by Roger Koppl
The issue of creativity has arisen in a fun discussion on Schumpeter over at The Austrian Economists. I have often heard people say that we cannot model creativity. I suppose that must be true in some sense, and yet there is much we can say about “creativity” and social institutions. Early in the Wealth of Nations Adam Smith gives us a good account of what creativity is, namely, the “combining together the powers of the most distant and dissimilar objects.” As my old friend Dick Langlois taught me years ago, creativity is recombination. I think we can have an economic theory of recombination. Indeed, the elements are out there.
William Baumol’s famous 1990 article on entrepreneurship gives an important part of the analysis (“Entrepreneurship: Productive, Unproductive, and Destructive,” JPE, 1990, 98: 893-921). His abstract:
The basic hypothesis is that, while the total supply of entrepreneurs varies among societies, the productive contribution of the society’s entrepreneurial activities varies much more because of their allocation between productive activities such as innovation and largely unproductive activities such as rent seeking or organized crime. This allocation is heavily influenced by the relative payoffs society offers to such activities. This implies that policy can influence the allocation of entrepreneurship more effectively than it can influence its supply. Historical evidence from ancient Rome, early China, and the Middle Ages and Renaissance in Europe is used to investigate the hypotheses.
Institutions create incentives that influence the direction of entrepreneurship. Incentives influence which distant and dissimilar objects are combined.
Baumol seems to hold that entrepreneurial alertness is roughly constant across institutional settings. But both Benny Gilad and David Harper use the idea of “locus of control,” which shows how the institutional structure can influence the overall amount of entrepreneurship. (See Gilad, B. (1982). On encouraging entrepreneurship: an interdisciplinary approach. Journal of Behavioral Economics, 11(1), 132–163 and Harper, D. (1998). Institutional conditions for entrepreneurship. Advances in Austrian Economics, 5, 241– 275.) You have an “internal locus of control” if you think outcomes depend on your actions. You have an “external locus of control” if you thin outcomes depend on outside elements beyond your control. Persons in psychiatric hospitals may easily acquire an external locus of control because others plan everything for you. What you eat, where you sleep, your clothes, the temperature of the room, and so on all depend on choices made by someone else, not you. In such and environment, your entrepreneurial alertness may switch off. In a liberal policy regime of free contract, rule of law, and so on, your outcomes depend on your actions to a relatively high degree. It is a “mixed game of skill and chance” as Hayek says somewhere, but your actions are an important factor influencing outcomes. In such an environment, entrepreneurial alertness is switched on. We get more alertness and creativity. We get more and better combinations of distant and dissimilar objects.
Finally, I think there is also a complexity and computability dimension to the issue. We use the words such as “creative” and “novel” only for unexpected instances of recombination. Although “creativity” is “mere” recombination, we do not see all the creative possibilities at once because we cannot make all the computations required for such omniscience. If we have a relatively simple system, we will have few unexpected instances of recombination and little creativity. If we have a more complex system, more instances of recombination will be surprising. An important result by K. Vela Velupillai shows how this works. In “The impossibility of an effective theory of policy in a complex economy” (in Salzano, M. & Colander D. (eds.), Complexity hints for economic policy, 2007, Berlin: Springer) Velupillai shows that if the economy is “complex” in the sense that it is “a dynamical system capable of computation universality,” then an “effective theory of policy is impossible.” That means that we cannot predict what the system is going to do. If you want to know what it is going to do, you have to watch it unfold. Perhaps the system is “deterministic” in some metaphysical sense. God’s infinite mind is not in the least surprised by what happens. But we mortals with our finite minds cannot make godlike predictions of the system’s behavior. Indeed, it is logically impossible for us to make such predictions if the system is “complex” in the specified sense. Thus, we are constantly surprised by its creativity, by the distant and dissimilar objects the system combines together.
I think policy can influence the amount of creativity by ensuring things such as transparency that enable increased complexity and foster internal locus of control. Policy can influence the direction of creativity for the sort of reasons Baumol explained. Does that mean we can, after all, “model creativity”?