Many lay people, aided by the teachings of economists, believe that the major economic processes in life are driven by the inexorable laws of economics. Prices rise and fall responding to demand and supply, which are the aggregation of thousands of atomistic decisions by individuals; trade occurs when there are differences in comparative advantages between nations; wealth accrues to the smart and the hardworking. There is something mildly consoling about this view. When one sees the all-too-visible inequities of economic life, this belief in inexorable laws comes a close second to fate, karma, and religious determinism as a source of comfort.

What most people grossly underestimate is the importance of politics in economics. Transparency not being the hallmark of politics, this is a mistake easy to make. An illuminating illustration of politics behind economics is the recent steel-tariff controversy. President Bush's preaching of free trade and practice of raising steel tariff to nearly 30 per cent caught many by surprise. Bush justified it by referring to the report of the International Trade Commission, which had been asked by him to do a ‘global safeguard investigation’ into the subject of steel imports and had concluded in December 2001 that increased imports were hurting the nation across the board. But a little research shows that the real reason for the tariff was political. Steel is an important industry for Pennsylvania and West Virginia, and these states have midterm elections coming up in November 2002.

The 1997 IMF-led loan package of $55 billion for South Korea was the biggest financial rescue effort to date. When, a few months before that, Thailand's financial crisis spread to the Philippines, Indonesia, and Malaysia, it was nothing but a distant tragedy to much of the industrialized world. Then, suddenly, the contagion jumped the boundaries of South East Asia, touching Brazil, Japan, and, in a very big way, South Korea. The crisis was marked by stock market crashes, currency depreciations, runs on banks, and the actual collapse of several banks—including Hokkaido Takushoku, one of Japan's largest.

In the mayhem, no one really understands what happened, what started the forest fire in South East Asia—there is an actual forest fire in the region, to add to the confusion—and how to douse it without bringing the economies to a halt. As is usual, pundits are cropping up by the day. They claim to have known all along that this was coming. They tell us that these Asian economies had ‘weak fundamentals’, a safe thing to say since no one knows what that means; their exchange rates were overvalued; their monetary policy was wrong.

Nothing can be further from the truth. On 1 March 1997, The Economist, while pointing to several cracks in the Asian economies, noted that ‘on most structural issues, these economies have got a large number of big things absolutely right: high savings, prudent monetary and fiscal policies, openness to trade’.

A social science which explains social regularities and phenomena, such as reciprocity and inflation, wholly from the decisions and behaviour of individual human beings is described as adhering to methodological individualism (henceforth, MI). Whether this is the right methodology for social science or not was once a matter of considerable dispute, which engaged the minds of leading economists and sociologists. Gradually, interest in the subject died down, individuals continued to do social science research without, mercifully, trying to explicitly articulate the method that they were in fact using. But with this developed the feeling, especially among economists, that the problem of MI was either trivial or resolved in its favour. There is, however, a revival of interest in the rights and wrongs of MI as evidence from the works of Bhargava (1993) and Arrow (1994). The aim of this essay is to evaluate this resurgence of interest, by critically examining some of Bhargava's ideas, and to present the reader with an open-ended and somewhat paradoxical problem concerning methodological individualism and normative judgements.

Rajeev Bhargava's book is meant to be a challenge to orthodoxy. In this book, which is a revised version of his PhD thesis submitted to Oxford University, Bhargava argues that MI is not trivial, there are versions of it which are intellectually sophisticated and deserve our attention; however, MI can be challenged and he goes on to construct non-individualist methodologies which according to him are at least as satisfactory as MI.

On 31 March 2001 India will witness a dramatic change in its foreign trade regime, when quantity restrictions on the import of virtually all goods are removed. The only permitted exceptions will be a few special goods on grounds of security and religion.

Broadly speaking, there are two methods of curbing imports—the first is to charge a tariff on the commodity being imported, and the second is to rule that the commodity is not allowed to be imported. The latter is described as a ‘quantity restriction’; and it is just as well it has a popular acronym, QR, since it has been used so widely in India. A whole range of agricultural, consumer, and some capital goods—a total of over 700 goods—are prevented from entering the country under this criterion.

Once QRs are removed on all these 700 items, a host of new goods will flow into India. Unsurprisingly, a lot of Indian businessmen are exercised over this imminent policy shift.

