Michael Best on How Growth Really Happens

BestAchieving economic growth is one of today’s key challenges. In this groundbreaking book, Michael Best argues that to understand how successful growth happens we need an economic framework that focuses on production, enterprise, and governance. Best makes the case that government should create the institutional infrastructures needed to support these elements and their interconnections rather than subsidize individual enterprises. The power of Best’s alternative framework is illustrated by case studies of transformative experiences previously regarded as economic “miracles”: America’s World War II industrial buildup, Germany’s postwar recovery, Greater Boston’s innovation system, Ireland’s tech-sector boom, and the rise of the Asian Tigers and China.Accessible and engaging, How Growth Really Happens is required reading for anyone who wants to advance today’s crucial debates about industrial policy, free trade, outsourcing, and the future of work. 

Why is the study of economic “miracles” important?

National and regional experiences of rapid growth that lack easy explanations are often casually ascribed to divine intervention. Over two dozen national and regional experiences of rapid growth lacking explanation have been dubbed ‘miracles.’ These ‘miracles’ are unexpected and outside the scope of the conventional policymaking mindset. This book brings several such purported miracles back to earth. It offers an explanation in terms of an economics anchored by fundamental principles of production and business organization. The claim is that we can learn about how capitalist economies function and malfunction from examining cases of rapid and transformative growth. The lesson is that there is no divine intervention, just a man-made conjunction of capabilities.

What does the book do?

The book characterizes the economic policymaking framework and implementation means common to the rapid growth experiences. The framework is informed by a historical genealogy of major economic thinkers that have contributed to an economics of transformative growth. It is an economics of capability development and mutual adjustment processes in which changes in business organization, production system, and skill formation are inextricably bound together. The three domains are not separable and additive components of growth, but mutually interdependent sub-systems of a single developmental process. No one of the three can contribute to growth independently of mutual adjustment processes involving all three. I call this the capability triad. 

What unites the neglected economic theorists that shed light on transformative experiences?

The economic theorists whose ideas are discussed in this book examine the innovation dynamics that underlie productivity growth. They share an alternative economics methodology for understanding how economies function and for informing and conducting policymaking. Each thinker focuses on a different interactive connection in the economy to characterize an innovation dynamic within a multidimensional and complex economy. But taken together the innovation processes have common features and can interact with one another. Strategically organized, they can produce dynamic increasing returns.

These great scholars lived and wrote about the real world, which their descriptions suggest is not amenable to magic bullets. But there is no throwing up of hands in despair and depicting episodes of rapid growth as unexplained and inexplicable. Each contribution does offer, at the minimum, an analytical framework in lieu of a “growth miracle.” These models can protect policymakers from unreflective failures. Together they offer more. Economic policymaking is always informed and defended by models, but no single model can mimic modern complex economies or fit all contexts. The capability triad is a better way to understand how crises can be overcome and robust growth achieved.

How did you come to study economic miracles?

In 1969 when I started teaching economics at the University of Massachusetts, the economic outlook for the region was not encouraging. Between the 1930s and mid-1970s, with the exception of World War II, the New England economy underwent a sustained period of economic decline.  Boston’s population declined from 800,000 in 1950 to 560,000 in 1980.

What occurred next is known as the Massachusetts Miracle. Between 1975 the mid 1980’s unemployment fell from 12% to less than 3% as upwards of a half a million jobs were created most in new sectors. Michael Dukakis, governor of Massachusetts, campaigned for the US presidency in 1988 attributing the ‘miracle’ to the creation of a range of quasi-public agencies. But as a board member of one such agency, I was acutely aware this was not the case. At the same time, it was not a consequence of a spontaneous burst of ‘animal spirits’ or unleashed by laissez-faire policies and free markets.

What role did government policy play in the Massachusetts Miracle?

State policy did not plan, foresee, or drive the Massachusetts Miracle. But it was not passive. The state government funded a huge investment to increase the number of electrical engineering students in public higher education from around 600 in 1976 to over 1600 ten years later. In so doing it turned a transformative potential into a sustained growth experience. These graduates were like a high-octane fuel for an explosive growth in the size and number of engineering intensive enterprises. 

