Economic Growth Hinges on Reduced Government Intervention

Following the 2008 global financial crisis, many economists and market observers hastened to declare that the era of free markets was over. America and the world, they said, were trending toward greater reliance on government controls.

Contrary to those predictions, the changing nature of economic growth means that prosperity is actually more, not less, reliant on free, competitive markets, according to Frontier Economics: Why Entrepreneurial Capitalism Is Needed Now More than Ever, a report released by the Kauffman Foundation.

“Over the past generation, world economic policy has been dominated by greater reliance on market competition,” said Brink Lindsey, the study’s author and Kauffman Foundation senior scholar in research and policy. “Notwithstanding the recent financial crisis, there are good reasons to believe this trend will continue well into the future.”

Lindsey’s analysis focuses on the evolving requirements of economic growth as countries grow richer. “Imitative growth,” which comes from applying existing knowledge, becomes less important; “innovative growth,” which comes from new ideas, becomes more important. The world economy has entered an era of “frontier economics,” Lindsey says, as growth is increasingly something that takes place at the technological frontier.

According to the paper, when countries are poor and less advanced, the economic future is relatively predictable. The example of rich countries allows policymakers in less developed countries to peek into the future and see the economic changes that need to be made. Consequently, there is less need for market competition to guide the course of development. But as countries successfully pursue “catch-up growth” and approach the technological frontier, the future grows increasingly uncertain. Now innovation, rather than imitation, is the key to continued progress, and the ceaseless trial-and-error experimentation of competitive markets becomes indispensable.

Meanwhile, the nature of the technological frontier keeps changing. Over the course of the 20th century, the central economic challenge was the fulfillment of basic material needs through mass production and mass distribution. As mass affluence spreads and deepens, though, the future course of economic development becomes increasingly unpredictable. Only wide-open competition among countless rival new ideas can solve the puzzle of increasing consumer welfare.

The richer nations get, the more they “rely on innovation to keep growth going and, therefore, the more we need free-market policies that foster the creation of new businesses and the implementation of new ideas,” Lindsey said. “If we are to”_launch a new, 21st-century boom, it is in the direction of freer, more competitive markets that our policies must turn.”

Visit the Kauffman Foundation for more information.