It is true that, left to ourselves, we would have phased out QRs more slowly. But we had no choice. Ever since the conclusion of the Uruguay Round of GATT in 1993 there has been pressure on India to open its borders. In 1997 India proposed a nine-year phase-out plan to the WTO, arguing that it should be given temporary shelter under Article XVIII B of GATT which allows developing countries to use QRs to counter balance-of-payments problems.

To most lay persons, few economic phenomena are as puzzling as advertising. It seems impossible to believe that anyone with an iota of sense would be induced to purchase products by the tall claims made about them in glossy magazine and television ads. But when profitseeking firms and multinational corporations spend millions advertising, we can be sure that they have done their calculations right. In 1995 the top 100 firms in the US spent 50 billion dollars on advertising. Each year, during the SuperBowl, the final match of American football, a 30-second TV commercial costs more than a million dollars.

Over the next few weeks we will, in India, witness one of the largest advertisement campaigns that occur anywhere in the third world—the advertising of politicians and their parties. The BJP alone is believed to be ready with Rs 10 crore in its coffer. It is a sad fact of our political life that the marketing is as important as the content—often more.

So, though we may dismiss the ads we see on television and on hoardings, and believe that we are immune to them, the fact is that a vast majority of us is not. In 1994, soon after we arrived in the US, my family would watch on TV the commercial for a cumbersome fitness machine and laugh at gullible Americans. A few months later I was outvoted and the machine arrived. Another few weeks and everybody stopped using it.

Much has been written about the bias against the girl child in India. A cursory glance at the data can be telling. In 1998, of every 1000 girls born in India, 77.2 would die between the ages of one month and five years; whereas for boys the figure was 59.9. This ratio of 1.3 to 1 seems large; but in itself a ratio means very little.

It is too large or too small only when compared against some standard. On 14 May 2002, in Philadelphia, President George Bush is supposed to have remarked (according to a list of ‘Bushisms’ published in Slate.com): ‘For every fatal shooting, there were roughly three non-fatal shootings. And, folks, this is unacceptable in America.’

One reason why this observation is ambiguous is that it is not clear whether the speaker wishes to emphasize the poor marksmanship of those doing the shooting or the high rate of fatality.

Is India's relatively high girl child mortality rate the symptom of a malaise? By all accounts, it is. Detailed studies, done under controlled circumstances and in developed countries, suggest that if there is no difference in the treatment between girls and boys, a girl is more likely to survive than a boy during the first month of her life. Then, from the age of one month to five years, girls and boys have equal survival chances.

“The Tragedy of the Commons” opens with a salvo from two nuclear scientists who had thought long and deeply about the arms race between the superpowers: “It is our considered professional judgment that this dilemma has no technical solution” (italics in original). Garrett Hardin expands upon that judgment and perceives that a whole class of problems exists that have no technological solution. The question arises: do climate fluctuations belong to that class?

One does not need to summon the spirit of Hardin to imagine his answer. A section of “The Tragedy of the Commons” is entitled “pollution” and Hardin explains that “it is not a question of taking something out of the commons, but of putting something in…dangerous fumes in the air.” What then would be Hardin's reaction to the article “Keys to Climate Protection” which opens with “Technology policy lies at the core of the climate change challenge”? The author, Jeffrey D. Sachs, is arguably the world's leading development economist and the magazine, Scientific American, arguably the most august in American science. How would Hardin have reacted to the Sachs' short list of promising technologies? Topping that list is “Carbon Capture and Sequestration” (CCS) which “…depends on the ability to capture carbon dioxide at the power plant at low cost, transport it by pipeline over significant distances, and sequester it underground safely, reliably and durably.”

Introduction

In this chapter, the analysis moves from the area of foreign trade to that of foreign direct investment (FDI). The purpose of the chapter is to discuss the ways in which the operations of multinational enterprises may have influenced the structure and organisation of national systems of innovation first during the previous, now ‘classical’ period of MNE expansion (1955–1975) and how they may be impacting on these systems today within the new phase, often referred to as ‘globalisation’, which began in the course of the 1980's.