Nevertheless, the Massachusetts Miracle cannot be explained without reference to the institutionalized means by which the US economy was transformed during World War II. State education policy responded to an increase in demand driven by the post-war emergence of a large population of technology-driven enterprises themselves exploiting opportunities created by the federal government’s wartime investment in technologically advanced weapon systems. Greater Boston’s research-intensive universities and the state’s legacy of precision engineering were key components in the design, development, and implementation of the President’s wartime strategic vision and mobilization programs. The federal government oversaw the creation of a national science and technology infrastructure of which Massachusetts was and has remained a major beneficiary.

What can we learn from the US World War II experience about industrial policymaking?

World War II was a period of policymaking experimentation and government intervention much as the Great Depression that preceded it. But while the Great Depression inspired an emerging Keynesian macroeconomic demand management perspective, the successful policy regime of the wartime American economy, namely to create and grow new industries and transform existing industries to meet unprecedented performance targets, did not inspire a new supply side, production development perspective within the economics profession.

In fact, the World War II US policymaking experience was an unparalleled industrial policy success. GDP nearly doubled in a four-year period, far exceeding all other nations. Its unmatched performance can be measured by comparing national rates of expansion in munitions production Over the period from 1935-9 to 1944, munitions output expanded 7 times in Germany; 10 times in the USSR; 15 times in Japan; 22 times in the UK; and 140 times in the US (Goldsmith 1946). Furthermore, the US alone produced guns and butter; guns were not produced at the expense of the civilian standard of living (Edelstein 2001; Overy 1995).

President Roosevelt’s vision to create the Arsenal for Democracy was not enacted by either an invisible hand or by central planning but purposefully by an industrial policy and economic governance agenda that organizationally integrated and diffused rapid technological and production innovation. Three complementary productive structures were pivotal. 

The first was the integration of science and industry to design, develop, produce, and deploy new technologically advanced products (e.g., radar systems, penicillin). The second was the diffusion of mass production principles to build and ramp up new organizationally complex products/plants/industries (e.g., aircraft, ships), and to convert existing factories to new products (e.g., cars to jeeps) and to extend mass production and enterprise output coordination principles throughout and across supply chains. The third was the design, administration, and implementation of a participatory management philosophy and skill formation methodology to foster workforce involvement in job design, quality improvement, and new technology introduction. Each of these productive structures is examined using case studies that take us inside the real-world economics of production, business, work, universities, and industrial organization to examine how US industrial policy transformed the nation’s industrial innovation system.

What unites the policy frameworks of the successful transformative growth experiences examined in the book?

Explosive growth experiences are many. I apply the Capability Triad framework to explain other success stories including West Germany, Ireland’s Celtic Tiger, Japan and China as well as policy framework failure in the UK, Italy and the US in recent decades.

We know that they are not explained by stabilization policy. No amount of adjustment of stabilization and market reform policies are sufficient to address matters of productivity and growth. We find in the success stories the crafting and implementation of strategic development policy frameworks. This takes us beyond the terrain of the economics equilibrium and optimal resource allocation, although economics is critical to it. But it is an economics of capability development and mutual adjustment processes in which changes in business organization, production system, and skill formation are inextricably bound together.

This does not mean that macro policy instruments are irrelevant; it means that the transformative experiences are better understood as capability informed macro policies. The idea is to characterize successful economic policies from an organizational capabilities perspective.

In the success stories we find a unified or coordinated set of extra-enterprise, capability-development infrastructures that galvanize a population of companies to engage in product development and technology management capabilities; we find macro-policymaking guided by a production-centric awareness of where a region or country fits within the global competitive environment and the use of the critical barrier analysis to inform infrastructural investment priorities. These can include access to a machine tool industry, engineering support services, development finance and skill formation institutions which, if inter-connected, enable a whole group of firms to innovate and grow without generating severe skill gaps and thereby curtailing progress.    

Why is the formulation of a conceptual policy framework important?

