There is considerable disagreement on optimal antitrust policy both within the United States and between the United States and some other nations and regions. These fundamental disagreements over the right approach to competition don’t stem principally from politics, rather they stem from doctrine – the overarching view of antitrust held by regulators and other policy makers. In a new report, ITIF examines the four principle antitrust doctrines, how they influence approaches to and positions on antitrust including on particular antitrust issues (e.g., monopoly, collusion, pricing, and mergers) and how the field of antitrust can move forward to better cope with the challenges of the 21st century, innovation-based global economy.

Presentation entitled “Innovation Economics as the 21^st Century Economic Doctrine” for a Technology Transfer: Issues and Processes class at the USDA Graduate School.

In May, 2010 ITIF and the Center on Labor and Community Outreach co-hosted a meeting in Chicago of innovation economists, social justice activists from a range of organizations, and thinkers from the environmental movement to explore how technology and innovation are linked to everyday concerns about justice, human rights, economic opportunity, and environmental initiatives. The summary of that meeting provides useful insights on the common ground as well as the differences among today's creative thinkers from these varied communities.

Last week’s cover story of The Economist, "Picking winners, saving losers", assails nations’ industrial policies, arguing that they almost always fail and constitute inappropriate government intervention in markets. Our blog post picks this argument apart, noting that The Economist’s article fails to adequately distinguish between innovation policy and industrial policy, glosses over a litany of successful contributions U.S. innovation policies have made to spurring economic growth, and fails to explain how the private sector alone could have created the Internet or mapped the human genome. It notes that, though neoclassical economists may not like it, governments play a legitimate and crucial role in shaping the innovation capabilities of national economies. As between corporations, it’s a competition; and, as with companies, the countries that develop the best strategies and skills at fostering, developing, and delivering innovation are the ones most likely to win.

Budget deficits are emerging as one of Washington’s chief economic obsessions, with both liberal and conservative economic camps opining about the deficit’s effect on the economy. Robert Samuelson’s recent column in the Washington Post describes how the major economic doctrines—particularly Keynesian and monetarists (or supply-siders)—interpret the fiscal impact of budget deficits.

Keynesians believe budget deficits (either from increased spending or reduced taxes) can stimulate the economy, leading to more demand and therefore more jobs. As Paul Krugman’s recent arguments have demonstrated, they believe that when unemployment rates are high job creation should not be sacrificed on the altar of deficit reduction. In contrast, many neoclassical economists, especially conservative supply-siders, argue that big government deficits reduce national savings and increase interest rates while also contributing to financial uncertainty and reducing private sector investments.

While Samuelson rightly points out the differing perspectives of the Keynesian and supply-siders, he misses what they have in common. Neither of them considers the role of innovation in their growth models or distinguishes between spending and investment. And with this omission they fail to see what particular types of deficit spending can be harmful to the economy and conversely what kinds can be beneficial.

Innovation economists argue that the long-term benefits of investments, particularly in innovation, outweigh the costs of temporary budget deficits. For example, as the Information Technology and Innovation Foundation recently demonstrated, expanding the R&D tax credit, while costing the government money in the short run, would actually lead to more revenue for the Treasury in the medium term. Innovation economists support direct investments, such as government research, and indirect public investments, such as an expansion of the R&D tax credit. Robust investment in innovation and technology are essential to long-term growth. This is because innovation increases productivity, and productivity gains have accounted for the lion’s share of economic prosperity over the last several decades.

Once economists recognize innovation as the most important part of economic policy, the impact of budget deficits becomes clearer. For example, neoclassical economists worry that deficit spending will increase interest rates and reduce the amount of capital available for private sector investment. Innovation economists believe that investments in technology and knowledge spur economic growth and will generate more capital. The problem is that the market doesn’t always allocate as much capital to these endeavors as it should. Indeed, the extremely low interest rates in the early 2000s did little to boost these kinds of investments. Instead, people used low interest rates to increase capitalized spending, specifically in housing, which created the housing bubble. Instead of emphasizing access to capital, innovation economics argues that if investment in technology (including new capital equipment used by business) is the goal, then policy makers would do better to focus on policies that incentivize such investments, such as allowing first-year capital expensing—even if doing so temporarily increases the budget deficit.

Samuelson frets that the differing opinions on how to handle the budget deficit indicate that “[w]e may be reaching the limits of economics.” Indeed, if in the knowledge-based economy we are limited by theories that still define the production process as only land, labor or capital, as Adam Smith did, these legacy economic doctrines will likely offer little advice on the budget. On the other hand, the new-growth theory of innovation economics that puts knowledge and innovation at the center of the contemporary production process is more able to intellectually navigate the modern, global economy and dictate appropriate policy decisions.