The analytical approach adopted is historical. The underlying hypothesis is that as a result of capital accumulation, income growth and technological change, the substantive dimensions and the organisational forms of international production and the other operations of MNEs undergo over time significant and at some moments qualitative changes.

Along with some other factors, the same processes which offer new, enlarged opportunities for MNEs will have impacts on the economies and social institutions largo sensu of nation states. The level of inward and outward foreign direct investment (FDI) as well as the forms investment take and more generally the changes occurring in the operations of MNEs, represent one broad avenue through which such impacts occur.

One strange and negative fallout of globalization, which seems to have gone unnoticed, not just by the laity but also by professional economists and political scientists, is this. Even if every country becomes more democratic, the world as a whole is firmly on course to becoming less democratic. This paradoxical process is a consequence of globalization, entailing the increasing ease with which countries can exert influence on the society, economy, and polity of one another. This has never been more transparent than in the wake of the East Asian economic crisis, South Asian nuclear tests, and political and military skirmishes and battles around the world, especially the Middle East. What is noteworthy is that the increase in the power of nations to influence one another has not been symmetric. The well being of Cubans, for instance, depends a lot on what the US president does. The US, because of its enormous international power, can cut off much of Cuba's trade lines, prevent it from exporting goods, and pursue policies which result in inflationary pressures in Cuba-all without having US personnel step beyond the shores of their country. There is, however, very little that Cubans can do to influence the quality of life in the US. Similar asymmetries can be found all around the world: India and Sri Lanka, Japan and Korea.

Introduction

Studies of national systems of innovation (NSI) often focus on the R&D system. This chapter will argue that less conspicuous production and sales/purchase activities are an alternative and, in many ways, more adequate point of departure. More specifically, the claim is that by shifting attention to the production and linkage patterns of nations a whole set of questions is raised and much can be said about rates and directions of innovative activities.

This chapter will develop this claim in several steps. First, the basic approach and the analytical elements of the analysis of NSI are sketched (section 4.2) and the background of the approach is discussed (section 4.3). Then the two sides of the approach are treated: production structure and ‘simple’ learning (section 4.4), and linkage structure and interactive learning which includes the special case of development blocks and their structural tensions (section 4.5).

The Basic Approach

Behind the production and linkage approach to NSI is the postulate that most of what is normally classified as ‘innovation’ is closely related to existing products and processes. We find first of all that new possibilities are often discovered as more or less unconscious by-products of production and sales activities. Second, more ambitious and conscious searching for and learning about new products and processes quite often start with the problems of existing products and processes, which may be conceptualised as two lists of possible demand specifications accumulated since the last shift of product or process: one list containing errors, repair problems and larger breakdowns and another list of ideas and wishes for new features, facilities, performance measures etc.

This book has a long and complex history. Already in the late seventies, the IKE-group at Aalborg University began to integrate a French structuralist approach to national systems of production with the Anglosaxon tradition in innovation studies, in order to explain international competitiveness. This ‘new combination’ is reflected in the concept national systems of innovation which is at the centre of the book. The first sketches to the book, which date back to 1986, were specifically oriented towards the problems of small national systems of innovation (Andersen and Lundvall, 1988), but gradually we realised that the process of internationalisation and globalisation has made all countries ‘small’, and this is reflected in the final design of the book.

At several stages of the project, the Danish Social Science Research Council has given its financial support. The Research Committee, Aalborg University has funded some of the activities while our department, Institute for Production, has been consistently supportive both financially and administratively. We gratefully acknowledge the patience of these funding institutions.

During the long process, many people have commented on the general outline and on drafts of chapters at workshops and seminars. In particular, we would like to thank Carlota Perez for her often very critical but still supportive comments, at the early stage of the project, and Cristopher Freeman who is not only a co-author, but also has given us invaluable advice all through the process.

After one eats in a restaurant, that one has to leave a tip is a social norm, and that one has to pay for the food is law. As is evident from this, both norms and the law influence our behaviour. What we say, for instance, can be curtailed by having laws that restrict freedom of speech. But not having such a restrictive law, or having a law or a constitutional requirement—such as the First Amendment in the US—which gives individuals the right to say what they wish or believe in, does not automatically guarantee freedom of speech. Social restrictions can also curtail our freedom. If there is a social norm against a certain opinion or viewpoint or against the explicit mention of certain facts of life, then through the threat of ostracism and other ‘social’ punishments the individual freedom to express a viewpoint or fact can be limited.

