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Competing theories of economic thought: a changing pedagogy?

Dr Mark Cloney, Professor of Practice, Economics

Dr Mark Cloney, Professor of Practice, Economics

By Mark Cloney

Mark Cloney is a Professor of Practice at La Trobe Business School. In the following piece, POP Mark Cloney observes that economic theory has been a bit slower than other sciences to catch up to the changing nature of knowledge and the dynamics of the knowledge-based global economy [1]

He argues in the following entry that this has implications doe the discipline in terms of its capacity to engage with contemporary economic challenges, and also raise questions about the teaching of economics.

Capitalism has variously been described as an economic system with private or corporate ownership of capital goods; where investments are determined by rational decision makers and supply and demand; and production and the distribution of goods determined mainly by competition in a free market. These microeconomic foundations stem from neoclassical economics through the writings of economists such as Marshall [2].

Marshall’s Principles of Economics (1890) formalised the move from labour to utility as the source of value: a commodity’s value came from its utility to consumers through the forces of the market (i.e. supply and demand) [3]. Accordingly, in the marketplace people are rational and utility maximisers characterised as households, consumers or economic agents. These concepts were formalised in pure mathematical form in the general equilibrium model by Arrow and Debrea (1954) based on Walras’s earlier theory of equilibrium [4].

This general equilibrium model has formed the basis for economic thinking in most Western economies and university teaching of economics for the last 60 years or so.

So microeconomics analyses, the market behaviour of individual consumers and firms, is an attempt to understand the decision-making process concerned with the factors that influence the choices made by buyers and sellers, price, and supply and demand in individual markets. And, this is what drives innovation, economic development and firm behaviour in a globalised knowledge–based economy – or is it?

One of the problems with this perspective is that factors such as investment in research and development (R&D) or where actual research is conducted matters very little [5]. The traditional neoclassical view of knowledge as a public good  is that it is available everywhere and to everybody simultaneously which implies that innovation flows in a frictionless manner from producers to a full set of intended and unintended beneficiaries, contributing to generate a long-term process of convergence across countries and regions (see Rodriguez-Pose 2008). [6]

But what happens if competitive advantage in a global knowledge-based economy is as much actually determined by local non-market factors including its institutions, networks and innovation ecosystems? Or, by the forces of ‘collaboration’ not ‘competition’, or maximising ‘social and shared value’ not profits for stakeholders but for the community within in which firms operate? Do these orthodox microeconomic foundations still hold up?

The emergence of the knowledge-based economy, where knowledge, learning and innovation are the new drivers of economic growth and competitiveness, is premised on a distinct shift in the mode of production from the traditional capital and labour divisions to knowledge generation and diffusion [7]. This understanding of the knowledge economy comes from evolutionary, neo-Schumpeterian and economic geography economic theories. [8] Complementing this work are studies into the entrepreneurial society  and creativity where entrepreneur capital is a key driver for economic growth [9].

Internationally, innovation and regional development policy that focuses more explicitly on the ‘institutional’ and ‘locational’ dimensions of enterprise and socio economic development has emerged as a major policy tool to foster competitive advantage [10]. That is, there has been an increasing recognition by many that non-market factor influence competitiveness of firms just as supply and demand. So government policies have been designed to better coordinate collaboration structures in regions or local innovation ecosystems between government, education and the private sectors. Here local institutions including financial and legal support the supply side inputs and entrepreneurial activity that drives economic development and innovation [11].

These ideas support a range of alternative government policies targeted at small to medium business, industry clusters, business incubators and accelerators, strengthening institutional arrangements and networks, encouraging university/industry collaboration, local capacity building (including education, training and entrepreneur skills) and regional innovation ecosystems.

Consistent with these trends, Michael Porter and Mark Kramer (2011) [12] argue for the importance of creating shared value, which focuses on policies, collaboration and operation practice that enhances competiveness of a company while simultaneously advancing the economic and social conditions in the communities in which they operate. They cite firms such as Google, IBM, Intel, Jonson and Johnson, Nestle, Unilever and Wal-Mart as examples of companies that have embarked on shared value initiatives within the community’s where they operate. The notion of shared value changes the traditional emphasis on profit and price to a much broader definition.

