I've just finished reading a new book on "new growth economics" -- From Poverty to Prosperity: Intangible Assets, Hidden Liabilities and The Lasting Triumph over Scarcity by Arnold King and Nick Schulz. The first 3 chapters and especially the conversation with Paul Romer make up one of the best explanations of the new economy I've seen.
Unfortunately the rest of the book is not as good. It pains me to say it, but the chapter on entrepreneurship descends to a level of gross oversimplification and glorification bordering on psycho-babble. That is a real missed opportunity, because it touches upon and begins to delve into a real issue in innovation: the principal-agent problem. The point is important in their discussion about innovation inside and outside of organizations. As they point out, innovators inside organizations are playing with the company's dime. And the systems inside companies are set up to prevent rogue employees from taking overly risky bets. Thus, there are some real reasons why organizations are resistant to change -- that goes beyond the standard explanation of "cultural resistance." It would have been a major step forward if the authors had explored these issues in greater detail.
I also think that they overplay how the external entrepreneur bears the cost of failure (in contrast to the internal innovator). One of the strengths of the US entrepreneurial system is that the market in the US is relatively tolerant of failure. The key is to fail small and fail quickly. Those types of failures are accepted as part of the learning process. If we had a market system where failure was severely punished, then the innovation ecosystem would be very different.
The chapter on financial intermediation seems thrown in to dealt with a perceived need to say something about the financial meltdown.
The book also has a pretty evident ideological bias -- both anti-"industrial policy" and anti-government -- which is clear in the authors' talk at Cato Institute. It would have been a far more interesting book if they had a more balanced set of interviews of people you have made important contributions -- like Joseph Stiglitz and Paul Krugman among others.
As a result of their ideological bias, they completely dismiss any role of government in fostering the creation of intangible assets and promoting innovation. Instead they repeatedly assert a version of the simplistic "markets good; government bad" rhetoric. That version is based on a good concept -- adaptive or dynamic efficiency (they use the terms "adaptive" and "dynamic" interchangeably). But they seem incapably of accepting that government can play a positive role in promoting adaptive efficiency. Even though one of the interview explicitly talks about the importance of anti-trust regulations, the conclusion is that regulation hurts, everywhere, all the time. Likewise they use broad strokes to deny that governments can be innovative -- pulling out that hoary old chestnut of the Department of Motor Vehicles (again without an apparent understanding of how DMV's have changed in the past decade to utilize information technology).
Again here they miss a wonderful opportunity to explore the pressures that make governments innovative and compare them to markets. In fact, the rhetoric that "of course we all know governments can innovate" is itself a major barrier to innovation. Like the little train that can't, if you are always told you can't innovate, you won't. The discussion of adaptive efficiency could have been an important contribution to the innovation debate. Instead, it was used to assert that government is bad.
Too bad. If they had taken a more open minded approach, this could have been an excellent book. As it is, this is merely a book with some very good parts.
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