Must-read: Dani Rodrik: “From Welfare State to Innovation State”

Must-Read: Dani Rodrik: From Welfare State to Innovation State: “A specter is haunting the world economy – the specter of job-killing technology…

…When the new industrial working class began to organize, governments defused the threat of revolution from below that Karl Marx had prophesied by expanding political and social rights, regulating markets, erecting a welfare state that provided extensive transfers and social insurance, and smoothing the ups and downs of the macroeconomy. In effect, they reinvented capitalism to make it more inclusive and to give workers a stake in the system. Today’s technological revolutions call for a similarly comprehensive reinvention…. The bulk of these new technologies… entail the replacement of low- and medium-skilled workers with machines operated by a much smaller number of highly skilled workers…. Skill and capital-intensive technologies are the leading culprit behind the rise in inequality since the late 1970s. By all indications, this trend is likely to continue…. It doesn’t have to be this way. With some creative thinking and institutional engineering, we can save capitalism from itself – once again….

Achieving the socially desirable level of innovative effort… requires either foolhardy entrepreneurs… or a sufficient supply of risk capital. Financial markets in the advanced economies provide risk capital…. But there is no reason why the state should not be playing this role on an even larger scale…. As Mariana Mazzucato has pointed out, the state already plays a significant role in funding new technologies…. Designing the right institutions for public venture capital can be difficult. But central banks offer a model of how such funds might operate independently of day-to-day political pressure….

The welfare state was the innovation that democratized – and thereby stabilized – capitalism in the twentieth century. The twenty-first century requires an analogous shift to the ‘innovation state.’ The welfare state’s Achilles’ heel was that it required a high level of taxation without stimulating a compensating investment in innovative capacity. An innovation state, established along the lines sketched above, would reconcile equity with the incentives that such investment requires.