The goods that we buy, the food that we consume, the services that we render are all influenced both by the law and the norms of society. But in traditional economics there was little recognition of this fact, especially the influence of norms. In recent years this has been changing and there have been several initiatives to integrate the analysis of norms and institutions with markets and the provision of public goods (see, for instance, Ullmann-Margalit 1977; Elster 1989).

Robert W. Fogel won the 1993 Nobel Memorial Prize in Economics “for having renewed research in economic history by applying economic theory and quantitative methods in order to explain economic and institutional change.” Clio was the muse of history and Fogel applied the new “cliometrics” to accounting records of slave transactions. In 1974, he and Stanley Engerman published Time on the Cross: The Economics of the American Negro Slavery. The analysis refuted the popular narrative that ran something like this

• The slave system was economically moribund;

• Union soldiers, fired up by abolitionist presses, died in vain;

• Slaves would have soon been freed anyway;

• The rising tide of sentiment pro-abolition in the North had little to do with secession of the Confederate States in the South.

Although exposing mythologies is healthy for any democracy, such analysis can also be misconstrued. For example, Fogel and Engerman note that “…the evidence that is beginning to accumulate suggests that the attack on the material conditions of the life of blacks after the Civil War was not only more ferocious, but in certain respect, more cruel than that which preceded it.” Was slave-life better than freedom? The question is loaded and invites an affirmative response which is both facile and repugnant. A holistic response is the stuff of the general theory of second best. “The attack on the material conditions of life after the Civil War” means that the government failed to intervene in a way that would put the freed slaves on a path of material well-being.

Indian film historian Ashish Rajadhyaksha had once famously and perhaps apocryphally quipped that all Indian films may be divided into two categories – Bombay cinema and Satyajit Ray – the former a cinema for the masses, the latter an art cinema of limited commercial appeal of which Satyajit Ray was the great exemplar. More recently, this mass-class/commercial-art binary is being re-written by the popular press, and by fans and bloggers as ‘hat-ke’ versus ‘KJo.’ ‘Hat-ke’ literally means ‘off-center’ and ‘KJo’ is short for the Bollywood Director Karan Johar. These terms name divergent tendencies in Hindi cinema in the last decade and as such can shed light on the disintegration of film form and the segmentation of movie publics currently ongoing in the film industry. ‘Hat-ke’ refers to a growing body of films that are made on smaller budgets by new production corporations like Adlabs, Pritish Nandy Communications and UTVfilms. They feature lesser-known stars and match formal innovation with utterly contemporary – often risky – subject matter. The ‘hat-ke’ film usually plays well in the multiplexes in India's many urban centers and is favored by a younger, cosmopolitan spectator. Though more commercially oriented than art cinema, ‘hat-ke’ films share the vision of the art film movement that attempted to capture reality more authentically by creating an alternative to the mass product emanating from the industry in Bombay. In other words, they bear a morphologic affinity with what Rajadhyaksha calls the ‘Ray’ film.

John Nash was, arguably, a genius. He certainly believed he was one. Most of his papers in game theory—the work for which he won the Nobel Prize in economics—were written by the time he was 25 years old. Subsequently, he wrote some fundamental papers in mathematics and theoretical physics. But it all ended by the time he was in his late twenties. Nash began suffering from delusions. At the age of 30 he had to be confined to a mental asylum and, for the next thirty years, he was in and out of mental homes, unable to work, incapable of relating to people, a hostage to the demons in his head, paralysed by fear and paranoia.

Unlike other Nobel laureates in economics, John Nash was not prodigious. Depending on how one counts, he wrote a total of three or four papers in economics and game theory. But these papers grew to be classics. ‘Nash’ became an adjective. When a group of self-seeking individuals interact—for instance, several producers of a commodity, deciding how to set prices and what marketing strategy to follow—what outcome can we expect? Nash described a general method for locating the outcome, which came to be known as the ‘Nash equilibrium’. This and the ‘Nash bargaining solution’ became standard tools of modern economic analysis. In classrooms and seminars people talked about the properties of the Nash equilibrium and used his ideas, but very few knew anything about the reclusive man behind this work.