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Learning as an emergent, creative process

A review essay on Joseph E. Stiglitz and Bruce C. Greenwald’s Creating a Learning Society

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Abstract

In Creating a Learning Society, Joseph Stiglitz and Bruce Greenwald examine the role of knowledge in economic growth. They view economic growth as an impersonal and automatic phenomenon. The history of economic growth, however, suggests that it is a creative and personal process. We argue that the analytical framework deployed by Stiglitz and Greenwald is unsuited to study the creation of new products, new ways of doing things, and the discovery of new markets. While the questions Stigltiz and Greenwald ask are of fundamental importance, their analysis is neutered by the inability of their conceptual toolbox to grapple with creativity and novelty.

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Notes

  1. Pecuniary externalities occur when the actions of some agents change the prices faced by other agents. For example, when Firm A hires an additional worker, it increases the wage rate and reduces the profits of all other firms. Non-pecuniary externalities occur when the actions of some agents affect the utility or profits of other agents through a non-price channel. For example, when Firm A pollutes a river, it reduces the consumer welfare, without directly affecting the prices faced by consumers. When prices reflect opportunity costs, pecuniary externalities do not have negative welfare consequences. Non-pecuniary externalities always have negative welfare consequences. Stiglitz and Greenwald (1986) argue that in markets with asymmetric information pecuniary-externalities look a lot like non-pecuniary externalities. This is because with asymmetric information competitive prices do not reflect opportunity costs.

  2. In other words, a competitive equilibrium is in general not even constrained Pareto Efficient. Bernanke and Gertler (1990) provide an application of the Stiglitz-Greenwald Theorem. They study an economy in which lenders tell the quality of a borrower by observing their collateral. A subset of individuals does not make profitable investments because they do not have enough collateral, though they have good projects. An information-constrained government cannot use Lindhal Prices to allocate loans. However, a government can redistribute income, thereby reducing the number of individuals who are wealth-constrained, and increasing the number of loans. The redistribution of income does not require the government to have more information than market participants regarding which individuals have good projects.

  3. Many economists treat the desire of individuals to get ahead as if it is a recent phenomenon. It is not. The human desire to outcompete others can be observed throughout human history. Further, the broader psychology literature finds that envy occurs in all societies and economic arrangements, independent of the size or quantity of the object being envied (see Schoeck 1987: 77).

  4. And these non-price effects can extend into other areas and industries. For example, Ford employed wood scraps from building the Model-T to establish the Ford Charcoal Company which today is known as Kingsford’s Products Company (see Smith 2015).

  5. Nor is it sensible to make claims about the ‘inefficiency’ of monopoly by comparing its pricing behavior to that of a perfectly competitive market by assuming that both have the same cost curve. Costs of production are not technologically given; they are the consequence of human action. Cost curves reflect the relations between economic actors and are therefore endogenous to “market structure” (see Schumpeter 1942).

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Acknowledgments

We would like to thank Dan Smith and Akshaya Vijayalakshmi for helpful discussion and suggestions for improvement.

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  1. Department of Economics, George Mason University, Fairfax, VA, USA

    Christopher J. Coyne & Vipin P. Veetil

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  1. Christopher J. Coyne
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Correspondence to Christopher J. Coyne.

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Coyne, C.J., Veetil, V.P. Learning as an emergent, creative process. Rev Austrian Econ 29, 415–428 (2016). https://doi.org/10.1007/s11138-015-0333-9

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