Society

Creating a Learning Society KENNETH J. ARROW LECTURE SERIES KENNETH J. ARROW LECTURE SERIES Kenneth J. Arrow’s work has shaped the course of economics for the past sixty years so deeply that, in a sense, every modern economist is his student. His ideas, style of research, and breadth of vision have been a model for generations of the boldest, most creative, and most innovative economists. His work has yielded such seminal theorems as general equilibrium, social choice, and endogenous growth, proving that simple ideas have profound effects. The Kenneth J. Arrow Lecture Series highlights economists, from Nobel laureates to groundbreaking younger scholars, whose work builds on Arrow’s scholarship as well as his innovative spirit. The books in the series are an expansion of the lectures that are held in Arrow’s honor at Columbia University. JOSEPH E. STIGLITZ AND BRUCE C. GREENWALD CREATING A LEARNING SOCIETY A New Approach to Growth, Development, and Social Progress READER’S EDITION Columbia University Press Publishers Since 1893 New York Chichester, West Sussex cup.columbia.edu Copyright © 2015 Columbia University Press All rights reserved Library of Congress Cataloging-in-Publication Data Stiglitz, Joseph E. Creating a learning society : a new approach to growth, development, and social progress / Joseph E. Stiglitz and Bruce C. Greenwald. — A reader’s edition. pages cm. — (Kenneth J. Arrow lecture series) Includes bibliographical references and index. ISBN 978-0-231-17549-4 (pbk. : alk. paper) 1. Social learning. 2. Information society. 3. Progress. I. Greenwald, Bruce C., 1946- II. Title. HQ783.S6942 2015 303.3'2—dc23 2015002293 Columbia University Press books are printed on permanent and durable acid-free paper. This book is printed on paper with recycled content. Printed in the United States of America c 10 9 8 7 6 5 4 3 2 1 Cover design: Noah Arlow References to websites (URLs) were accurate at the time of writing. Neither the author nor Columbia University Press is responsible for URLs that may have expired or changed since the manuscript was prepared. Contents Preface to the Reader’s Edition ix Preface to the Original Edition xiii Acknowledgments xvii Introduction 1 PART ONE Creating a Learning Society: A New Approach to Growth, Development, and Social Progress: Basic Concepts and Analysis chapter one The Learning Revolution 13 chapter two On the Importance of Learning 29 chapter three A Learning Economy 45 vi Contents chapter four Creating a Learning Firm and a Learning Environment 79 chapter five Market Structure, Welfare, and Learning 91 chapter six The Welfare Economics of Schumpeterian Competition 115 CHAPTER SEVEN Learning in a Closed Economy 157 CHAPTER EIGHT The Infant-Economy Argument for Protection: Trade Policy in a Learning Environment 169 PART TWO Policies for a Learning Society CHAPTER NINE The Role of Industrial and Trade Policy in Creating a Learning Society 199 CHAPTER TEN Financial Policy and Creating a Learning Society 227 CHAPTER ELEVEN Macroeconomic and Investment Policies for a Learning Society 239 Contents vii CHAPTER TWELVE Intellectual Property 254 CHAPTER THIRTEEN Social Transformation and the Creation of a Learning Society 282 CHAPTER FOURTEEN Concluding Remarks 297 Notes 307 References 349 Index 389 reader’s edition grant by Figure Foundation determination in wisdom Preface to the Reader’s Edition IN THE few months since this book first came out, it became clear that we had hit a resonant chord. The book, growing out of a lecture in honor of one of the world’s greatest economists, Kenneth J. Arrow, was aimed at a more academic audience than our other, more popular writings. We unabashedly included complicated mathematical equations; mathematics has become the language among academic economists, and we wanted to speak to them—to persuade them that some of their most long held precepts, even the virtues of free trade, at least for developing countries, needed to be rethought. We wanted to challenge them to think more deeply about what had really brought the enormous increases to standards of living that have marked the last two hundred years: the creation of learning societies. Governments, we argued, should focus on what creates a learning society. Some of the policies which economists had traditionally argued for actually impeded that. In the last two decades it had become conventional to describe the economy toward which we were moving as a knowledge economy and an innovation economy. But little attention was given to what that meant for the organization of the economy and society—or even for narrower subjects like economic policy. But our argument here was more general: creating a learning society is necessary for advancements in standards of living, even for economies well below the frontier that were not at the vanguard of advances in science and technology. Accordingly, the reception that the book received—not just in advanced countries in Europe, but in developing countries and emerging