Review of the first two Annual Arrow Lectures held at Columbia University

(written: Sunday-Tuesday, February 14-16, 2010)

I. The first two Annual Arrow Lectures

Professor Joseph Stiglitz instituted the Annual Arrow lectures at Columbia University, in honor of Professor Kenneth Arrow, at the end of the year 2008. Each year, at the lecture, one particular aspect of Professor Arrow's work is to be discussed by other famous economists. The inaugural lecture was held on November 12, 2008. This lecture "Helping Infant Economies Grow: Promoting Innovation and Learning in Developing Countries" dealt with a working paper that Professor Stiglitz was writing jointly with Professor Bruce Greenwald. The video recording of this lecture is available here.

During this lecture, Professor Michael Woodford introduced the lecture participants. Then Professor Stiglitz spoke about the joint working paper. He was followed by Professor Greenwald. Then Professor Philippe Aghion and Professor Robert Solow participated as discussants. And then Professor Arrow provided some editorial comments about the process of human learning and innovation. There was a final round of clarifications from Professors Stiglitz and Greenwald before the lecture concluded.

As Professor Stiglitz explained it in the beginning, there were two foundational themes for this lecture. The first theme was the fundamental concept of 'Learning by Doing' which Professor Arrow had introduced in a research paper published in 1962. The second theme was a powerful observation that Professor Solow had made in a research paper published in 1957, namely that economic growth in the 20-th century would be determined not so much by increases in the factors of production -- land, labor and capital -- but by gains in productivity (output per man-hour), which would be achieved through the technical processes and methodologies that were employed during economic activities.

The second Arrow lecture was held on December 11, 2009. This lecture "Social Choice and Individual Values" dealt with the Arrow Impossibility Theorem -- Professor Arrow's celebrated work on welfare economics that he had submitted for his doctoral thesis in 1950 at Columbia University. During this lecture, Professor Stiglitz made the introductions. The main lecturer was Professor Amartya Sen and the discussant was Professor Eric Maskin. The video recording of this lecture is available here.

Professor Sen first remarked on the three major influences of the Arrow Impossibility Theorem on subsequent research in welfare economics -- the axiomatic treatment, the framework of social choice and the statement of the impossibility theorem. He spoke particularly about the philosophical backdrop of logical positivism and utilitarianism that prevailed during the period, in the first half of the 20th century, when the ideas in the theorem were conceptualized and developed. He also remarked on the strange historical context in which the impossibility theorem developed -- that in the 1930s, with the Great Depression and widespread hunger, the assumptions in welfare economics about inter-personal comparisons of utility, were contested as being incomprehensible.

Then Professor Sen explained how the theorem's enunciation that the construction of a social choice from individual preferences breaks down even under some simple and necessary assumptions, resulted in researchers shifting to voting theory, in which Professor Maskin was the leading expert. Professor Sen then made some remarks on his own reformulations of the concept of welfare towards developing a theory of justice, which is the subject of his most recent book. Next, Professor Maskin spoke about surprising ways in which voting rules could congregate individual preferences, particularly focusing on the example of the Presidential election of 2000 where the final result came down to a few hundred votes in Florida. Finally, by way of a Q & A session, Professor Stiglitz asked three technical questions on social choice to which the two speakers responded in turn.


II. Learning by Doing

I first came to know about the Inaugural Arrow lecture in March 2009. After watching the video recording of the lecture a few times, I became convinced that the lecture had basically overlooked many important details about the relevance of learning to modern economic theory. I have been thinking about this topic ever since I started writing my article "Effective Philanthropy in India" during the summer of 2006. This article remains unfinished to date.

I had sent my unfinished article to Professor George Akerlof in the summer of 2007. Initially, he had responded encouragingly with "I'm not sure we are thinking about things so very differently". But the joint project between us never really took off after that. I really had a lot of new insights to offer to these famous folks, as I explain below. So with the great hope that I would get at least an offer of a post-doctoral position, I wrote to Professor Stiglitz in March 2009 after seeing the Inaugural Arrow lecture.