Porter has suggested elsewhere that government policy, business and community processes (in other words institutional arrangements) are as important determinants of industry success as is ‘price’ [13].

The move to ‘shared value’ has seen the rise of B Corps which are for-profit companies certified by the non-profit B Lab to meet higher standards of social and environmental performance, accountability, and transparency. More than 1,400 Certified B Corps from 42 countries and over 120 industries are working together toward the goal: to redefine success in business [14]. B Corps meet high standards of verified social and environmental performance, public transparency, and legal accountability, and aspire to use the power of markets to solve broader social and environmental problems. In 2013 the United States introduced legislation to recognise this new type of corporate legal entity which has now been passed into law in 17 states [15]. Under this legislation companies must have a corporate purpose to create a material positive impact on society and the environment, director’s duties include consideration of non-financial stakeholders, besides shareholders, and it includes a reporting obligation on the social and environmental activities (verified through third parties).

Although in its relative infancy this movement is attempting to overcome market failures and treat as endogenous the negative externalities typically associated with the dynamics of neo-classical theory. This may or may not be a lasting trend, but what if it became the norm for firm behaviour and economic development in the knowledge-based economy?

What assumptions and economic theories can best capture these economic and policy trends and explain the broader social-political context shaping these ideas, firm behaviour and competitiveness? This is the real challenge for the next generation of economic theorists.

One of the major challenges for orthodox economics is that its theory is embedded in axioms that used to understand the world as largely stable and predictive, and which are now seen as unstable and largely unpredictable [16], as the Global Financial Crisis demonstrated in 2008.

Since the 1960s there has been profound advances in how other science disciplines understand and teach the systematic nature of botany, biology, physics, computer science, neuroscience, oceanography, and atmospheric sciences to name a few. As Liu and Hanauer (2016) [17] argue across these fields we have seen a set of conceptual shifts in understanding from: simple to complex; atomistic to networked; linear to non-linear; mechanistic to behavioural; efficient to effective; predictive to adaptive; independent to interdependent; individual ability to group diversity; rational calculator to irrational approximators; selfish to strong reciprocal; win-lose to win-win or lose-lose; and, competition to cooperation.

More contemporary economic theory such as complexity, evolutionary and behavioural economics [18] are incorporating these types of conceptual shifts and as such challenge orthodox economic theories. These contemporary approaches variously emphasise the actual motivations for firm and human behaviour, the importance of networks, ecosystems and endogenous processes, and the dynamics of constant innovation and disequilibrium as the basis for better understanding the empirical reality of the knowledge-based economy.

The remaining challenge is to design a new economic pedagogy (conceptual models and theories) to support the teaching of these alternative approaches and to incorporate them into undergraduate economic degrees.

 

 

Dr Mark Cloney

Professor of Practice – Economics

Department of Economics and Finance

La Trobe Business School

College of Arts, Social Sciences and Commerce | La Trobe University | Bundoora Victoria 3086

T: 03 9479 5621   |M: 0428173880  |

E: M.Cloney@latrobe.edu.au

[1] See Ngai-Ling Sum and Bob Jessop (2013) Competitiveness, The Knowledge-based economy and Higher Education, Journal of the Knowledge Based Economy, Vol.4 pp 24-44.

[2] See E.K. Hunt. (1979), History of Economic Thought; A Critical Perspective, Wadsworth Publishing

[3] Ibid

[4] John, Peters, John Elliott and Stephen Gullenberg (2002), Economic Transition as a Crisis of Vision: Classical versus Neo-classical Theories of General Equilibrium, Eastern Economic Journal, Vol.28, No.2, Spring 2002.

[5] Andre’s Rodriguez-Pose and Richard Crescenzi (2008), Research and Development, Spillovers, Innovation Systems, and the Genesis of Regional Growth in Europe, Regional Studies, Vol 42.1, pp51-63, February.

[6] Ibid.

[7] Mark James Cloney. (2003), Regional Development in Australia: Rethinking the Basis for Regional Policy, PhD Economics, University of Sydney & Maskell, P. and Malmberg, A. (1999), Localised learning and industrial competitiveness, Cambridge Journal of Economics, 23 (2):167- 185.

[8] Ibid.

