Bottom-up or top-down? Which is the fastest route to economic development?

Senior Associate Dean Bhaskar Chakravorti interviews Professor Amar Bhide, Senior Fellow at the Center for Emerging Markets and Thomas Schmidheiny Professor of International Business

Bhaskar Chakravorti: Let us talk about the most effective mechanisms for transforming the well-being of a wide cross section of citizens. Specifically, I would like to focus on the distinction between mechanisms that are bottom-up versus those that are imposed from the top down.  Here, in the US, you have different gradations.  There are transformations that are brought about by entrepreneurs and the private sector, by legislation enacted by Congress and at the extreme by presidential order.  Congress lies somewhere inside that continuum; not that Congress is the market, but at least in theory it represents the broader population; so it isn’t purely top down. 

We are having this conversation at a point in time, where the top-down system in the US and Europe is not delivering.  Political gridlock is preventing bold and creative action. What would you say to people who suggest that the West needs another so-called “Sputnik moment”: a severe ratcheting up of the urgency to take dramatic action and increase funding for science, engineering and technology and lay down an infrastructure upon which many initiatives – more top down and entrepreneurial – could flourish. Is such a nudge to get the top-down action going a pre-condition for transformation and innovation?

Amar Bhide: Count me as a skeptic of the Sputnik moment. The alleged “missile gap” that triggered the panic turned out to be non-existent. Sure some innovations, such as freeze dried food, came out of the space program. But who knows how many more might have been produced if the same funds had been applied somewhere else. Sending a man to the moon was a fine symbol, but was it on the whole a good return on public funds?

A sputnik-like panic also broke out in the 1980s, when Japanese companies were going to take over the world. Fortunately no “action” was taken to cure it. Or think of the military misadventures that resulted from a top-down approach, such as the Iraq war and the Vietnam war. 

There certainly are some issues that should be decided at the federal level.  You cannot have an air traffic control system that is provided for – or regulated – at the state level. But even federal action can be more centralized or less centralized.  An air traffic control system can be created in Congress by some congressmen who are deeply involved in persuading their colleagues.  Or it can be dictated by a centralized executive authority.

I think we should, to the degree possible, keep things local.  National or international action should be a last resort. Even then, we should use a dialectical process involving representatives of different local constituencies rather than giving the authority to a single individual or institution.

For example, I think centralization and the absence of open debate about monetary policy has been a huge mistake. Alan Greenspan, the chairman of the Federal Reserve had altogether too much power. Now, Bernanke has too much power.  The results are disturbing.  Quite apart from the economic effectiveness of the Fed’s interventions – that no one can really know – it is awful that the Fed has lost the confidence of the public. The approval ratings of the Federal Reserve are below that of the IRS.

That’s a terrible outcome in a democracy. Whether the recession ends one quarter earlier or one quarter later is of less consequence than protecting a system of being governed by the people, for the people from secretive centralization. 

BC: Let us, briefly, dig into the “by the people, for the people” bit.  The economic equivalent of this democratic idea is the reliance on market forces.  At least, in principle, well-functioning markets tend to reflect the structural dynamics of various actors going about their activities while pursuing their individual objectives and then the market aggregates such behavior into signals, the price signal being the principal one.   The market participants, being rational actors, presumably, respond to signals. If some of those actors are entrepreneurs they are looking for opportunities to build businesses.  Is this kind of a mechanism you have in mind when you speak of alternatives to a central authority?

AB: There is a constant interplay between private initiative that often leads to technological advances and the need to solve the coordination and externality problems that arise through these technological advances.

I don’t believe the process works because individuals merely respond to market signals. That is, I think, one of the mistakes in the way economics construes real-world behavior: it assumes that market actors are automatons who simply arrive at the one and only one possible answer when prices changes.  I think there is a very different dynamic at work: individuals imagine the way the world ought to be and exert themselves to make it so.  We had entrepreneurs imagining that there could be such a thing as a horseless carriage. Then we had people who said, “The railroads are too powerful. Let us put public funds behind an alternative mode of transport”.  This got us the “good roads” movement. And then because of automobile accidents, we had other people who said we needed a thing that had never existed before, namely, traffic police. And so it goes.

BC: But isn’t it the case that this process involves the vast majority of market actors responding to signals? Of course, there are people like the automobile entrepreneurs or the Steve Jobs-type visionaries who imagine things that other people didn’t imagine. But most entrepreneurs and businesspeople are primarily responding to signals.  For example, if I am a PC maker, how do I stay competitive or stay ahead of the Taiwanese competitor with a superior cost structure?

AB: Certainly, everything is, to some degree, derivative. But even the least entrepreneurial act involves, to some degree, imagination of a world that does not exist except in the entrepreneur’s mind. So someone sees a closed shop-front and says: “why isn’t there a barber shop there?” There’s nothing startlingly creative about starting a barber shop, but starting a barber shop in a particular place or at a particular time is an act of imagination. Now it is also, to be sure, an act of responding to the observation that there is: a) a place available for rent; and b) a calculation of whether to start a barber shop there or not.  A sensible person will look at the rents and try to project whether the local customer base can support a barber shop. But it is very hard for me to imagine a business choice that does not require a certain leap of faith.

