Motivations
The K+S Model
Model Validation
Policy Experiments
Concluding Remarks
On the Complementarities between Innovation
Policies and Demand Management in the
Process of Development and Growth
G. Dosi1
Email:
A. Roventini1,2,3
andrea.roventini@univr.it
1 Sant’Anna
School of Advanced Studies, Pisa (Italy)
2 University
3 OFCE,
of Verona (Italy)
Sophia-Antipolis (France)
Motivations
The K+S Model
Model Validation
Policy Experiments
Concluding Remarks
Recalling some Ingredients of Development Policies ...
The “great transformation” from rural to industrial and
advanced service economies involves a major process of
accumulation of knowledge and capabilities at the levels of
both individuals and organizations
Successful episodes of industrialization / knowledge
accumulation have always involved a rich array of public
policies (from German and the U.S. to China and India)
Some key domains of policy interventions:
technological opportunities
technological capabilities
innovation appropriability
industrial policies
selection mechanisms
“Keynesian” demand-management
Motivations
The K+S Model
Model Validation
Policy Experiments
Concluding Remarks
Recalling some Ingredients of Development Policies ...
The “great transformation” from rural to industrial and
advanced service economies involves a major process of
accumulation of knowledge and capabilities at the levels of
both individuals and organizations
Successful episodes of industrialization / knowledge
accumulation have always involved a rich array of public
policies (from German and the U.S. to China and India)
Some key domains of policy interventions:
technological opportunities
technological capabilities
innovation appropriability
industrial policies
selection mechanisms
“Keynesian” demand-management
Motivations
The K+S Model
Model Validation
Policy Experiments
Concluding Remarks
... and the Significant Role of Inequality
Inequality impacts strongly on aggregate demand
dynamics and can contribute to the formation of bubbles in
financial markets (Fitoussi and Saraceno, 2010; Stiglitz,
2011)
The role of inequality in triggering crises: inequality
reached its maximum just before the Great Depression and
the current Great Recession
The impact of policies may be conditioned by inequality
levels
Motivations
The K+S Model
Model Validation
Policy Experiments
Concluding Remarks
Our Goals
These intuitions and pieces of historical evidence have not
been formalised
We do it in the family of Keynes+Schumpeter
agent-based models (Dosi et al. JEDC 2010, 2013)
Study the long- and short-run impact of technology,
industrial and demand-management policies
Assess how different income distribution regimes affect
growth, business-cycle fluctuations and the effects of
policies
Motivations
The K+S Model
Model Validation
Policy Experiments
Concluding Remarks
Why Agent-Based Modeling (ABM)?
ABMs model complex-system dynamics using
boundedly-rational, heterogeneous, locally-interacting
agents
Capturing relevant features of innovation and finance
“Strong” (Knightian) uncertainty
Complex innovation and credit networks
Risky, trial-and-error nature of innovation
Policy design and implications
Flexibility and modularity of ABMs allow to easily implement
different scenarios
Testing the short- and long-run effects of policies in a
natural way
Motivations
The K+S Model
Model Validation
The Structure of the K+S Model
Central Bank
- Sets the baseline interest rate
- Sets the max credit supply of banks
- Stocks reserves of the banks
Policy Experiments
Concluding Remarks
Motivations
The K+S Model
Model Validation
Policy Experiments
Concluding Remarks
The Sequence of Microeconomic Decisions
1
The maximum credit supply is determined by the bank
2
Capital-good firms perform R&D. The productivity of new
machines is determined.
3
Consumption-good firms decide how much to produce,
choose their supplier and order machines
4
Firms hire workers (wages are anticipated and proportional
to labor productivity). Firms pay machines using internal
funds and credit provided by the banking sector
5
Production in both sectors begins
6
The consumption-good market opens, workers fully
consume their wage, firms’ profits are determined
7
Entry and exit take place
8
Consumption-good firms receive the ordered machines
Motivations
The K+S Model
Model Validation
Policy Experiments
Concluding Remarks
Model Validation
ABMs are much more complex than standard, e.g.