[9] David. B. Audrestsch (2009), The entrepreneurial society’, The Journal of Technology Transfer, Vol. 34, Issue 3, June, pp. 245-254

[10] Giordano, B. (2001) Institutional Thickness: political sub-culture and the resurgence of regionalism in Italy a case study of Northern League in the province of Varese, Transactions of the Institute of British Geography, 26 (1): 25-41.

[11] Ngai-Ling Sum and Bob Jessop (2013), p. 32.

[12] Michael E. Porter and Mark R.  Kramer (2011) The Big Idea: Creating Shared Value, Rethinking Capitalism, Harvard Business Review, Jan- Feb – https://hbr.org/2011/01/the-big-idea-creating-shared-value/ar/pr

[13] See Michael Porter (1990) The Competitive Advantage of Nations, McMillian Press, Hong Kong.

[14] http://www.bcorporation.net/what-are-b-corps

[15] Gove, Andrea; Berg, Gary A. (2014), Social Business: Theory Practice, and Critical Perspectives, Springer-Verlag Berlin and Heidelberg GmbH & Co.p165.

[16] Eric Liu and Nick Hanauer (2016), Traditional Economics Failed. Here’s the New Blueprint’, http://evonomics.com/traditional-economics-failed-heres-a-new-blueprint/

[17] Ibid

[18] Amna Silim (2016), What is New Economic Thinking? Three strands of heterodox economics that are leading the way, https://evonomics.com/new-economic-thinking/

LBS Professors of Practice Profiles – Mark Cloney: “This is the time to open your mind and prosper”

As an LBS Professor of Practice, Mark Cloney brings a wealth of management and government experience to La Trobe Business School. With over twenty years of experience in the public sector and ten in the private sector, Mark Cloney has insights into economics, business and public policy practice that will undoubtedly be invaluable to students.

“I worked in the Commonwealth government for over twenty years.” Mark comments. “First I was in the department of Transport and Regional Development for thirteen years as a Director of Regional Development Policy, and afterwards I was in Senior Executive Service in the Department Agriculture, as the Assistant Secretary of Business Assurance and Risk.”

When asked about the skillset needed to enter the Public Sector, Mark is clear: “For a career in the public sector, people need common sense, a hands-on attitude, analytical skills, and a strong understanding of how government works and to be flexible and adaptable – because things change!. It is also crucial to understand how policy decisions will affect the broader community, and not just the intended target groups of a particular policy.”

A practical attitude is something that Mark is keen to pass on to his students through his teaching. As an assignment, Mark instructs his students to write a two-page brief to the minister after going through a case study about a specific decision or problem. In the assignment, students are asked to give a minister on overview of the options available in a short brief, to help the minister to make an informed decision. To this end, students must provide a brief history on the problem, the context, explain why it’s a problem, as well as policy options for consideration. Mark says. “Ministers usually don’t have a lot of time on their hands, so they need all the key information required, as quickly and succinctly as possible. They can always follow-up if they want more”.

During this process, policy officers must remain politically neutral, and look into solutions from a range of quite often competing perspectives. “In the position of a policy officer, you will have stakeholders coming at you from all sides,” Mark comments. “Often it is your job to find policy options that works for a variety of stakeholders. It is the Minister’s role to choose the options that best suits the political agenda and priorities of the government.”

When asked how being a policy officers differs from his current position, Mark says he is enjoying the change of environment; “As an academic, you can be a lot more independent in your research and teaching away from the daily cut and thrust of politics that senior bureaucrats have to deal with. When you work in policy in government, you’ll quickly discover that there is no silver bullet, or ‘right’ economic or policy theory for a lot of social, environmental or political problems.  Many of the major of problems of today are ‘wicked’ in nature i.e. climate change, pollution, or indigenous disadvantage etc. and not easily resolvable.  And, as government’s and ministers change so do their priorities and political agendas and consequently their appetite to address some problems and not others.”

So, how do you solve big problems as a policy officer? “You apply as many different lenses (tools, frameworks and approaches) to look at problems and take into account different stakeholder views,” Mark reckons. “When dealing with a problem on a large scale, you will need a range of solutions to address different symptoms caused by the problem and you need to work across jurisdictions and government agencies. No one agency or level of government has the answer or capacity to address the wicked problems. As a Policy Advisor, you will need to be able to think out of the box and apply innovation to your thinking. This is why broad based course such as political economy and economics are very useful for students try to understand global issues and public policy approaches.”