Basically, the Greenwald-Stiglitz joint work maintains that infant economies of the developing world could be helped towards increasing their productivity by providing them with some special favorable treatment in the terms of their international trade. Recall from the previous section that Professor Solow's work showed that productivity gains would be the main source of economic growth. The proposed favorable treatment in international trade would also enable the infant economy to reach economies of scale through increased exports.

Let us now consider the example of Korea in the 1950s, the same example that Professor Stiglitz had himself mentioned in his talk during the Arrow lecture as being one of the main motivations for the Greenwald-Stiglitz joint work. He had pointed out that based on the classical comparative advantages theory, Korea had been advised by the World Bank and the IMF in the 1950s, to continue to focus on rice production while the advanced countries in the West focused on making technologically advanced products. In hindsight, it is obvious that this would have been a disastrous policy.

The new Greenwald-Stiglitz theory would instead recognize that as a society, Korea's learning capacity would have been under-utilized if it only focused on rice production. Hence this theory, had it existed in the 1950s, would have recommended that Korea, which was an infant economy then, be given some favorable terms in trade to enable it to achieve larger productivity gains in the industries that it was then setting up newly.

And further, the theory would have acknowledged that the means to achieve these productivity gains was through widespread 'learning by doing' among its factory workers. The exact details of the favorable treatment that the theory would have recommended -- tariff reduction, subsidies, foreign reserve accumulation, exchange rate stability, to name a few options -- was left unspecified by Professors Greenwald and Stiglitz during the Arrow lecture.

Now, anybody who reads my article "Effective Philanthropy in India" would see right away that I am also advocating that the developing countries should use their learning capacities towards their economic progress. So, I figured that this was a good starting point to communicate with Professor Stiglitz. This was the reason that I focused on the Korea example when I wrote to him in March 2009. Unfortunately, I never heard from him. Perhaps he had reasoned that if I was saying the same thing that he was saying, why should he respond!

However, the big difference between the Greenwald-Stiglitz theory and my approach is that in the Greenwald-Stiglitz framework, knowledge always flows from the advanced countries to the developing countries. This flow of knowledge is simply further enabled by the theory, through some favorable treatment of the poor countries by the advanced countries. Would it be a stretch to suggest that the Greenwald-Stiglitz theory would provide the script for James Cameron's direction of a globalization block-buster, akin to that of the movie 'Avatar'? In striking contrast, my article examines the strengths as well as the weaknesses of the societies of the developing countries, relative to the societies in the advanced countries, towards achieving scientific knowledge.

Next, the particular way of formulating the Greenwald-Stiglitz theory, as one that is based on the terms of international trade, with the aim of providing 'learning infrastructure' for developing countries, is quite unsuitable for maximizing their economic growth. To wit, one of the most important historical contexts in which rapid productivity gains through 'learning by doing' was achieved was in the early years of communist governments. 'Learning by doing' in factory-based settings was the means by which the former Soviet Union and the former communist countries of Eastern Europe achieved rapid industrialization in their early years.

Moreover, this road-map for economic progress was a main reason that communism gained a powerful hold among the people of China and many other countries throughout the world during the first half of the 20-th century. This example of the rapid spread of communism shows that the passion for learning can be communicated even across strictly enforced political and economic boundaries. Tinkering with trade policies might help, but it would not be the most powerful way of stimulating the learning capacities of the poor countries.


III. The intellectual foundations of 'Learning by Doing' and 'Candle Lighting'

I had studied Professor Amartya Sen's book 'The Argumentative Indian' rather closely in the summer of 2007, and had written line-by-line commentaries for the first few pages of this book. Based on these studies, I had become quite concerned that Professor Sen was misrepresenting India. However, I must now say that I would be eternally grateful to Professor Amartya Sen for showing up at the Second Annual Arrow lecture and landing some telling blows on modern economic theory. Just to give a taste of it, I quote one sentence from what he said in the lecture, "... I mean, economists, very rarely recognize how parasitic the subject has been, even people who have any interest in philosophy, on philosophy".

