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11 On the Creative and Innovative Economy Like most people, I believe Hong Kong’s long-term economic growth depends critically on the creativity and innovation of its people. But is there a role for the government to promote policies and build institutions to foster creativity and innovation? This essay presents the intellectual case for selective intervention toward that end. It proposes a general approach that might have the highest chance of economic success in the Hong Kong context. Positive non-interventionism has long been the guiding principle in managing Hong Kong’s economic affairs, so naturally there is some hesitation about a new positive interventionist role. It is not easy for institutions and people to simply reverse gears on this issue. Moreover, the necessary political support to develop institutions and people to foster creativity and innovation will not be easy to sustain, as these investments are unlikely to yield instant success. Nonetheless, there are economic reasons why some positive intervention could be good for Hong Kong. Ideas as Causes of Economic Growth Economic growth is about increasing income per capita so that over time the standard of living improves. When income per capita rises continuously, its growth rate must be positive and this means labor productivity, defined as output per worker, will rise without limit. It also means that the law of diminishing returns ceases to apply and the economy experiences increasing returns. Per capita income may rise in three ways. First, an economy can increase labor productivity by increasing the stock of capital per worker. The mechanism for this is to lower consumption, which raises savings, produces more investment, and drives up per capita income. Growth continues as long as savings and investments can be increased. However, the amount an individual 114 Conditions Affecting Growth and Innovation can save is limited by his or her income and willingness to lower consumption. Once savings-driven investment ceases to increase, the growth rate will fall to zero. So investment alone cannot lead to continuous growth. Second, labor productivity can be increased if the economy has access to better technology. Poor developing economies with lesser technology can catch up with rich developed economies by learning or acquiring their better technology. Catching up is of course a one-off technological improvement and leads to a one-off increase in per capita income. Unless technology can improve continuously, its effect on per capita income, like that of investment, will run out and the growth rate will then fall to zero. Third, per capita income can grow continuously if technological progress can be sustained continuously. Chicago economists Paul Romer and Robert Lucas have worked out what it takes to achieve this using a model of endogenous growth. For them, economic growth arises from new ideas invented by people. They see the world as being divided into “ideas” and “things.” Output, labor, capital and human capital are “things.” These resources are scarce and are governed by the law of diminishing returns. They alone cannot produce sustained economic growth. Human beings, however, possess an infinite capacity to discover better ways to do “things” because they can have “ideas.” The application of “ideas” is not subject to the law of diminishing returns. Investing in human capital enhances the chance for discovering new “ideas,” while new “ideas” in turn enhance the stock of human capital. The iterative positive interaction between “ideas” and human capital therefore produces increasing returns. We can think of “ideas” as pure public goods and “things” as private goods. The value of a pure public good is not diminished by more people using it, but this is not true of a private good because anyone who uses it denies its use to another person. The pure public goods nature of “ideas” makes it fundamentally different from the private goods nature of “things” and this is the source of increasing returns. For example, the “idea” of standardizing units of measurement was an important productivity-enhancing discovery and had numerous applications. Similarly, the idea of making coffee cups of different sizes that use the same size lid in coffee shops is also a productivity-enhancing discovery. The paper that makes up the coffee cup is a “thing” and typically only one person can use one paper cup at a time. In other words, a paper cup is like a private good; when one person uses it, others are deprived of its use. The insight that the same On the Creative and Innovative Economy 115 sized lid can...


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