As Clive Crook and Arnold Kling remind us, even the most brilliant economists are not very good at settling basic questions over how the world works. To a greater extent than most of us would care to admit, we're relying on gut instincts, crude heuristics, and, yes, ideological biases. I'll be the first to admit that I have a favorite guru. When media outlets are looking for an optimistic, heterodox voice amidst the economic gloom, they are increasing turning to the extraordinary Amar Bhidé. The son of a successful entrepreneur who also happened to be a Stalinist and a bombmaker for pro-independence Indian terrorists, Bhidé sticks out like a sore thumb in the gray, colorless world of business punditry. He is also, in my view, the most brilliant and insightful economic thinker around, and he is the author of my favorite book of 2008 by far, The Venturesome Economy.
I was hoping to see Bhidé of Columbia Business School give a talk earlier today, but I had to miss it thanks to an ill-timed cold. Like Nicholas Nassim Taleb, author of The Black Swan, Bhidé is a critic of Bayesian thinking. He elaborated on this theme in a short piece on banking regulation that recently appeared in BusinessWeek.
Until the 1930s, economists had two views of uncertainty. John Maynard Keynes and Frank Knight (who then dominated the University of Chicago's economics department) treated uncertainties as elements that couldn't be quantified. Followers of the 18th century mathematician Reverend Thomas Bayes, on the other hand, quantified uncertainties as if they were bets placed on a roulette wheel.
In Bhidé's view, the triumph of the Bayesian view has lulled us into a false sense of security, one that has been shattered by recent events. Read the whole thing.
The focus of the book is, to quote the subtitle, "how innovation sustains prosperity in a more connected world." In the course of a detailed examination of how VC-baked businesses innovate, Bhidé outlines a framework for understanding how new ideas become successful new products. It turns out that cranking out scientists and engineers who perform basic research isn't the key to prosperity, a claim advanced by any number of economic Cassandras who fret over the supposed "threat" posed by the growth of R&D in China and India. Rather, mid-level and low-level innovations play a role that is at least as important. To get a good sense of Bhidé's brilliantly quirky take on the global economy, check out (if you can) The Economist's review, which I believe was written by veteran correspondent Vijay Vaitheeswaran.
First, [Bhidé] argues that the obsession with the number of doctorates and technical graduates is misplaced because the "high-level" inventions and ideas such boffins come up with travel easily across national borders. Even if China spends a fortune to train more scientists, it cannot prevent America from capitalising on their inventions with better business models.
That points to his next insight, that the commercialisation, diffusion and use of inventions is of more value to companies and societies than the initial bright spark. America's sophisticated marketing, distribution, sales and customer-service systems have long given it a decisive advantage over rivals, such as Japan in the 1980s, that began to catch up with its technological prowess. For America to retain this sort of edge, then, what the country needs is better MBAs, not more PhDs.
America also has another advantage: the extraordinary willingness of its consumers to try new things. Mr Bhidé insists that such "venturesome consumption" is a vital counterpart to the country's entrepreneurial business culture.
This last point strikes me as particularly important. Most
graybeards tells us that American consumers have to change their
spendthrift ways, and this is surely true to an extent -- but those
spendthrift ways have, in Bhidé's view, been a source of American technological leadership, as he explained to Maria Bartiromo.
As we speak, people of middle to low incomes are buying iPhones, and they're buying them smart because they're buying them to use as substitutes for computers. Many macroeconomists just think of consumption as one big lump of stuff. In fact, it's a whole bunch of things, some of which are good for the economy in the long run and some of which are less good. So I think we'll see a cutback in the kinds of things people consider dispensable. They may eat out less. They may not trade up to a larger home. But history suggests there will be no cutback in the consumption of the kinds of new technologies and products that ultimately make the economy grow.
Bhidé's contrarianism doesn't end there. Though he's no reflexive nationalist, Bhidé remains confident in the resilience of the American economy. But he is also deeply skeptical about both the bank bailouts and the various stimulus proposals floated by right and left.
One of the few things I agree with Paul Krugman about is that competitiveness is a dubious notion. One can talk about competitiveness in the Olympics, but competitiveness in terms of economic growth puts things in completely the wrong frame. We are living a world where there is going to be, in the long run, more prosperity in more parts of the world. As prosperity increases in more parts of the world, the U.S. share of world GDP will decline, and that is a good thing. But in the next couple of years, we could completely mess this up and go in the direction of socialism. We could go crazy with these stimulus packages and destroy the free-enterprise ethos that has sustained innovation for the past several centuries. I would rather have a slower recovery than try to accelerate the process and destroy the foundations of the free-enterprise system.
But like it or not, that's not an option that's on the table.