The Competitiveness of Nations

in a Global Knowledge-Based Economy

H.H. Chartrand

April 2002

The Neo Physiocracy

Biology, Economics & Epistemology

 

IV

Conclusions

Some Artful Reasoning about Biotechnology

Harry Hillman Chartrand ^©

02/04/24

Parts I, II & III

Table of Contents

Index

0.0 Introduction

1.0 Findings: IO Entries - Exhibit 1

2.0 Physiocratic Policy Paradigm – Exhibit 2

3.0 Neo Physiocratic Policy Paradigm – Exhibit 3

4.0 END

           References

0.0 Introduction

0.01      In this concluding paper I sum up findings of Parts I, II & III (Exhibit 1).  I also sketch out a Neo Physiocratic Policy Paradigm (Exhibit 2) and end with a statement of why both the findings and policy paradigm can be but ‘artful reasoning’ about biotechnology in an emerging global knowledge-based economy.

 Index

1.0 Findings: IO Entries

1.01      In Part I, the groundwork was laid with concepts and context defining the biotechnology sector of a global ‘knowledge-based’ economy.  It was established that:

(a)    biology is one of three elemental natural and engineering sciences including chemistry and physics.  Unlike it sisters, however, biology is engramed with inherent, yet varying, cultural (legal, moral, national and social) constraints on application of the experimental method; 

(b)    economics is loosely composed of three parts: micro-, macro- and meso-economics.  Once upon a time the dominant school of economic thought was the Physiocrats of pre-Revolutionary France.  For them, ‘economic surplus’ required for economic (as well as cultural) growth flowed primarily from agriculture: one seed, a thousand in return.  They were displaced, literally, by the guillotine and, conceptually, by the ‘manufacturing’ economics of the English Classical School.  At the meso-economic level, the taxonomy of Industrial Organization (IO) was chosen to organize evidence of the microeconomic behaviour of biotech consumers, firms and markets and link such evidence to the macro-, ‘national’ and/or ‘global’ economy; and,

(c)    epistemology, etymologically, defines ‘science’ by the Latin ‘to split nouns of kind or quality’ from which taxonomy, in biology and other ‘sciences’ – moral, natural and social, emerged.  Technology, on the other hand derives from the Greek techne for art, and logos for reason, i.e. reasoned art.  Similarly, economics, ecology and ekistics share the same Greek root – oikos-  referring, respectively, to: management of the house; activities taking place in and around the house; and, human settlement.

1.02      In Part II, the basic IO taxonomy was used to organize evidence about the industrial dynamics of the biotechnology sector.  Only selected taxonomic slots of the IO model received evidentiary entries under Basic Conditions, Structure and Conduct (Exhibit 1, below).  Evidence needs to be assembled and entry made for all slots to obtain a robust understanding of the biotechnology sector.  Evidence presented included:

·   the basic conditions of supply and demand including the role of ‘star’ innovators and ‘knowledge-preneurs’ in fuelling a spiraling cycle of technological change and the culturally and nationally varied resistance to biotechnological innovation ;

·   the economic institutions (and their agents) – including ‘star’ inventors/innovators, nonprofit (including the traditional university), private and public institutions, price and market systems and ‘national systems of innovation’ - constitute the skeletal structure of the biotechnology sector; and,

·   examined the conduct of economic agents in ‘doing business’ including their reliance on an evolving system of national and global intellectual property rights. 

1.03      In Part III, the IO taxonomy was completed with assessment of Performance (Exhibit 1, below).  In addition a prospectus for the biotech sector was sketched.  Evidence presented with respect to Performance included:

·   Allocative & Technical Efficiency: Allocative or economic efficiency has not been achieved.  The sector, as a whole, is experiencing significant annual losses while market capitalization soars (Part II - Table 1: United States Biotechnology Industry, 1993-2001).  This apparently contradictory situation reflects an economic consensus about the technical efficiency of the sector (‘can-do’ efficiency) combined with the expectation of large future profits (Part III – 1.0 Performance (a) Allocative & Technical Efficiency, para. 103-104).  In addition to growing equity capitalization of the sector, losses are also covered by the Schumpeterian deep pockets of large firms that tend to vertically integrate the innovation process – formally through acquisitions and informally through ‘partnerships’;

·    Conservation: assessing biotechnology’s performance with respect to conservation is unique.  On the one hand, biotechnology embodies ‘renewable (new) resources’ into the distant human future.  On the other hand, biotechnology, according to some, threatens to rend the inherited fabric of Nature (or of God) handed down from Time immemorial.  Resolution of this clash over “time preferences” (Bain 1968, pp.425-426) – essentially secular progress vs. religious return - boils down to an assay of value demographics;

·   Equity usually refers to the ‘fairness’ of reward shared by ‘stakeholders’, e.g., management, workers, shareholders, and the public.  Equity also has meaning in law, specifically, it governs the abuse of rights under the law.  Given that the legal foundation of biotechnology is intellectual property rights granted by the State, use and abuse of such rights by ‘rights holders’ are a matter of equity under the law.  ;

·   Progressiveness of the biotech sector was reviewed assessed with respect to the knowledge base, talent and technique. 

