What is the recipe for a healthy economy?

In business what we want for Christmas, and throughout the New Year, could be a healthy economy. However where can we find the recipe for that – and is economics the right perspective from which to look? asks Professor Simon Bridge

Is a healthy economy like a thriving ecology: a complex system where there are many things which, if they go wrong, can harm it – but no one thing which, on its own, can build it? Indeed the so-called Anna Karenina principle (as expounded by Tolstoy in his book of that name) would appear to apply here: ‘All happy families are alike; each unhappy family is unhappy in its own way’. In other words, happy families (and thriving economies) share a common set of attributes which lead to happiness, while any of a variety of attributes can cause a family to be unhappy (or an economy to fail).

But what are the hings which thriving economies share – and do we really know? Some may appear to be obvious, and some less so. But some of those which might appear to be obvious, possibly because they are often quoted, might not be as relevant as is commonly supposed – whereas some heretofore hidden or overlooked things might be crucial.

For instance is growth an essential condition – or is it a possible, but neither inevitable nor essential, result from a system working well? Also can we afford continuous growth in a finite world? And are low tax and/or institutional support crucial? Are they popular because they are expected/asked for, useful for those who are going to operate anyway and lauded because they are visible? But are they necessary and sufficient? In practice they are hard to direct effectively to businesses which need support and will perform better with support that would otherwise be the case? So can such businesses be appropriately targeted: what are the right targets and can support be directed to them and not to others, and, if it can be provided just to them, does it lead to cost-effective lasting improvements?

In this context some recent studies of plants may be interesting because they suggest that earlier theories of plant growth may have missed some important factors. It might be supposed that nutrients, water and sunshine are the key inputs that will lead to plant growth but, in his book Seed to Seed, Nicholas Halberd describes how a plant he studied had growth inhibitors built into its DNA. The result of this was that, instead of automatically growing whenever it had sunshine, water and nutrients, as theory suggested, this plant only grew well in conditions which caused it to produce a hormone which turned off the growth inhibitors. Thus, without that hormone, a plant remained small although otherwise healthy and it would still mature and could produce some flowers and seeds – but the lack of automatic growth ensured that it did not grow too big for the situation in which it found itself.

Them what about entrepreneurship: is it a key ingredient? I suggest that depends on what you mean by ‘entrepreneurship’ as there are many different definitions of it – some of them not compatible with others. Also it would seem that in some quarters, in the absence of a clearly accepted view on what it is, entrepreneurship is instead viewed by what it is supposed to do – which is to make economies work. But that is little help to those who want a description in order to build or grow it.

So, if those are not the key ingredients then, like the unexpected hormones mentioned above, are there unsuspected things that might be important for economic vitality? For instance:

Is fairness and the even-handed rule of law (to which even the rulers must conform) a necessary condition? Daron Acemoglu and James Robinson, the authors of Why Nations Fail) clearly think so?

Are diversity and cross-fertilisation from different backgrounds and disciplines important? In his book, The Medici Effect, Frans Johansson argues that innovation comes from diverse industries, cultures, and disciplines when they all intersect, bringing ideas from one field into another. But, if that is so, how can they be brought together to mix appropriately?

Could a supportive and encouraging social environment be the thing that negates any other possible inhibitors – because building enterprise becomes the fashionable and desirable thing to do? In The Rainforest, their book about Silicon Valley, Victor Hwang Greg Horowitt emphasis the socially supportive and reinforcing attitude to be found there.

Might that lead to a shared approach to innovation – including the acceptance of ‘trial and error’ as often the right way to proceed? Paul Kennedy, in Engineers of Victory, recounts how the Allies won the Second World War, not by sticking to traditionally favoured approaches but, ‘through skilful and artful contrivance’, ‘engineering’ solutions to five key but complex strategic problems – not like the thinking behind the 10X ‘vision’ which appears to laud innovation but shows little evidence for the capability actually to practice it. Like cooking a tasty meal, it is not just assembling the right ingredients, but engineering the conditions in which encourage them to combine in a helpful way.

Could some or all of these be at least part of the answer? None of them are simple cause-and-effect factors with a direct and sure link from inputs to outputs where ‘if you do this – that will happen’. Therefore they are not easy to justify by clear links to measurable outcomes. Has a consequence of that been a fall-back preference for copying others? But trying to replicate the supposed success of others without understanding the real nature of what is being copied is unlikely to be successful, as experience has shown. Therefore, instead of thinking that we know the answer I suggest that we need to look with open minds.