Moreover, it was only after Professor Sen explained the philosophical backdrop for the developments in welfare economics in the 19-th century and the first-half of 20-th century, that it occurred to me that that was also the very same philosophical backdrop against which the concept of 'learning by doing' had been developed by Western intellectuals. Firstly, utilitarianism provides a sort of protective cover for ignoring the destructive side of 'learning by doing'. The destructive nature of technological progress and scientific research is all too obvious in the 21-st century what with environmental degradation and the threat of nuclear annihilation.

But in the mid-20-th century, utilitarianism provided a separation between the human action involved in 'learning by doing' and its potential for destruction. By specifying that the consequences of human action is measured in the utility of its outcome, utilitarianism gave a clean chit to 'learning by doing', thereby further enabling the process of developing mathematical models to study economics, a process which had already been underway for several decades by then. Secondly, logical positivism enabled the concept of 'learning by doing' to be put on a concrete framework by importing wholesale from the collection of scientific procedures and methodologies that had been developed over several centuries through Descartes' Scientific Method.

In the Inaugural Arrow lecture, Professor Stiglitz also referred to the work of Professor Kenneth Arrow and Professor Gerard Debreu on the conditions under which the competitive equilibrium of a market economy would be efficient (in Pareto's sense). To quote him, "One of the assumptions in that analysis was that technology was fixed. It was not endogenous. And his [Ken's] later work explained why that was true." And that was, that the creation of the kind of knowledge that is required for drastic changes in the technological landscape is not something that modern economic theory can reliably measure.

It is only for the process of 'learning by doing' that one could reliably measure gains in productivity. An example of 'learning by doing' would be a factory worker or a company employee learning through repetition, in a controlled environment, to complete her work more and more efficiently. Invariably this learning includes gaining facility with the processes of automation, mechanization and computerization. Sure enough, the type of knowledge that the company employee or the factory worker creates in this process is micro-economic and mostly achieves increase in human capital through individual self-improvement. Even so, the resulting gains in productivity translate, in turn, to reliable measurements of economy-wide growth.

On the other hand, the kind of knowledge and innovation that have the potential to make improvements to entire industries, or to transform entire economies, are also important for economic growth. But the acquisition and management of this kind of knowledge is highly unpredictable. Moreover, Western philosophy is not very effective with measuring this kind of knowledge, let alone fostering it. The Schumpetrian concept of 'creative destruction' was the main mode of wealth creation in the 19-century, when the then infant economies of the West went through their first phase of industrialization. The approach that is available in modern economic theory, however, to deal with this kind of knowledge, as Professor Stiglitz explained it in the lecture, is to first make the decision to treat this knowledge as a public good.

That is, there is no marginal cost for somebody else using the knowledge of this kind that one has gained. Professor Stiglitz illustrated this situation in a poetic fashion, when he cited an inscription on Thomas Jefferson Memorial "when one candle lights another, it doesn't diminish from the light of the first candle". The branch of economics called endogenous growth theory provides another set of tools for fostering this type of knowledge. Acknowledging that under endogenous changes in technology, markets would not be Pareto efficient (see the reference to Arrow-Debreu above), this branch recommends policy interventions by the government. These interventions could be in the form of subsidies for R&D and education, so as to encourage innovation.

The trouble with endogenous growth theory is that the government has to have the ability to anticipate, many years in advance, which industries and technologies would be the long-term winners, and which ones would lose out along the way. The collapse of communism in the 80s and the stagnation of Japan in the last 15 years provide examples for the pitfalls of government-managed industrial policies. Having said that, it is also true that most of the industrial world has achieved the current state of advanced economic development only through responsible participation of the governments in the charting of their industrial policies.