·   With respect to the knowledge-base, it is, metaphorically, expanding exponentially (Howard 2000).  There is an economic consensus about its eventual and substantial financial yield. 

·   With respect to talent, like all ‘knowledge sectors’, biotechnology is evolving institutional patterns to accommodate highly innovative talent that, by its nature, tends to be uncomfortable in highly bureaucratized structures with the sometime exception of the traditional university.  A parallel was drawn between the arts industry and biotechnology.  In both sectors, large global corporations use intellectual property rights – copyright in the arts sector, patents in biotechnology – to construct business ‘empires’.  In each, large enterprise has the Schumpeterian deep pockets to maintain the innovation process and bare the costs of market testing and regulation.  Both tend to solve the problem of creative talent by employing them in smaller subsidiary or affiliate firms with corporate office responsible for strategic development, ‘mass’ production and marketing. 

·   With respect to technique, as part of a fundamental scientific revolution, the initial tools and techniques of biotechnology are ‘first generation’.  They are technically efficient but do not usually achieve immediate allocative efficiency.  Process innovation is occurring leading to rapid and continuing improvement of the very devices and processes that caused the initial paradigm shift.

·   Public Infrastructure: Biotechnology is the first major scientific ‘paradigm’ shift to take place in full public view.  This new optic of ‘public transparency’ has been provided by a postwar institutional lens of rights granted by, regulations established and monitored by, and, national ‘innovation’ systems constructed by, the State, to foster and encourage innovation while maintaining public health and safety.  This has had a significant and differential affect on the IO Performance of the biotechnology sector in different countries.

1.04      Entries made to the IO taxonomy in Parts II and III are indicated in Exhibit 1, below:

1.06      In the Prospectus, economic concepts of expectations and futurity were examined to explain why the biotechnology sector, as a whole, is experiencing significant annual losses while market capitalization soars.  In short, one’s vision of the future affects one’s actions today.  Visions of the future concerning technology are generated using a range of technological forecasting and assessment techniques that breakout into two major categories: exploratory forecasting of existing trends and normative forecasting of preferred futures and how to get there.  Available forecasts suggest a continuing flow of significant new biotechnologies, products and processes well into the middle of the century.

 Index

2.0 The Physiocratic Policy Paradigm

2.01      In the natural and engineering sciences (NES) new knowledge displaces old, e.g., colour TV replaces black and white.  In the humanities and social sciences (HSS), however, as well as in the arts, what is old often becomes ‘new’ again having been conserved in the ‘cultural canon’.  Thus Aristotle and Plato are still taught, Bach is still played and King Tut still amazes.  Economics, as part of HSS, is not just about ever increasing precision of mathematical formulae; it is also about retracing the numerous voyages made by economists over some three centuries of discovery.  In many cases captains and crews never returned marooned in intellectual cul de sac.  Sometimes, however, their voyages are retraced and the discoveries of early explorers are then, sometimes, added to mainstream thought: witness ‘New’ Classical Economics, ‘New’ Institutionalism and the revivification of Schumpeterian ‘creative destruction’. 

2.02      Not only economic thought is changed as the mainstream evolves, economic policy is affected involving, as it does, implementation by nonprofit, profit and public institutions with the expenditure of vast sums of monies and person-years of effort.  Such reconstruction will, I believe, be the fate of Physiocracy in the emerging global knowledge-based economy:

The Physiocrats  were a group of French Enlightenment thinkers of the 1760s that surrounded the French court physician, François Quesnay.  The founding document of Physiocratic doctrine was Quesnay's Tableau Économique (1759).  The inner circle included the Marquis de Mirabeau, Mercier de la Rivière, Dupont de Nemours, La Trosne, the Abbé Baudeau and a handful of others.  To contemporaries, they were known simply as the économistes.

History of Economic Thought Website

Department of Economics, New School University

http://cepa.newschool.edu/het/schools/physioc.htm

2.03      The term “Physiocracy” itself (introduced by Dupont de Nemours in 1767) literally translates to “the rule of nature”.  For the Physiocrats, the ‘surplus’ required for economic (as well as cultural) growth flowed primarily from the land, i.e., agriculture: one seed, a thousand in return.  They were displaced, some of them literally by Madame La Guillotine and all, conceptually by the ‘manufacturing’ economics of the English Classical School founded with Adam Smith’s Wealth of Nations (1776).  Beyond a focus on agriculture, the Physiocrats are also remembered for two French phases incorporated into mainstream economics: laissez faire and laissez passer. 