When it comes to forming students who are ready for the work-force, Mark Cloney is positive. He is encouraging when it comes to industry placements. As a Professor of Practice, Mark has been a strong advocate for pushing industry partnerships, collaboration, and blended learning. “A lot of the tools students need today come down to having a broader skillset rather than narrow knowledge gained from a particular discipline or course.  It is about how they use the knowledge obtained through their degree to collaborate, problem solve and innovate more broadly. This is what is demanded in a knowledge based global economy”.

Mark says, “Universities are great places to explore your interests, and try out new things. Students should take advantage of that but always with an eye to future employment.”

Innovation and shared value critical for regional development, says LBS Professor of Practice

Dr Mark Cloney, Professor of Practice, Economics

By Mark Cloney

Could a new approach to regional development policy premised on creating shared value and utilising existing institutional networks be a key catalyst to the implementation the Turnbull government’s national innovation agenda?

The upcoming Federal Budget should outline more details of the government’s national innovation agenda. One way to ensure the successful implementation of the agenda could be to utilise established institutional arrangements and networks that foster regional economic development across Australia’s regions – and not duplicate or marginalise their efforts.

In December 2015 the Turnbull government announced an Innovation Statement that committed $1.1 billion dollars over the next four years to support business based research, development and innovation. A key focus of the Innovation Statement is a desire to strengthen the ties between business, universities and scientific institutions.

Many leading theorists have written on the importance of innovation and regional development to the international competiveness of firms and nations. For example, Harvard business gurus Michael Porter and Mark Kramer (2011) argue for the importance of creating shared value, which focuses on the connections between societal and economic progress including enabling industry clusters. Much of what they say is consistent with the Innovation Statement objectives.

According to Porter and Kramer (2011), policies, collaboration and operation practice that enhances competiveness of a company while simultaneously advancing the economic and social conditions in the communities in which they operate will be the power behind next wave of global growth. They cite firms such as Google, IBM, Intel, Johnson and Johnson, Nestle, Unilever and Wal-Mart as examples of companies that have embarked on shared value initiatives within the communities where they operate. According to Porter, in particular, the success of every business is affected by the supporting companies and soft and hard infrastructure around it and the networks within which they operate (i.e. the microeconomic foundations). Therefore stronger local capabilities in areas such as education and training, R&D, transport services and logistics, supplier collaboration, distribution channels and infrastructure are key to increased competitiveness and innovation. To support industry cluster development, business needs to identify gaps and deficiencies in these areas and enter into closer collaboration with like businesses, peak industry groups, government and universities to collectively address local deficiencies.

Regional Development Australia (RDA) is a national network of 55 committees (including metropolitan RDA’s) made up of local leaders who work with all levels of government, business and community groups to support economic and social development of their regions. This initiative is funded by the Australian Government and supported by state, territory and local governments in all jurisdictions. Most RDAs have at least one university in their catchment area and are at various stages of maturity in their engagement with them. For example, La Trobe University is a board member of both the North Melbourne (NM) RDA and North Link, two regional development bodies who between them cover seven local government areas in Melbourne’s northern suburbs (incorporating La Trobe University’s Bundoora campus).  La Trobe has been supporting these organisations for a number of years and provides facilities for North Link at its R&D Technology Enterprise Centre. The established networks of NMRDA and North Link are all about facilitating R&D research connections with business, industry and the tertiary sector in the northern region with an objective to help local business grow and innovate.

Perhaps options to consider delivering the innovation agenda through policies focused on creating shared value and directing new resources to the existing institutional arrangements and networks of the RDAs would provide an efficient mechanism and real impetus to delivering the government’s innovation vision.

Dr Mark Cloney is a Professor of Practice Economics at La Trobe Business School.

Mark has had 20 years’ experience in the federal government in corporate areas including program design, implementation, evaluation and compliance. He was a member of the Senior Executive Service in the department of Agriculture and completed a PhD with the University of Sydney in 2003 on regional development policy and economic theory.

