One thing that I intend to do on this blog is highlight interesting books on innovation and growth. Let’s start with From Poverty to Prosperity: Intangible Assets, Hidden Liabilities, and the Lasting Triumph over Scarcity by Arnold Kling and Nick Schulz (Encounter Books, 2009)
I like this book a lot. But first, let me say a word about Arnold. I first came across his online essays a few years ago (one that I remember in particular was “You Call This Health Insurance?”). I was very impressed–here was someone who both understood his economics better than most academic economists and could also write more clearly than most journalists).
Kling, who today is one of the main writers on the terrific blog EconLog, continues to write very interesting and original stuff. In this book, Kling and his co-author Nick Schulz of the American Enterprise Institute, do two things. First, they have chapter-long interviews with many of the big-name thinkers in the economics of innovation: Robert Fogel, Robert Solow, Paul Romer, Joel Mokyr, Douglass North, William Easterly, Edmund Phelps, Amar Bhide, William Lewis, William Baumol. Great stuff that you can’t get anywhere else (though I think they should have also interviewed Daron Acemoğlu of MIT and Rob Atkinson of the Information Technology and Innovation Foundation).
Kling and Schulz also make a case for what they call ‘Economics 2.0’ . Here what they say in the book :
“Economics 1.0 is about scarcity….Economics 2.0 is about abundance, which arises from technical progress.”
“Economics 2.0 says, ‘Markets often fail. That is why we need markets….In Economics 2.0, the market is a mechanism for stimulating and filtering innovation”
I think Kling and Schulz are on the right track. What they call Economics 2.0 is similar to what I and others have called “innovation economics,” which stresses knowledge and intangible assets . Way back in 2008, I wrote a cover story for BusinessWeek (remember that magazine?) called
Can America Invent Its Way Back?
The subhead was
“Innovation economics” shows how smart ideas can turn into jobs and growth—and keep the U.S. competitive
It’s good to see a book which focuses on this topic, whether the authors call it innovation economics or Economics 2.0 or something else. We need more of this kind of thinking.
Mandel on Innovation and Growth 
The referenced health insurance article does do a better job than I ever could of articulating what I mean when I say, about dissatisfaction with my own health insurance situation, “But all I wanted was insurance.”
The gist of what I gather might be drawn from the book may fit nicely with my (still developing) view of many relatively recent financial innovations. They seem designed to benefit the creators and a few astute others rather than serve a real social need. They include legitimate tools for managing risk, which is a legitimate purpose. However, the one party who would benefit most from such risk management — the home buyer/owner/wannabe faced with a market whipped into a volatile frenzy by external forces — is the one party who had no access to such risk management nor any way to understand what was really happening as home ownership subtly shifted from a place to live to an investment requiring a lot deeper analysis. Even so-called sophisticated parties failed to grasp the proper use of the new tool set, in fact I’m not sure that anyone other than Goldman-Sachs really got it.
It’s too late now, but entrepreneurs could have created a whole new home value protection product that goes far beyond simple mortgage insurance. Maybe next time. It’s been a very long time since any financial innovation offered anything to tempt me. Reverse mortgage? No, thanks. Annuity? No thanks, I prefer self-annuitization — it’s more efficient.
I see in the reviews of the cited book a bit of wariness that holds me back from gung-ho rushing out to buy. Perhaps Economics 2.0 thinking needs some time to enter the public sphere to overcome the great wariness that is holding us back, because I see ignored opportunities all around me and am downright puzzled why neither the rich nor the desperate act on them. My own excuse is the constant threat that is repeatedly raised to the role of Social Security in my retirement plan — innovation successfully stifled. I wonder what the authors would say about that.