DSGE, macroeconomic models
The model is able to match many more
macroeconomic stylized facts than standard models
Empirical Discipline on Microfoundations: the model is
also able to match the largest number of
microeconomic (cross-sectional) stylized facts
Motivations
The K+S Model
Model Validation
Policy Experiments
Concluding Remarks
Macroeconomic Stylized Facts
(1) Self-sustained growth with endogenous
business cycles
25
20
Logs
15
10
(2) BP-filtered standard deviations
5
GDP
Inv.
Cons.
0
Investment more volatile than GDP;
consumption less volatile than GDP
0
50
100
150
200
250
Time
300
350
400
450
Logs of GDP, C, and I
1
0.8
0.6
0.4
(4) Time-series GDP growth-rate distrbutions
Quasi-Laplace fat-tailed distributions
Percent
0.2
0
−0.2
−0.4
−0.6
GDP
Inv.
Cons.
−0.8
−1
0
50
100
150
200
250
Time
300
350
400
450
BP-Filtered GDP, C, and I
4
10
3
10
Density (Logs)
(3) BP-filtered cross-correlation with output
Consumption, net investment and change in
inventories procyclical and coincident
Unemployment, prices and mark-ups are
countercyclical. Productivity and inflation
are pro-cyclical
Total credit is procyclical and coincident
Bankruptcy rates are pro-cyclical
2
10
1
10
0
10
−6
−4
−2
0
Growth Rate
2
4
6
GDP Growth-Rate Distribution
Motivations
The K+S Model
Model Validation
Policy Experiments
Concluding Remarks
Microeconomic Stylized Facts
The model is able to account for a
rich ensemble of micro (firm-level)
cross-section stylized facts (Dosi,
2007)
0
10
Simulation Data
−1
10
Tail Distribution
(1) Productivity dispersion among firms is
large
(2) Inter-firm productivity differentials are
persistent over time
(3) Firm size distributions are right-skewed
(and even more skewed than
log-normal distributions)
(4) Firm growth rates can be proxied by
fat-tailed quasi-Laplace densities
(5) Investment lumpiness (coexistence of
firms investing a lot and investing
almost-zero, see Gourio & Kayshap, J.
Mon. Econ., 2007)
(6) Bankruptcy rates can be proxied by
power-law densities (see Fujiwara,
2004, Di Guilmi et al. 2003)
−2
10
−3
10
0
10
Bad Debt
Motivations
The K+S Model
Model Validation
Policy Experiments
Concluding Remarks
Policy Combinations
Schumpeterian innovation policies affecting
opportunities (e.g. expected value of innovation draws)
firm search capabilities (e.g. R&D productivity)
appropriability conditions (e.g. patents; imitation)
Entry and competition policies affecting market
structure:
competition policies (e.g. antitrust policy)
entry and exit (e.g. barrier to entry and/or exit)
Keynesian demand macro-management policies:
fiscal policies
Motivations
The K+S Model
Model Validation
Policy Experiments
Concluding Remarks
Schumpeterian Innovation Policies
Vary opportunities of technological innovation
change the productivity of new technological draws
GDP growth rises unemployment fall with increasing
technological opportunities
Vary firm search capabilities
change the capital-good firm R&D productivity
GDP growth rises, GDP volatility and unemployment fall as
the R&D productivity increases
Vary appropriability conditions: Patent system
patent length w. or w/o patent breadth
patents reduce GDP growth rate and raise unemployment,
the effects are stronger in presence of patent breadth
Motivations
The K+S Model
Model Validation
Policy Experiments
Concluding Remarks
Entry and Competition Policies
Vary entrants’ expected productivity
different technological entry barriers
GDP growth rises, GDP volatility and unemployment fall as
the expected productivity of entrants increases
Antitrust Policy (Capital-good Industry)
capital-good firms with a market share higher than a fixed
threshold cannot add new customers
antitrust policy spurs GDP growth and it reduces both
unemployment rate and output volatility
Motivations
The K+S Model
Model Validation
Policy Experiments
Concluding Remarks
Are Schumpeterian Technology Policies Enough?
