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Will Paul Romer Be the Cat Among the World Bank Pigeons?

By Shlomo Maital  

 Romer

Paul Romer – New World Bank Chief Economist

      The World Bank was created in July 1944, at Bretton Woods, NH, and has as its goal spurring growth among poorer countries by helping them  borrow capital for infrastructure projects. Repeatedly, the modern relevance of the World Bank has been questioned, when, in a globalized world, nations that run their economies well can access world capital markets by themselves – and nations that do not won’t get World Bank funding anyway.

     The relevance of the World Bank depends on understanding what are the underlying factors that drive growth. For years, economists simply did not know. Here is what The Economist says:

     Prevailing models of growth assigned an important role to technological change, but lacked a convincing explanation for how it came about. Instead, the models treated new ideas a bit like manna from heaven, arriving in a mysterious and unpredictable manner.

   Prof. Paul Romer had a different theory.  

   Mr Romer sought to change that. His work made the development of new ideas “endogenous”, meaning that it sought to account for them, rather than writing them off as “exogenous” surprises. In his “endogenous growth” theory, new ideas materialise as firms invest in physical capital or research and development, creating knowledge that spills over to the rest of the economy. That suggests that open economies, with institutions that encourage investment in physical and human capital, ought to do best.

   The importance of the quality of institutions and of the dissemination of innovation led Mr Romer to focus on urban areas, which are often hotbeds for the creation and transmission of ideas. That focus, in turn, sparked a radical notion of economic development oriented around “charter cities”. Poor countries, he argued, should create new cities and give them leeway to experiment with daring economic and political reforms.

I know Romer is right. Israel has startup cities, like Tel Aviv, that are vibrant entrepreneurship ecosystems. Berlin is one; so is Silicon Valley (a region, not a city); Research Triangle (N. Carolina); Cambridge, UK, and so on.

Will Paul Romer change the thinking of that Old Lady, World Bank, with its old-fashioned stodgy theories? Will he leverage the World Bank’s lending power to foster entrepreneurship in poorer nations?

Stay tuned!

 

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Creativity Capital: We’re Destroying Billions of Dollars Worth!

By Shlomo Maital

money burning

   What is “capital”? For most people, capital is something tangible, like money, houses, or other assets. But for economists, capital is somewhat abstract – it is the summed present value of a stream of future benefits.  

   For instance, a bond pays interest for 10 years or 25 years, and its value is the summed p.v. of those interest payments plus the principal.

   People, too, comprise capital. When you improve your skills, the summed present value of the added income from those added skills is also capital and can be calculated – this is “human capital”.

     I believe there is a kind of capital that we are constantly destroying, rather than building as we should. It is “creativity capital”.

     Here is a small story. The daughter of a close friend drew a picture in elementary school. The teacher said that it was utter rubbish. Even though the young girl’s mother was a skilled artist, and even though she herself had talent – she never again drew a picture.   Perhaps the world lost an important artist; but more important, she herself lost an activity that could have given her enormous pleasure.

     This one case is creativity capital that was destroyed, because a stupid teacher was insensitive and failed to understand that her role is to encourage and empower, not destroy. How many other such cases are there? How many readers have encountered similar massive destruction of their creativity capital?

     How do we get schools to stop destroying massive amounts of creativity capital? What if we tried to put some numbers on ‘creativity capital’ and more important, investment in it (the additions to Creativity Capital)?   What if we tried to measure schools not by students’ scores on stupid mechanical tests, but by the extent to which their students excel in, say, the Torrance Creativity Test?  

     What if teachers’ job definition changed radically, from teaching test-taking skills to fostering ability to come up with wild ideas and then implement them?  

     But – how in the world can we make this happen?  We need creative ideas to create Creativity Capital.

Blog entries written by Prof. Shlomo Maital

Shlomo Maital
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