2.04      Given the feudal nature of France during their time, the Physiocrats called for the removal of restrictions on internal trade (laissez faire) and labor migration (laissez passer), the abolition of compulsory labour or corvée, the removal of state-sponsored monopolies and trading privileges as well as the dismantling of the guild system.  In England, the Statute of Artificers continued regulating training and employment in the craft guild tradition until 1814 when, responding to Classical Economists, Parliament abolished the statute (Savage 1985, 94-97). 

2.05      Unlike Smith, Marx, and Keynes, the Physiocrats had but one short-lived opportunity to implement the policy implications of their theory.  Thus Anne Robert Jacques Turgot served as Contrôleur général of France between 1774 and 1776.  While not formally a member of the économistes, Turgot engaged “in a heroic but ill-fated attempt to sweep away statist restrictions on the market economy in a virtual revolution from above.” (Rothbard 2002)  He was fired.  In little more than a decade the so-called Ancien Regime was swept away in revolution.  The Physiocrats became little more than a footnote in economic history trotted out, time to time, in support of free enterprise, limited government and the sanctity of private property.

2.06      Behind the Gallic façade of laissez faire, laissez passer and a focus on agriculture, there lays, however, deeper policy implications to Physiocracy.  First, unlike the Classical Economists, the Physiocrats accepted government as an active and productive agent in the economy:

The Physiocrats would have influenced the allocation of resources directly, as they deemed necessary; and, moreover, pervasively, by controlling the particular institutional environment within which resource allocation takes place, to wit, so as to direct resources to agriculture - neither of which is Smithian.  The free market of Smith was relatively spontaneous, autonomous and viable; that of the Physiocrats would not be the opposite but it would be a manipulated economy.  To Smith, government had positive tasks but was to be relatively passive insofar as resource allocation and economic development were concerned; to the Physiocrats, government was to supervise actively the performance of the economy (thus antedating contemporary programs of economic development). (Samuels 1962, 159)

Second, the nature of public intervention was to be radically different from Marxian ‘ownership of the means of production’ or Keynesian macroeconomic management of aggregate demand.  Accepting that private property and self-interest were the drivers of economic growth and development, the Physiocrats planned to reach beneath the surface of the laissez faire, laissez passer marketplace.  They would reach down to the legal foundation of capitalism (Commons 1924) and manipulate the nature of property rights themselves:

The Physiocratic theory of economic policy is fundamentally related to a theory of property: state relations in which private property is the dominant institutional form but wherein the public interest is manifest in the continuing modification or reconstitution of the bundle of rights that comprise private property at any given time. (Samuels 1962, 161)

Thus Physiocrats intended to ‘load the dice’ of the marketplace to raise the ‘commanding heights’ of the economy or build up its strategic sector – agriculture.  They intended the conscious manipulation of capitalist self-interest –accumulation of marketable property - to foster and promote the economic growth and development of France - their Royaume Agricole.

Finally, the Physiocrats did not just view property rights as instruments of economic policy, they also viewed the entire foundation of the economy – what is bought and sold, how and where – as essentially legal in nature and subject to public policy control and manipulation to further the public good:

Thus did the Physiocrats implicitly recognize that the basic economic institutions (the organization of economy) are legal in character; that law is an instrument for the attainment of economic objectives and that economy is an object of legal control. (Samuels 1962, 162)

In summary, the Physiocratic policy paradigm (Exhibit 2) consisted of:

(a) an objective – the economic and cultural growth of the nation, absolutely and relative to its rivals;

(b) strategic choice, and focused support, of a ‘core’ sector whose health and development contributes most in attaining national objectives;

(c) creation of tactical ‘instruments’– property rights and manipulation of the legal structure and form of institutions – to direct individual and collective behaviour towards development of core capabilities; and,

(d) logistical ‘deployment’ of core enhancing instruments into a free wheeling, private property, laissez faire, laissez passer marketplace.

Exhibit 2

The Neo Physiocratic Policy Paradigm

3. The Neo Physiocratic Policy Paradigm Index

3.01      It should be noticed that in Exhibit 2, no country is named and no core specified.  If, however, one were to replace ‘France 1776’ with ‘Canada 2002’ and ‘agriculture’ with ‘knowledge-based economy’, the paradigm seems to fit the facts.