And this is the case both in the private sphere and in the public sphere. We are not computers programmed to play jeopardy games; we are, inherently, forward-looking.

BC: Let us keep with the notion of the imaginative actor and stick with this last distinction that you just made about the context in which they operate: the public and the private spheres. I am trying to get a sense of whether top-down or bottom up has an edge in terms of the degree of creativity and inventiveness.  Have you in your research or in your experience observed any distinction between people in the public sphere versus the private sphere in their ability to imagine? Let me clarify. Very often when you’re in the public sphere, your ability to be overly imaginative or truly go off the reservation is restricted because you’re playing to a multi-stakeholder audience with multiple agendas that need to be tended to. And people often argue that that is why top-down initiative is not as innovative because you are beholden to multiple constraints, multiple shareholders or stakeholders. On the other hand, in the private sphere if you are a bottom-up entrepreneur, working your way up from the grassroots, you are just choosing opportunity as you see it or as you imagine it.  You are to some extent freer.  You may have fewer resources at fewer levels but you are potentially far more open to imagining something that isn’t there and then making a run for it.

AB: It’s more a question of what scale you’re operating on.  A lot of politics is local, and then you have politics that has national and international dimensions.

Likewise, you have entrepreneurs who run small businesses and CEOs who run gigantic organizations. A CEO who is running a gigantic organization can, more or less, make a multi-billion dollar acquisition, which the entrepreneur cannot.  On the other hand, the entrepreneur doesn’t have to persuade a whole bunch of employees or boards of directors.  So in many ways the CEO may have much less power. Likewise, in politics, you have mayors who have an enormous amount of power locally, but they cannot declare wars. Presidents can declare wars but, compared to mayors, they may be unable to effectively respond to hurricanes. 

BC: In other words, there are benefits coming at it from both directions. The higher you go you are more constrained, but you also have more resources. An entrepreneur may have more freedom but fewer resources to put against the opportunities. 

If you were to just shift this discussion to the global stage, almost every other day there is yet another round of chest-beating that happens about the free-enterprise, messy democracies falling behind the tightly controlled centrally run societies, such as China. Today in the Financial Times, in fact, there is an op-ed about how even though the United States has won the majority of the Nobel Prizes, this position is going to be short-lived.  The author predicts that, in the future, the majority of Nobel prize-winners are going to be from Asia. The general point being there is a concern that the top-down state-led, highly coordinated method of rapid growth will outpace the messy free-market kind. So if you were to project this as the new “Sputnik moment” for the US, if I may call it that, where do you think this top-down versus bottom-up debate would be headed?

AB: God save us from a new Sputnik moment.  As Paul Krugman has eloquently pointed out, the notion of country competitiveness is deeply flawed; people compete, firms compete, but the notion of countries competing is bogus.

As a matter of fact, this was the thesis of my last book: it is absurd to think of technological progress as a zero-sum nationally-based game, as a kind of Olympics where for China to win more medals, the US must win less.

Specifically, on the issue of Nobel prizes, I don’t think that the number of Nobel Prizes has much to do with economic prosperity. If Nobel Prizes mattered, then Hong Kong’s GDP per capita wouldn’t be 30 percent greater than that of Japan and Germany.

The notion of a centralized directed effort to produce more Nobel Prizes is misguided. This is the kind of obsession that distracts from more serious problems.  The attention and resources that Congress and other federal policy-makers have available to them is limited. I would rather that they focus on things that really mattered for the public good.

BC: In the near term the biggest issue that seems to be on everyone’s mind is: jobs and the unemployment rate. Is that a purely domestic problem or is that linked to the global economy?

AB: I think unemployment is largely a domestic problem.  And, as far as a top-down economy goes, things are not roses in China either.  Corruption is a very serious matter, for instance.

BC: Yes, especially at the local level it is well known that it is an integral part of the system.

AB: Another great danger for China is that it could become like Japan: an export machine that produces trade surpluses and holdings of U.S. Treasury Bonds but falls short of satisfying what its people need.

BC: One final question, for which let us turn to the example of India. India is going through an ambitious project: a unique identification project.  Are you following that?

AB: My very good friend from college is leading it.

BC: Nandan Nilekani.

AB: Yes.

BC: What do you think about this interesting top-down approach to identifying every single individual with the objective, in an ideal scenario, of giving him or her enough tools and resources to engage in productive bottom-up activity. In a way, an initiative such as this, which is top-down with the eventual goal of promoting bottom-up initiative, closes the circle of what we’ve been talking about.  Do you have any observations on this project?

AB: I haven’t been to India since it started. But I would say that record-keeping has never been very good in India. Many countries in Europe have long had a system whereby whenever you moved to a new place you had to register, so everyone’s location and identity was recorded. Solving this universally across India strikes me as being a gigantically hard problem. But again, this is entrepreneurship right? Whoever dreamt up this idea was clearly visionary even if somewhat over-ambitious.  The wisdom of such ideas is hard to determine until after the fact.

BC: I agree.  At the very minimum we can say that whether one looks for the top-down approach or the bottom-up initiative to get a path to transformation started, a critical step is imagining a future that currently does not exist.  In some cases, that imagination comes from the top.  In others, it is developed at the grassroots and then finds a way to multiply.

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