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Simon Kuznets’ Nobel Acceptance Lecture: Innovate Social Institutions!

December 12, 2011

Simon Kuznets is probably best known for his sophisticated statistical work on inequality and growth, as well as for the “Kuznets Curve”. Although famous for this technical work, Kuznets spends a great deal of his 1971 Nobel Prize acceptance lecture on the problem of institutions, even going so far as to use the phrases “social tools”, “social innovations,” and even “social technology.” His arguments are relevant to advocates of competitive governance.

Kuznets opens with a point that I’ve argued recently: technological growth requires social innovations if its fruits are to be fully and equitably enjoyed:

Advancing technology is the permissive source of economic growth, but it is only a potential, a necessary condition, in itself not sufficient. If technology is to be employed efficiently and widely, and, indeed, if its own progress is to be stimulated by such use, institutional and ideological adjustments must be made to effect the proper use of innovations generated by the advancing stock of human knowledge.

Kuznets was also well-aware of the political dimensions that restrained (and still restrain) the majority of the world’s population from the growth modern technology is capable of.

…the spread of modern economic growth, despite its worldwide partial effects, is limited in that the economic performance in countries accounting for three-quarters of world population still falls far short of the minimum levels feasible with the potential of modern technology.

…the difficulty of making the institutional and ideological transformations needed to convert the new large potential of modern technology into economic growth in the relatively short period since the late eighteenth century limited the spread of the system. Moreover, obstacles to such transformation were, and still are being, imposed on the less developed regions by the policies of the developed countries.

A century of foreign aid and large-scale ‘development’ projects has not brought prosperity to the developing world, and has likely even enshrined violent, slow-growth institutions. Kuznets suggests that developing nations can “stimulate growth and structural change” by their ability to “refer, select, or discard, legal and institutional innovations that are proposed in the attempt to organize and channel effectively the new production potentialities [of technology].”

This is exactly the method used by innovative projects like the Dubai International Financial Center — a wildly successful 110-acre island of British common law in a sea of UAE Sharia Law. Countries like China and India have already begun experimenting with free-trade zones and Honduras has recently started a project for special reform zones. Here are Kuznet’s nations, picking and choosing institutional innovations to channel “new production potentialities.”

Kuznets seems to accept (forty years before it was written) Paul Romer’s framing of institutions and rules as open to innovation when he argues that his “conclusions [about physical technology] apply pari passu to innovations in legal forms, in institutional structure, and even in ideology.”

Kuznets sounds like an optimist, but one that realizes that innovation is an uncertain business. The possibilities that come with change — as innovations filter through a global system — can be tremendous:

A technological innovation, particularly one based on a recent major invention, represents a venture into the partly unknown, something not fully known until the mass spread of the innovation reveals the full range of direct and related effects. … Its cumulative effects, all new, extend over a long period and result in an enormous transformation of economic production and of production relations. But these new effects can hardly be fully anticipated or properly evaluated in advance (and sometimes not even post facto).

Even when the technological innovation is an adaptation of a known technique by a follower country, the results may not be fully foreseeable, for they represent the combination of something known, the technology, with something new, an institutional and ideological framework with which it has not previously been combined.

An invention or innovation may prove far more productive, and induce a far wider mass application and many more cumulative improvements than were dreamed of by the inventor and the pioneer group of entrepreneurs. Or the mass application of a major invention may produce unexpected dis-economies of a scale that could hardly be foreseen in the early phases of its diffusion.

Examples of both positive and negative surprises abound. Many Schumpeterian entrepreneurs failed to grasp, by a wide margin, the full scope and significance of the innovations that they were promoting and that eventually brought them fame and fortune. And most of us can point at the unexpected negative effects of some technological or social invention that first appeared to be an unlimited blessing.

So Kuznets counsels skepticism of those claiming to know too much about the outcomes of these innovations:

The significant aspect here is that the surprises cannot be viewed as accidents: they are inherent in the process of technological (and social) innovation in that it contains an element of the unknown. Furthermore, the diffusion of a major innovation is a long and complicated sequence that cannot be accurately forecast, with an initial economic effect that may generate responses in other processes.

This uncertainty requires dynamism, it:

demands a stable, but flexible, political and social framework, capable of accommodating rapid structural change and resolving the conflicts that it generates, while encouraging the growth-promoting groups in society. Such a framework is not easily or rapidly attained, as evidenced by the long struggles toward it even in some of the presently developed countries in the nineteenth and early twentieth centuries.

Complexity theorist Nassim Taleb (author of The Black Swan) calls this ability to cope with turbulence, ‘anti-fragility’. This is precisely the kind of resilience, responsiveness, and ‘turbulence-calming’ that radical decentralization and competitive governance offers. But it’s not as easy as just importing the social technologies of developed countries to other regions:

nor is the social technology that evolved in the developed countries likely to provide models of institutions or arrangements suitable to the diverse institutional and population-size backgrounds of many less developed countries … These comments should not be interpreted as denying the value of many transferable parts of modern technology; they are merely intended to stress the possible shortage of material and social tools specifically fitted to the different needs of the less developed countries.

Kuznets concludes his talk with words of warning for the future.

…a substantial economic advance in the less developed countries may require modifications in the available stock of material technology, and probably even greater innovations in political and social structure. It will not be a matter of merely borrowing existing tools, material and social; or of directly applying past patterns of growth, merely allowing for the difference in parameters.

The guiding principle of this innovating is experimentation, and will necessarily be context-dependent:

It seems highly probable that a long period of experimentation and struggle toward a viable political framework compatible with adequate economic growth lies ahead for most less developed countries of today; and this process will become more intensive and acute as the perceived gap widens between what has been attained and what is attainable with modern economic growth. While an economist can argue that some aspects of growth must be present because they are indispensable components (i.e. industrialization, large scale of production, etc.), even their parameters are bound to be variable; and many specific characteristics will be so dependent upon the outcome of the social and political innovations that extrapolation from the past is extremely hazardous.

What we cannot simply learn from the past, we have to reach for in an experimental future.

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