So far we have found that Schumpeterian policies has
both long-run and short-run effects
However, such results are conditional on a “Keynesian
machine” well in place
What happen if we switch that off?
More generally, do Keynesian fiscal policies have also
long-run effects?
Motivations
The K+S Model
Model Validation
Policy Experiments
Concluding Remarks
Keynesian Policies
Eliminate the public sector
we eschew the public sector from our model and we then
“pump up” Schumpeterian policies
threshold effect: Keynesian policies are necessary to
support sustained long-run economic growth
Schumpeterian policies are not enough to push the
economy away from low growth trajectories
Changing taxes and unemployment benefits
tuning up fiscal policies does delock the economy from the
low growth trajectory and brings it to the high growth one
avg. GDP growth almost the same, but Keynesian policies
have strong countercyclcial effects
More generally, strong complementarity between
“Keynesian” policies affecting demand and
“Schumpeterian” policies affecting innovation
Motivations
The K+S Model
Model Validation
Policy Experiments
Concluding Remarks
Inequality and Macroeconomic Dynamics Distributions
How does inequality affect the the aggregate behavior of
the economy?
We tune the mark-up rate to study different income
distribution regimes
We then consider the impact of fiscal policies under
different income distribution scenarios
Notice that the mark-up rate determines:
the distribution of income between profits and wages
(distributive effect)
the flow of internal funds of firms (financial dependence
effect)
Motivations
The K+S Model
Model Validation
Policy Experiments
Concluding Remarks
Changing Income Distribution
Frequency of full employment
At low mark-up rates the economy spends much more time in
full employment...
Motivations
The K+S Model
Model Validation
Policy Experiments
Changing Income Distribution
GDP growth volatility
... business fluctuations are smoother ...
Concluding Remarks
Motivations
The K+S Model
Model Validation
Policy Experiments
Concluding Remarks
Changing Income Distribution
Unemployment
...unemployment rates are lower; average growth is unaffected.
Motivations
The K+S Model
Model Validation
Policy Experiments
Fiscal Policy and Income Distribution
until now there is a positive level
of fiscal policy intervention
we repeat the same experiment
on mark-up rates by setting to
zero fiscal policies
Results
without fiscal policy, the effects
of income distribution on real
variables are strengthened
long-run growth effects: high
levels of the mark-up rate lock
the economy into a low-growth
trajectory
Concluding Remarks
Motivations
The K+S Model
Model Validation
Policy Experiments
Concluding Remarks
Fiscal Policy and Income Distribution
Volatility
furthermore, fiscal policy is more effective in reducing volatility
and unemployment when mark-up rate is high.
Motivations
The K+S Model
Model Validation
Policy Experiments
Concluding Remarks
Globalization, Inequality, Policies and Growth: Some
Reflections by Way of Conclusions
How do our policy experiment results relates to the
challenges posed by globalization and increasing
inequality?
Let me conclude this talk showing further empirical
evidence...
... And possibly providing some policy responses
Motivations
The K+S Model
Model Validation
Policy Experiments
Concluding Remarks
Globalization
Financial globalization is weakening the policy setting
powers of States
Globalization is weakening the manufacturing base in
the US and Europe
What is so special about manufacturing?