Michael E. Porter and Mark R. Kramer (2011) The Big Idea: Creating Shared Value, Rethinking Capitalism, Harvard Business Review, Jan- Feb – https://hbr.org/2011/01/the-big-idea-creating-shared-value/ar/pr

North Melbourne RDA – Regional Development Australia web site: https://rda.gov.au/

North Link website: http://melbournesnorth.com.au/

Can Economics Improve People’s Wellbeing?

jan Libich La Trobe Business

jan Libich La Trobe BusinessLBS economist Jan Libich has a mission. He has been determined to show that economics, often referred to as the dismal science, can be very useful in helping us improve our lives. His newly published book ‘Real-World Economic Policy: Insights from Leading Australian Economists’ is a culmination of his effort so far. It bridges the gap between academic economists, policymakers, students and the general public by exploring how influential economists – including four former central bank Governors/Board members, an ACCC Commissioner, and a current member of the federal parliament and Shadow Minister – use economic research to develop and evaluate policy.

When asked what constitutes this gap between economists and the general public, Jan Libich’s passion for economics shows: “Economics is often portrayed as divorced from the real world; it is criticized for being about boring curve-shifting, equations and heartless definitions. The book attempts to show that such image is not accurate, that economics can help people and policymakers to make better decisions and thus improve their prosperity.”

Real-World Economic Policy: Insights from Leading Australian Economists is based on a series of one-hour video-interviews the author recorded from 2011–2014 , aiming to help the reader identify welfare-improving policies in areas including healthcare, education, retirement financing, monetary and fiscal policies, banking regulation and climate change. Libich explains: “We all make hundreds of decisions every day. Economics attempts to understand how we make them, and whether we can perhaps improve on our decision making to achieve our goals (whatever they may be: economics does not prescribe that money is all we should care about). The same is true at the country level, whereby the quality of public policies can have a major impact on people’s wellbeing.”

In Jan Libich’s eyes, research in economics has been getting more mathematical over time to enable a more rigorous and objective examination of the economy: “It is about discipline, it is easier to see a flaw in logic when one has to clearly state all the assumptions rather than just use verbal arguments. Together with improvements in computing power this enabled exploration of more complicated models and environments.”

However, these developments have also created a gap between what academic research can teach us and what policymakers in government and the general public can understand. “To me, this implies that academic economists need to pay more attention to communicating their findings and recommendations in an understandable and convincing fashion. And to be honest, we have not done that as well as we should have,” Libich says. “My book is a humble attempt in this direction.”

More information on ‘Real-World Economic Policy: Insights from Leading Australian Economists’ can be obtained here.

ISBN: 9780170364386, Published by Cengage Learning Australia, Pub Date: November 2015, © 2016

“Near Enough is Good Enough”

Mark Morris La Trobe Business School Professor of Practice
By Mark Morris

It’s not often that I intuitively align the laborious machinations of industry policy deliberations in Canberra with the wise intonations of the Rolling Stones but that is exactly how I responded after I digested the Federal Government’s National Innovation and Science Agenda report issued on Monday 7 December 2015.

As Mick and Keith once sagely wrote ‘You can’t always get what you want but if you try sometime you find you get what you need.’ This pretty much sums up the overall impact of the myriad of changes announced which collectively makes Australia a far more attractive place in which to invest in innovative businesses. This is the case even if the report falls short of the cutting edge vision of economies like the United Kingdom.

On the plus side it is clear that the Federal Government has commendably adopted a multi-disciplinary approach to improving research and development (R&D) and related commercialisation. It has done this by proposing measures that enhance access to venture capital, drive closer collaboration between universities and industry, improve educational outcomes in science, technology, engineering and maths, ensure digital by default delivery of government services and capitalises on the growth of big data and the need to leverage it for the benefit of the economy through advanced data analytics.

As such the Federal Government is seeking to apply a more holistic view on innovation policy along the lines championed by the Cutler Review of the National Innovation System way back in 2008. This was before the Global Financial Crisis derailed the process to the point where we did not need a Minister for Science as if that distracted us from the fixation of repairing the Budget Deficit.

Crucially the tax settings of the new innovation regime are also a considerable improvement over the status quo. Tax incentives are not only available for companies undertaking R&D but also for investors who provide the venture capital to fund the commercialisation of any resulting R&D.