As an aside, we mention here that the laboratory work of a scientific researcher or the computer programming of a software developer involve, for some part, the aspects of 'lighting a candle', though these jobs too involve 'learning by doing' for the most part. Moreover, this 'lighting a candle' phenomenon has an aspect of being an innovation (the lighting of the first candle), as well as an aspect of carrying no marginal cost for sharing (the lightings of subsequent candles). This is in contrast to the factory worker or the company employee whose skill sets consist predominantly of completing routine tasks on time, in addition to exhibiting organizational and managerial abilities.

Some other techniques for dealing with the 'candle lighting' phenomenon is provided by the topic of economic geography. The idea here is to bring together a concentration of experts, skilled in a certain profession, in close geographical proximity. The concentration of talented computer professionals in the Silicon Valley area or the Route 128 area in Boston are examples. Other examples are the locations of the motion picture industry in Hollywood, the oil industry in Texas, the advertising industry in Chicago and the automobile industry in Detroit.

Due to the dense concentration of professional talent, the innovation that one person comes up with has the effect of 'knowledge spillovers' onto one's colleagues. This leads to rapid advancements and innovations as a team achievement, that would not have been possible if the professionals were working in isolated environments. A particular variant of this spillover effect is the Jane Jacobs spillover. Here several different industries are concentrated in a single city, and this leads to these industries evolving, in a creative sense, under the influences of each other. The quintessential example of this spillover is New York which serves as the hub of America's print and television industry, its finance industry, its fashion industry and its performing arts industry.

In spite of the variety of techniques mentioned above for the management of knowledge, I should emphasize that modern economic theory could deal in a satisfactory manner only with the process of 'learning by doing'. This process was one of the main influences by which the advanced countries went through prolonged phases of steady industrialization during the 19-th and the 20-th centuries. However, in modern times, such a capturing of the wealth created by the learning process, through measurement techniques from economics, rapidly turns highly destructive, when one moves up even a little from 'learning by doing' to add on 'candle lighting'.

In the 19-th century, when the Western economies were infantile, it seemed possible that these two learning processes could co-exist -- that creative destruction could happen at the macro-economic level, while the working conditions and the learning environment for workers could improve drastically at the micro-economic level. However, this co-existence is severely challenged in modern times. After 'learning by doing' had been effectively employed for several decades in the post-World War period, the Western economies, which have matured in these decades, had to turn to 'candle lighting' as the source of wealth creation. But, the inability to manage the resulting creation and destruction in a stable manner seems to gather a chaotic strength, precisely during the stages when these economies try to mature further.

This was made clear at the end of the 20-th century, when the internet revolution came along, bringing major social and technological changes. But modern economic theory could not reliably assess the permanent value of the wealth created by the internet revolution. By the end of 2001, massive destruction of wealth among the comapny stocks in the technology sector had been wrought. This lesson was brought home once again at the end of the decade of 2000s when financial innovation and automated trading combined into a potent and inflammable mixture that burned down trillions of dollars of wealth in the stock markets and the real estate markets.


IV. Re-formulation of 'Learning by Doing' and 'Candle Lighting' using the concept of an 'Empire'

The great mistake in the Stiglitz-Greenwald-Aghion-Solow-Arrow approach to the learning capacities of societies, be they from the developed world or otherwise, is that this approach refuses to acknowledge that its toolkit is painfully lightweight. Either one learns through the process of 'learning by doing' or the only other hope is 'candle lighting'. The situation is saved for the advanced economies in the Western countries, because the university system in these countries have a long-established tradition of successfully fostering innovation. One should note that the university system shoulders the responsibility for both aspects of 'candle lighting' -- the lighting of the first candle by producing original results in research, and the lighting of subsequent candles from the teachers to the students.

Professor Stiglitz has recently commented in the news media that America's strong university system would be a major source of its economic growth in the 21-century, and that this would be the saving grace in the midst of the economic turmoil persisting currently. It could very well turn out to be true, but what if it doesn't? Could one bet the future of the Western world on the one hand on 'learning by doing' happening on a day-to-day basis in the company environments and the scientific laboratories, and on the other hand on 'candle lighting' happening, frequently enough, in the university system? There is also some 'candle lighting' happening in hi-tech companies and in publicly funded research parks, by way of inter-disciplinary research.

