5 questions for Arthur Diamond on economic growth and innovative dynamism

How open to creative destruction is the American economy? Does
GDP growth really benefit Americans in an age of already high living standards?
Is innovation good or bad for the labor market? Arthur Diamond joined Political
Economy to discuss these questions and others.

Arthur is a professor of economics at the University of Nebraska Omaha, and he’s a senior fellow for the American Institute for Economic Research. He is the author of “Openness to Creative Destruction: Sustaining Innovative Dynamism,” released last year.

Below is an abbreviated transcript of our conversation. You can read our full discussion here. You can also subscribe to my podcast on iTunes or Stitcher, or download the podcast on Ricochet.

Pethokoukis: Even though the book is called “Openness to
Creative Destruction,” you’re not a terribly big fan of that phrase. So why
don’t you tell me what that phrase is and why you’re not a big fan of it?

Diamond: Well, creative destruction was a phrase that
Joseph Schumpeter is well known for, and it was his view of the way that
innovation occurs in societies. And it was part of his general account that
innovation results in human betterment, and especially in betterment for the
least well-off. And I think the phrase does capture an element of what is true
about the process of innovation: There are some costs. But I think it
overemphasizes these costs.

I instead want to emphasize the creation part, especially
since I’ve come to conclude that the destruction part is much smaller than what
I had originally thought. I think that was one of my own main self-discoveries
in the process of doing this research. So I use the phrase “innovative
dynamism,” which I think is a more positive way to describe the process than “creative
destruction.”

I’m worried that maybe we’re not as tolerant of creative
destruction as we used to be. There seems to be a lot of concern now that maybe
we’ve had too much disruption from trade and automation. Do you think that’s
the case?

I think most people in the United States at least, and
maybe in other parts of the world too, are still embracing innovation in their
role as consumers at least. There’s a guy named Amar Bhidé who says that it’s
not just enough to have people creating. You have to have people who are
willing to take a chance and purchase what’s being created. This is one aspect
of our success that we don’t emphasize enough.

Via Twenty20

So I think most people are still very tolerant as consumers,
especially in the United States. The declining tolerance you’re suggesting
comes from people’s concerns as workers. So I make my case that fewer people
will lose their jobs than expected, that the economy is resilient, and people
themselves can take actions to be more resilient. If I can make a good case for
that, I think the vast majority of people in the United States will be all in
on this process of innovative dynamism.

Do you feel like you need to make the case that faster
economic growth is important over the long term, even though many people may
think that our current standard of living is already good enough?

I don’t use the phrase “economic growth” too often,
because I think it calls to mind more of the same, leading people to ask “how
many more shoes or yachts do people really need?” Instead, I emphasize several
categories of innovative new goods that previously didn’t exist and really
change people’s lives in fundamental ways that are important to us — medicines,
cars, illumination, and air conditioning, for instance.

I suggest that the people who have achieved successes in
working towards a cure for cancer have acted entrepreneurially and they’ve been
outsiders. They’ve been people who’ve used trial and error. They’ve used
hunches. They’ve used serendipity. The same sorts of things that characterize
entrepreneurs. We encourage them the same way we need to encourage
entrepreneurs in the broader economy — by lessening regulations, by being more
tolerant of outsiders, by having less credentialism.

I think this is a more compelling way to think of economic
growth and innovation. There are people who could say, “We don’t need more cars
or yachts,” but where do you find people who don’t want more cures for cancer?

I’m concerned that we’ll come out on the other side of
this pandemic more risk averse and less tolerant of creative destruction. Is
that a valid concern?

I think so. It’s partly going to depend on how we look at
what solves the problems we’re facing with COVID-19. And many people have
argued that we’re having problems because we don’t have enough central
planning. And I think a good case can be made that the problem is instead too
much central planning and that we need to rely more on the entrepreneurs who
are in the trenches fighting COVID-19.

For example, the World Health Organization dragged their
feet on admitting that there was substantial symptomless transmission of
COVID-19. And they didn’t just drag their feet for a week or two weeks, they
dragged their feet for four months. Everybody wearing masks is much more
important if there’s substantial symptomless transmission. In effect, they were
as close to a central planning organization as we have for this, and they have
botched it big time in a way that I think substantially extended the length and
severity of this crisis.

What can policymakers do to upgrade the American economy
so we can have faster growth and more innovative dynamism?

For one, we’ve had a growth of something called the
precautionary principle within our regulatory system, meaning people
increasingly have to prove that their innovations will not possibly cause any
harm before they can be adopted. But a large number of past innovations were
ones where you didn’t know what harm there might be until you tried it out. It
makes you wonder: What innovations would exist that we’re not allowing
ourselves to have because we’re enforcing this precautionary principle? So I
emphasize lighter regulations as one of the key policy directions if we want
more innovation.

We also need to keep taxes lower. Part of what I argue is that the bigger the breakthrough innovation is, the less likely that people besides the entrepreneur are going to be able to judge whether it’s plausible or not. Only the innovator behind that innovation may know. That means at the precarious early stages of a breakthrough innovation, it almost inevitably will have to be self-funded. For it to be self-funded, you have to allow the innovator to accumulate the money to self-fund, and so you need to have a light tax policy to allow them to do that.

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