Accordingly, the Federal Government has finally recognised that tax breaks need to be provided over the life cycle of a business to encourage entrepreneurs to conduct and invest in risky projects which may ultimately not be viable especially in the new rapidly dynamic and volatile digital economy.

As a case study to the Report highlights the retention of the existing refundable R&D tax offset allows start-up companies to leverage tax credits to help finance eligible research and development. This is so, even if it appears that the offset will be retrospectively cut from 45% to 43.5% from 1 July 2015).

This has been augmented by new tax breaks which allow individual investors a 20% non-refundable tax offset for investments in certain start-ups, and a capital gains tax exemption where investments held in such companies are held for more than three years but less than 10 years. In addition, partners in early stage venture capital limited partnerships (ESVCLP) will get a 10% non-refundable tax offset on capital invested in the partnership which can now raise funds of up to $200 million in early stage development of eligible activities.

Taken collectively there is therefore much to be praised in the new package.

So where does it fall down?

Firstly, the Report flags that there will be yet another review of the efficacy of the R&D incentive by the newly created Innovation and Science Australia Board. This concession has been around in various forms since 1985 and has had almost as many reboots or variants as the James Bond franchise. The last thing that an innovative entrepreneur wants to see is uncertainty as to whether it will still be around to help finance their initial R&D so let’s hope it is enhanced and not diminished.

Secondly, the take up in ESVCLP has tended to be relatively low as high wealth investors with surplus cash want some control over their venture capital investment. This is not the case with this investment vehicle where your investment is generally capped to a maximum 30% interest. I do not see that radically changing because of the prospect of a 10% non-refundable tax offset. And the proposed rules on other investors are typically over-restrictive.

Thirdly, and perhaps most importantly, the Report does not address our internationally uncompetitive corporate tax rates of 28.5% and 30%. Additionally, the demarcation between those tax rate regimes can itself be a practical nightmare to navigate.

How does this compare to the United Kingdom’s 18% corporate tax rate to apply from 1 July 2020, and particularly to royalties and capital gains arising from intellectual property subject to their patent box regime which will likely be subject to further concessional tax treatment?

I would suggest not that well even if it is not an apple to apple comparison.

It’s true that businesses don’t do things solely because of a tax break but a whopping differential in tax rates could be a deciding factor in a mobile digital world as to where you want to invest your capital in innovative products and processes.

However, even if the proposed changes fall short of addressing all facets of our international competitiveness they do signal that our Federal Government is finally serious about instilling an innovation mentality and culture in our businesses, universities and the broader community.

Which leads us back to Mick and Keith.

Maybe the announced changes are not what we ideally want in becoming an international trendsetter on innovation but maybe it’s what we need to allow us to nationally lift our head and embrace being part of the new innovative digital economy.

And given where we have been perhaps that is enough at this point.

 

La Trobe University National Water Forum – Are we ready for the next drought?

 

La Trobe University La Trobe Business School Water Scarcity drought Australia

Abstract

Australia is commonly described as the driest continent on earth. However, on average Australians have more access to water per head of population than many other places in the world. The challenge of managing water in Australia is that rainfall is highly variable both spatially and temporally.

At the conclusion of the millennium drought Australians had witnessed several policy successes and arguably a number of policy failures in response to drought. Rather than dwelling on these, this year’s Water Forum asks ‘are we better prepared for drought given the current policy and institutional settings?’

The 2015 Water Forum, organised in part by La Trobe Business School academics Professor Lin Crase and Dr Bethany Cooper, will focus on preparedness for drought and the prospect of better dealing with water shortages. As with previous events the Forum will use high-calibre keynote speakers to give shape to the theme of the Forum and also provide an opportunity to divide into separate industry strands of interest covering:

  •  Environmental Water
  •  Urban Water
  •  Agricultural Water

The Forum is free, and open to practitioners, policy makers, researchers and resource managers. We welcome involvement by early career professionals.

Forum

Date: Thursday 12 November 2015

Time: 8am – 4pm

Venue: Main Lecture Theatre, La Trobe University, University Drive, Wodonga

RSVP: Call the Center for Water Policy and Management on 02 6024 9835, email us at cwpm@latrobe.edu.au or register via the corresponding webpage.

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