3.02      The stated Canadian objective is national ‘competitiveness’. The ‘knowledge-based economy’ has been chosen as the strategic ‘core’ sector because of its national income enriching potential through innovation of new knowledge – commercial and cultural.  Tactical instruments have been, and are being, created through the manipulation of intellectual property rights (Exhibit 3) and creation (and endowment) of an institutional network constituting, de facto and de juro, a national innovation system.  And finally, these core enhancing instruments have been deployed into a free wheeling, private property, laissez faire, laissez passer marketplace overseen by the WTO (that, in turn, is engaged in manipulating ‘global’ property rights and institutional structures).

3.03      There are at least two ‘legal’ reasons why this apparent coincidence of old and new should take place in Canada.  First, like the temperamental homeland of the original Physiocrats, Canada is a constitutional monarchy in which, ‘not withstanding’ the Charter of Rights and Freedom, all persons and property are subjects of Her Majesty.  This is why there is no guarantee of private property within the Charter.  Second, Canada is not only bilingual and bicultural, it is also bi-juridic.  Concepts and principles of both Anglo-American Common Law and French Civil Code are current in Canada.  With respect to intellectual property rights the currency of the Civil Code tradition has had a palpable effect, at least with respect to copyright.  Thus Canada’s Copyright Act (Sections 14.1 and 14.2: Chartrand 1997) includes ‘moral rights’ (a Civil Code tradition) for creators relative to the American Copyright Act that contains no such provisions (Chartrand 2000). 

3.04      In conclusion, early 21^st century Canadian national economic policy appears to be a variation on a Physiocratic theme.  The past is present in the future.

 

4.0  END  Index

4.01      This final paper in the series is sub-titled ‘Some Artful Reasoning about Biotech”.  It is appropriate for two reasons.  First, as noted above (Findings, para. 1.01c), the word ‘technology’ derives from the Greek techne meaning art and logos meaning reason, i.e. reasoned art.  An alternative wording, however, would be “artful reasoning”.  The policy or ‘technology’ of economics involves much artful reasoning.

4.02            Second, the economics of biotechnology, at present, amounts to little more than artful reasoning for a number of reasons: 

• as the scion of a fundamental scientific paradigm shift, the biotech sector is just beginning.  It has no baseline like automobiles, retailing or even computers (there is no ‘Moore’s Law” regarding biotechnology) to fully assess present or project future performance; 

• unlike previous paradigm shifts, biotechnology is unfolding in the full glare of public scrutiny.  Its development is subject to an evolving set of public licensing, patenting and regulatory controls never experienced during any previous technological revolution.  These controls, and especially their cultural and political elasticity, means the economics of biotechnology must engage not just production cost and price, but also cultural, moral and religious values that vary dramatically between countries and cultures; and,

• finally, economics, as a discipline, must re-tool.  It confronts, among other things, an industry displaying an almost ‘right-angled’ average cost curve, i.e., creation of the first in the line of a new ‘organism’ is expensive but all subsequent units have a relatively, if not absolutely, low cost.  Thus if biotechnology succeeds in cloning a goat to lactate spider silk (Noble 2002), the cost of the first ‘breeder’ will be high but subsequent units will cost little more than the price of hay.  Accordingly, my findings and conclusions remain but ‘artful reasoning’ about biotechnology.

References  Index

Chartrand, H.H., The Compleat Canadian Copyright Act, 1921 to 1997: Current, Past and Proposed Provisions of the Act plus Annual Updates to 2000, ISBN 0-9689523-1-3, Compiler Press, Saskatoon, October 31, 1997.

Chartrand, H.H., “Copyright C.P.U. - Creators, Proprietors & Users”, Journal of Arts Management, Law & Society, Vol. 30, No. 3, Fall 2000.

Commons, John R., The Legal Foundations of Capitalism - Chapter VII: The Price Bargain, © 1924, Macmillan, NYC, 1939.

Department of Economics, New School University, History of Economic Thought Website,  http://cepa.newschool.edu/het/schools/physioc.htm

Noble, I., “Spider scientists spin tough yarn”, BBC News, January 17, 2002.

Rothbard, M., N., Biography of A.R.J. TURGOT (1727-1781) ,  Ludwig von Mises Institute, http://www.mises.org/turgot.asp

Samuels,W.J., "The Physiocratic Theory of Property and State", Quarterly Journal of Economics, 75(1), Feb. 1961, pp. 96-111.

Samuels, W.J., "The Physiocratic Theory of Economic Policy", Quarterly Journal of Economics, 76(1), Feb. 1962, pp. 145-162.

Savage, L. (1985). The history of art education and social history: Text and context in a British case of art school history. In B. Wilson & H. Hoffa (Eds.), The history of art education: Proceedings from the Penn State Conference. University Park: Pennsylvania State University.

Index

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