The Roots Of Sustained Economic Development Rest On A State Of Mind – Classical Thinking Assumed Innate Economic Behavior – Today We Understand That Economic Progress Depends On Intangibles Such As Curiosity And Motivation – Part 5

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By Paolo von Schirach

Related story:

http://schirachreport.com/index.php/2012/07/25/the-roots-of-sustanined-economic-development-rest-on-a-state-of-mind-most-of-the-world-has-yet-to-experience-real-development-let-alone-understand-it-even-in-the-west-we-do-not-have-a-clear-econo/

July 26, 2012

WASHINGTON – This is the fifth installment in a series exploring what we know about “economic development”. Please look at the link above to get to the previous pieces.

Questioning the conventional economic wisdom

Although the debates as to which are the key ingredients of economic growth and the agents of growth have not been settled, at least at some level for the longest time there has been an almost unchallenged orthodoxy which came to dominate “official” economic thinking, at least in the West. And this is the “classical” economic theory, which, notwithstanding the many instances in which it has been proven wrong by empirical facts, continues to have a surprising resiliency.

Classical economic theory

Western classical economic theory that continues to provide the elements and the framework for a large part of economic discourse is rooted in the European rationalism of the XVII and XVIII Century. According to this thinking, Man is fundamentally a rational creature. Therefore, it is postulated that he will have a natural propensity to look rationally at economic activities. This propensity will spontaneously lead him to constantly maximize the use of resources in the most rational way, in order to obtain the best return for the effort. He will also have a natural proclivity to always develop better tools and sophisticated machines that will enable him to improve quantity and quality of existing and new products.

It is important to stress that classical economic thought postulated the existence of an innate human predisposition to always look for better ways, to experiment with new technologies and to constantly refine processes in order to obtain the best return on any investment of resources.

Qualities are not innate, they are acquired

In more recent times, new psychological theories made it apparent that capabilities and skills, including those “rational qualities” to always search for better solutions attributed by the classical theory to humankind in general are instead acquired through a process of learning, as opposed to being innate, natural tendencies.

The ability to innovate and to quickly find optimal commercial applications for innovation is in fact an acquired and progressively refined skill learnt in school and/or on the job by the people who are actually involved in the different stages of any productive process. Leaving aside exceptionally talented individuals, the key variable for economic success is to improve the average skills. Skills can be improved, depending on the length and quality of the instruction provided to the individuals. An environment that stimulates and rewards original thinking is an almost indispensable precondition to creatively build upon what exists and engineer more and more innovation.

Psychological make up

Thus today we define the individual’s capability to perform well and innovate in any given economic activity as the outcome of a learning process that provides basic knowledge coupled with a psychological approach that postulates that progress can be constant, that it is desirable, and that it is within the mental abilities of all people to actively contribute to it. In other words, people acquire knowledge necessary to perform certain activities; but more importantly they learn that it is always possible to apply their own ingenuity with the objective of constantly improving upon what exists today.

Thus, little by little, we are coming to accept the notion that at least certain critical components of the economic equation have to do with the psychological make up of the individuals. These conditions largely determine whether the person will just execute basic commands or feel instead motivated to push the envelope.

Further, we have come to recognize that the economic actions of individuals are a function of their knowledge and skills, combined however with creative thinking. Most importantly such a propensity towards creative thinking is a skill that can be acquired through learning and education process, formal or informal as it may be.

A major shift

This is already a major shift. Little by little we are coming to believe that,assuming a given level of knowledge available to all, the individual’s psychological disposition towards innovation and change is probably the single most critical variable in the economic process. Depending on what he/she is taught about the value of innovation, or what is learnt through experience, the individual is likely to do or not do certain things that are going to have significantly different economic consequences.

This is important. Modern thinking has moved away from the notion of a “natural, inborn propensity” to maximize value shared by all humans. But, although this shift is relevant, we have not yet grasped its full dimension.

Still an incomplete picture

Indeed, the current debate about innovation, is still largely focused on skills, that is how much people know, how good is their academic background. How much economically applicable knowledge about science, technology, management and business practices has the individual received? From this vantage point, the individual is regarded almost as an empty vessel. Pour in the right mix of information, knowledge and training and he/she will perform in a way that will produce improved economic results.

It is undeniably true that certain specific and increasingly sophisticated skills are absolutely required in order to improve performance, as many economic activities are more and more tied to the ability to understand, manage and manipulate complex information. Yet, this approach, although largely true, is incomplete. It fails to capture the broader picture.

The fact is that economic skills are interconnected and tied to the rest of the person: his/her attitudes, beliefs, needs, aspirations and problems.

Whereas we still fail to fully grasp that individual economic behavior is one component of the person’s psychology and ensuing disposition towards all areas of his life, including economically relevant activities.

Psychology is the key economic variable

Assuming equal level of skills, the dominant variable that determines economic behavior and thus different economic outcomes is the basic psychological make up of the individual. If we want improved economic results, we have to focus on “what makes the person tick”, what motivates him to do more, to think outside the box.

If this propensity were indeed innate, as assumed by classical economic theory, then with the same or comparable levels of knowledge, on average, all humans would perform at the same level, with the same results. But they don’t.

Some cultures stress development, progress and innovation, while others do not. In fact, (see link above to earlier pieces in this series), many societies have not even got to the point of fully understanding economic development, let alone appreciating the value of constant innovation. The problem is not so much lack of knowledge but what to do with it.

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