Planning vs. Trial and Error
By Arnold Kling
Tyler Cowen quotes Barry Eichengreen.
Thus Europe, which had relied on extensive growth in the 1950s and 1960s, had no choice but to switch to intensive growth from the 1970s on. The problem was that institutions tailored to the needs of extensive growth were less suited to the challenges of intensive growth. Bank-based financial systems had been singularly effective at mobilizing resources for investment by existing enterprises using known technologies, but they were less conducive to growth in a period of heightened technological uncertainty. Now the role of finance was to take bets on competing technologies, something for which financial markets were better adapted.
As Amar Bhide has pointed out in The Origin and Evolution of New Businesses, bureaucracies are effective under circumstances of low ambiguity but high capital intensity. On the other hand, small enterprises competing in a Darwinian trial-and-error contest are a better approach in situations of high ambiguity, meaning circumstances of rapid change where the rates of return are highly uncertain ex ante.
As Eichengreen’s book apparently points out, Europe’s institutions were set up to work effectively under low ambiguity. However, America’s more open capitalist system is more effective in industries where ongoing technological change is more significant.