innovation opportunities
dynamic increasing returns
most R&D is in manufacturing
large base of decent jobs
crucial contribution to foreign accounts
Motivations
The K+S Model
Model Validation
Policy Experiments
Concluding Remarks
Gross International Financial Assets of Advanced
Countries
(millions of current US dollars) 160000000 140000000 120000000 DEBT FDI Equity DerivaFves Total GDP 100000000 80000000 60000000 40000000 20000000 0 1970 1975 1980 1985 1990 1995 Source: updated and extended version of the database developed by Lane and Milesi-­‐FerreQ (2007). 2000 2005 Motivations
The K+S Model
Model Validation
Policy Experiments
Concluding Remarks
Manufacturing Value Added
(% of World Value Added in Manufacturing, Current Prices)
(% of world v.a. in manufacturing, current prices) EU 27 Japan France 35 30 China Germany India United States Italy United Kingdom 25 20 15 10 5 0 1980 1985 1990 1995 2000 2005 2010 Motivations
The K+S Model
Model Validation
Policy Experiments
Concluding Remarks
Growing Inequality
Possible causes:
globalization
skills (tasks) destroying technical change
institutions (stagnant or declining minimum wages, weaker
unions, tax-cuts to the super-rich)
More consequences:
families forced to borrow beyond their means
lower aggregate demand (via differential consumption
propensities)
wage differential hinders work motivation and productivity
At the same time public expenditures necessary to
finance a universal welfare model are increasing
Motivations
The K+S Model
Model Validation
Policy Experiments
Concluding Remarks
Inequality: Mostly about Top Incomes
(% of top-­‐incomes)
1975
1985
1995
2005
Top 10% Top 5% top 1% Top 10% Top 5% top 1% Top 10% Top 5% top 1% Top 10% Top 5% top 1%
France
33,41 22,06
8,48 31,05 19,96
7,2 32,41 20,93
7,7 32,89 21,88
8,73
Germany
30,8
21,6
10,1 31,37 21,24
9,64
31,4 20,84
8,84 .
.
.
Italy
31,2 20,04
7,24 26,83
17,5
6,81 30,57 20,58
8,13 33,19 22,78
9,35
Japan
30,52 19,58
7,08 31,92 20,25
7,03 34,02 21,47
7,3 40,56 25,96
9,42
United Kingdom
27,82
17,4
6,1 32,65 20,75
7,4 38,51
25,8 10,75 41,62 29,57 14,25
United States
32,62 21,03
8,01 34,25 22,38
9,09 40,54 28,46 13,53 44,94 33,12 17,68
Source: the World top-­‐incomes database
Motivations
The K+S Model
Model Validation
Policy Experiments
Concluding Remarks
Public Expenditures on Health Programs
(% on GDP) 10 9 France Germany Italy Japan United Kingdom United States 8 7 6 5 4 3 1980 Source: OECD 1985 1990 1995 2000 2007 2009 Motivations
The K+S Model
Model Validation
US Marginal Tax Rates
Policy Experiments
Concluding Remarks
Motivations
The K+S Model
Model Validation
Policy Experiments
Concluding Remarks
Scenario and Policy Options
Business as usual
further weakening of the manufacturing base
low rate of growth
increasing inequalities
Managing globalization:
industrial policy
mission oriented programs (equivalent to Apollo/military
space programs)
pragmatic use of competition policy
strengthening European ventures such as EADS/Airbus
fiscal policies
heavy taxation on financial rents (e.g. Tobin tax)
heavy progressive taxation in general
stop a race-to-the-bottom in European fiscal polices
Motivations
The K+S Model
Model Validation
Policy Experiments
Concluding Remarks
Scenario and Policy Options
Business as usual
further weakening of the manufacturing base
low rate of growth
increasing inequalities
Managing globalization:
industrial policy
mission oriented programs (equivalent to Apollo/military
space programs)
pragmatic use of competition policy
strengthening European ventures such as EADS/Airbus
fiscal policies
heavy taxation on financial rents (e.g. Tobin tax)
heavy progressive taxation in general
stop a race-to-the-bottom in European fiscal polices
Motivations
The K+S Model
Model Validation
The Wal-Mart Archetype
Policy Experiments
Concluding Remarks
Motivations
The K+S Model
Model Validation
Policy Experiments
Concluding Remarks
The Wal-Mart Archetype
1.3 mln employees (largest retailer in the US)
over 15% of U.S. imports of consumer goods from China
political involvement to reduce trade barriers
each Wal-Mart worker replaces 1.4 retail workers (-2.7%
reduction in retail employment)
Wal-Mart store openings lead to declines in county-level
retail earnings of about 1.5%
NB: all this, net of the effects on US manufacturing
employment