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Saturday, May 29, 2004

Rational exuberance, innovation and growth

Bweek has published excerpts from a brilliant book, called Rational Exuberance : Silencing the Enemies of Growth and Why the Future Is Better Than You Think and it talks about how risk taking and exuberant growth from innovation helps expand the economy and help so many people increase their standard of living. Considering the focus these days on people who seem more worried about how growth can destroy their jobs, this optimisam and logic is a refreshing change.Mike Mandell is Chief Economist at BusinessWeek, responsible for formulating BusinessWeek's coverage of economic policyThe difference between exuberant and cautious growth is not simply that one is faster than the other. Exuberant growth transforms the entire economy. In terms of the critical economic variables -- wages, jobs, international competitiveness -- the evidence is compelling that innovation-driven economies come out way ahead. Technological change also brings an excitement and wonder to our daily lives. The ability to travel to distant places, to communicate instantly with people in other parts of the country, to have online access to a vast array of information -- all of these capabilities open up new possibilities that capture our attention. In the absence of change, economies are not just slow-growing, they are boring and ultimately failures. The central theme of the book is -There are three main pathways through which innovation drives growth: the "ramp-up," the "spin-off," and the "free lunch."Ramp-up: When the innovation first hits the market, and the demand grows very rapidly, there's typically a lot of investment in the new industry and new products. This can give a very big onetime pop to growth. That's what happened in the 1990s, when the advent of the Internet helped propel an enormous amount of investment in information technology and telecom companies and products.Spin-off: As the innovation takes hold, it transforms other parts of the economy. In some cases -- such as information technology and electricity -- the effect is to increase the productivity of other industries. But that's not necessarily the only big impact. The automobile, for example, opened up new possibilities for spatial arrangements of work and living, creating the modern suburbs, and transforming the housing market.Free lunch: Economists like to quote an old saying: "There's no such thing as a free lunch." The idea is that you usually only get what you pay for. In particular, future growth must be paid for by deferring current consumption, and putting it into savings and investment. But big technological breakthroughs violate the free lunch principle, giving a boost to growth and living standards that goes far beyond any added investment.
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