markets—was heartening. So too in places like Malaysia, Singapore, x Preface to the Reader’s Edition Turkey, Jordan, South Africa, and elsewhere where we had an oppor- tunity to discuss the ideas. A major Dutch think tank, closely linked to the government, even released a report, Towards a Learning Economy, a blueprint for that country going forward.1 Many editors, readers, and scholars from both the advanced countries and the emerging markets asked if we could produce a shorter version focusing on the core theoretical developments, the main mes- sages, and the central policy prescriptions. This edition responds to that request. In the almost one year since we finished the draft of the first edition of the book, we have continued with our research, sharp- ening some of the results, clarifying some of the complex trade-offs, and linking some of the ongoing policy debates to our overarching framework. This edition incorporates some of these new ideas, especially in chapter 11. Chapters 5 and 6 in the previous edition described the relationship between competition and innovation and discussed the efficiency of the market in innovation; in this reader’s edition, these chapters have been basically rewritten, but the message is the same: the relationship between competition and innovation is complex—far more complex than anyone previously realized. Still, we can identify some of the critical factors in this relationship (e.g., the role of government). Moreover, there is no presumption that the market is efficient in either the pace or direction of innovation. Insights from our analysis of the factors affecting the pace of innovation can and should help shape our innovation policies. In the original version of the book, part 2 was devoted to developing the mathematical analytics underlying “creating a learning society.” But the basic insights can be conveyed in words, and chapters 7 and 8 attempt to do just that with the help of appendices providing simple diagrammatic expositions of the basic mathematical ideas. Readers interested in the formal models underlying the analysis are referred back to the original edition of the book and to the more extended papers that we cite. The original version included commentary on the Arrow lecture by Robert Solow, Kenneth Arrow, and Philippe Aghion; a summary of the discussion that followed the Arrow lecture; and a complementary paper on industrial policy by Aghion. Because of space limitations, these have been omitted from this edition. Preface to the Reader’s Edition xi In addition to the acknowledgments listed in the preface to the original edition, we wish to acknowledge the assistance of Eamon Kircher-Allen and Feiran Zhang in preparing this edition of Creating a Learning Society. Joseph E. Stiglitz Bruce C. Greenwald New York, 2015. Acknowledgments Acknowledgments for the Series The Kenneth J. Arrow Lecture Series has been made possible through the efforts of Columbia University’s Committee on Global Thought (which I chaired at the time the series was inaugurated, and which is now co-chaired by Saskia Sassen) and by the Program in Economic Research (PER) of the Department of Economics at Columbia University (chaired by Michael Woodford) with the support and encouragement of the Columbia University Press. We are especially indebted to Robin Stephenson, Gilia Smith, and Sasha de Vogel of the Committee on Global Thought and Myles Thompson and Bridget Flannery-McCoy of the Press for guiding this book to publication. We are grateful for the support of the Kaufman Foundation, who funded the Inaugural Lecture. Acknowledgments for the First Arrow Lecture While this lecture represents a continuation of my extraordinarily fruit- ful collaboration with Bruce Greenwald, extending now for more than three decades, my work on the topics covered here goes back to my days as a graduate student, with a half-century of accumulated debts. I need to begin by especially thanking two of my teachers, who were present at the lecture at which the earlier version of these ideas was presented, Kenneth Arrow and Robert Solow. At the time I was a graduate student, growth theory was all the rage, and endogenous growth theory—explaining the rate of technological progress—absorbed much of our attention. xviii Acknowledgments I was fortunate to be able to spend time not only at MIT but also at the University of Chicago and Cambridge University. At MIT, I should acknowledge the influence of Evsey Domar, Paul Samuelson, and Franco Modigliani; at Cambridge, of Nicholas Kaldor, James Meade, James Mirrlees, David Champernowne, and Frank Hahn. Hirofumi Uzawa brought a group of us together from throughout the United States for a summer at the University of Chicago to discuss these issues—including George Akerlof, Eytan Sheshinki, and Karl Shell. While at Cambridge, I began my collaborations with Tony Atkinson and Partha Dasgupta, and the ideas developed with them permeate this book.

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