The historical experiences described in this book tell us that a development policy framework is important for success. The case studies reveal extraordinary leaders responding to daunting challenges by crafting appropriate strategic policy frameworks at both enterprise and government levels. At the same time, luck plays a large part in successful outcomes. The expected external conditions needed to support success do not always arrive conveniently, and their absence may frustrate otherwise admirable policy initiatives. Nor is the true significance of the internal elements of a strategy always fully understood even by its own designers. But luck and chance, however random, can be handled best within well-thought-out and coherent frameworks that take full account of the nature of the external environment (opportunities and threats), as well as realistic views of domestic capabilities (strengths and weaknesses). What we can add, as well, is that the resulting SWOT (strengths, weaknesses, opportunities, and threats) analysis can be much richer if it is guided by the alternative economic baseline of the capabilities and innovation perspective and of the dynamic growth processes that it illuminates.

Perhaps the most daunting aspect of the capability triad is that it treats the scope for public policy as being almost completely and seamlessly blended into the detailed mechanics of change that occur within private firms. In this framework, public policy and private entrepreneurial actions do not operate in isolation from each other but become mutually reinforcing. There is some scope for a separable public policy, such as in skill formation, to ensure that the right mix of education and skills is produced to accommodate the changing demands of the economy as it develops. But even here, the links between public and private activity are crucial.

In the quest to break free from narrow, dependent, and reactive policy mindsets, the capability triad framework proposed here does not provide all the answers. But it helps those who hope to fashion transformative policies to be smart when time is pressing and when financial and human resources are limited. Such policies are essential if we wish to bring focus and synergy to the disparate policies that make up a broad enterprise-development strategy in a national, provincial, or local economy.

What is the relationship between conceptual framework and policy success?

Conceptual frameworks and policy design, implementation, and renewal usually evolve in parallel with each other. Frameworks are rather like maps that tell you where you are, where you need to go, and the direction that you must take to get there. Policy design and implementation deal with the messy business of gathering resources, making pragmatic choices, overcoming obstacles, and bringing the team along to a collective goal. To confuse these separate but interrelated elements of strategy, or to emphasize one at the expense of the other, will almost certainly lead to failure. Having a wonderful map, but of a route that would take you over impassable terrain, is useless. Wandering aimlessly in the wilderness bereft of any maps is equally futile.

Fortunately, the capability triad is not like the weatherman! It can offer diagnoses, and  even contingent predictions, and it can also suggest ways forward. The country case studies examined in this book suggest that the logic of the capability triad, based as it is on a distillation of actual experience, provides both structure and content to strategy design. To neglect its lessons, and to focus on price competition and stabilization processes as advocated in standard economics, has condemned national and regional economies to stagnation and decline and to all the social problems that such failures propagate.

What about research methodology in economics?

The economics advanced by a review of the historical experiences of rapid growth and decline in this book do not advance a policy framework with the clarity or certainty of the market fundamentalist or even Keynesian perspectives. Together they tell us that economies are inherently complex and not reducible to mechanical relationships. The methodological argument is that an alternative paradigm, beginning with case studies and empirical research rather than formal models grounded in a priori principles, is a more fruitful approach to understanding real-world economies and guiding policy. This is the position taken by all the thinkers in the production-centric paradigm.

Why have Nobel prizes overwhelmingly gone to the economics of optimal resource allocation? Part of the answer is that it is a comprehensive, context-free theory of individual rationality tractable to elegant simplification. Capabilities do not fit; they are about activities that cannot be done alone or at once.

My book goes the route of a different research methodology of which Darwin is the most prominent. This is systemic observation in which one searches for general principles, applies them to more experiences and in the process subjects them to tests. Not a complete answer but we start with what goes on inside the business enterprise because it is here that innovation and value creation either take place or do not take place. My book links Edith Penrose’s capabilities theory of the growth of the firm with Charles Babbage’s principles of production and Darwin’s evolutionary principles of variation, descent with adaptation and population dynamics. All three operate within the systemic observation methodology that distinguishes the production-centric economics perspective. 

Michael H. Best is professor emeritus of economics at the University of Massachusetts, Lowell, where he was codirector of the Center for Industrial Competitiveness. He has held numerous academic fellowships and participated in development projects with the United Nations, the World Bank, and governments in more than twenty countries. He is the author of The New Competition: Institutions of Industrial Restructuring and The New Competitive Advantage: The Renewal of American Industry.