I am not suggesting that I have answers, to the above questions, one way or the other. All I am arguing is that a different perspective might make one realize that there are plenty of other types of learning. Moreover, some of these other types of learning might bridge the big gap between 'learning by doing' and 'candle lighting' in a much smoother manner than the Western world is used to. Please recall that in my recent article, "A New Perspective on the Global Economic Crisis IV: It is NOT the Economy, Stupid!", I had proposed the idea of retaining the Efficient Market Hypothesis (EMH) with the newly refined view that it should be super-imposed on the infrastructure of an empire. I now employ the concept of an empire to suggest that in the long-term future, the creation of economic value may not necessary depend exclusively on the knowledge-lead that the Western economies currently possess relative to the rest of the world.

If one thought seriously about it, one would see that the processes of 'learning by doing' and 'candle lighting' garner the most attention in the Western world, for policy considerations, because these are the approaches that are best supported by the infrastructure of an empire. Moreover, the particular techniques that economic theory employs to capture the wealth creation in 'candle lighting', mostly arise from utilitarian principles. As a result, business skills and entrepreneurship, rather than original research, are the main avenues for the kind of 'candle lighting' that would create economic wealth. One of the most important and lasting contributions of the Chicago School of Economics is to honestly acknowledge that the ethics of the businessman ranks above the ethics of the academician, in Western societies.

Next, during the Inaugural Arrow lecture, Professors Greenwald and Stiglitz also discussed some guiding principles for devising trade policies in a way that is favorable to promoting learning in infant economics. Firstly, they believe that competition among private firms is very important, in light of the collapse of the communist regimes which retained complete state control of the economy. Secondly, it is also non-controversial that stability of the economy is very important. This means especially that during downturns, the government would resort to deficit spending with the goal of avoiding widespread lay-offs and large-scale bankruptcies of firms. The rationale behind this view is that massive levels of firm-destruction results in irretrievable loss of skill sets among the workers, as well as permanent damage to productivity gains. Thirdly, they believe that the most dominant influence on the learning in infant economies would be the 'knowledge spillover' effects of trade -- that coming in contact with the advanced economies through trade would provide the best learning opportunity.

Professor Solow mentioned that within the developed world, if one looked at a fixed industry, like manufacturing, banking, construction, etcetra, then a McKinsey Global Institute study showed that the differences in productivity levels within the same industry, but across countries in the developed world, could not be accounted for by availability of skilled labor or capital or technological know-how. The determining factor was managerial expertise gained through competitive pressures. Professor Arrow emphasized that the biggest cost in knowledge is not the production or distribution of knowledge, but in its assimilation, which was also echoed by Professor Greenwald when he put it nicely as "in practice, information dissemination and absorption looks much more important than information creation". In short, nearly every perspective on knowledge that was expressed at the Inaugural Arrow lecture tacitly assumed the backdrop of an empire.

The factors mentioned in the previous three paragraphs demonstrate that Western intellectuals rely on the infrastructure of an empire, much more than they realize. Once one understands this point, one can then see that in the long-run, Western societies need to focus on other methods of learning, in addition to 'learning by doing' and 'candle lighting', in order to have a cultural rejuvenation that is strong enough to enable them to escape the current economic turmoil. Learning through quiet reflection, learning by appreciation, learning by reading, learning history, learning cultural sophistication, learning about foreign cultures, learning multiple languages, learning to pursue truth, learning to avoid narcissism, learning patience, learning by synthesis, learning by refinement, learning to obey the law even when there is no threat of punishment, learning to avoid fraudulent abuses of international law are some approaches to learning that would add new economic value to an empire-based society.

Finally, I request the Professors to kindly provide me with post-doctoral employment for a period of 3 years, so that I could pursue effectively, the investigation of the many path-breaking ideas mentioned in this article.