The following overview sums up Rules for Growth, a Kauffman-published book that examines how laws and institutions affect economic growth and how thoughtful adjustments in these rules can help make growth happen. The book addresses a surprising and critical void in understanding how to accelerate long-term growth in the size of the "economic pie."

The global recession of 2008 has intensified policymakers' focus on finding ways to promote economic growth. While Brazil, China, India, and other emerging economies have ridden out the storm reasonably well, most European economies and the United States have grown unusually slowly since bottoming out some time in 2009, while racking up enormous debts for economic stimulus and various financial bailouts.

Given the persistence of high unemployment rates, it is understandable that policymakers focus on decisions they believe have immediate payoffs. People desperate to find work after long periods of unemployment need jobs now, while those who fear getting laid off need the comfort of knowing that a growing economy will sustain their employers' economic health, or, at the very least, boost their prospects for finding jobs elsewhere.

In such an environment, it is all too easy for policies designed to boost long-term growth—the key to sustained improvements in living standards and an important lubricant to ease social frictions and anxieties—to get lost in the political shuffle. Policy adjustments to spur entrepreneurship and innovation, in particular, can get short shrift, even though a substantial body of economic evidence shows that innovation is the most important "factor of production" behind economic growth in developed economies, and that entrepreneurship, in turn, is a principal means by which innovations find their way into economies and societies.

At the Kauffman Foundation, we are convinced that the current public debate—with its focus on the traditional policy levers of fiscal and monetary policy—is neglecting to concentrate on potentially significant yet low-cost ways of advancing long-term growth. In particular, what's missing is consideration of the ways that our laws and legal institutions might be changed, at essentially no cost to taxpayers, to promote the entrepreneurial activity and innovation that enable firms and economies to grow.

Unfortunately, the relevant scholarly research on this subject is sparse. Broadly speaking, the law and economics literature, which one would think would be most apt, largely has concentrated on what economists call "static efficiency"—that is, ways of making economies more efficient in the short run using existing resources and knowledge. This literature has not yet tackled the far more important challenge of designing rules to maximize economic growth, or achieving "dynamic efficiency"—fostering the development and commercial application of new knowledge that generates more rapid advances in the size of the "economic pie" over the longer run.

The Genesis of
Rules for Growth

To be sure, economists have been quite successful building models that describe how growth happens. But they have been less successful identifying and verifying specific policy changes that can reasonably accelerate growth. For example, we still don't know with much certainty what's inside the black box we call "innovation," what specific factors influence it, or to what degree. We presume, for example, that some rules, such as patent and trademark protections, encourage growth by ensuring that inventors and innovators can enjoy an economic benefit from their own creativity. But there is little empirical evidence to prove or disprove that presumption and others like it. With more definitive information and scholarship, policymakers would be better positioned to act in ways that spur economic growth on a sustained basis.

We asked legal scholars and economists throughout the country to help us write what became a comprehensive must-read for anyone interested in how our laws impact economic expansion titled, Rules for Growth. Among the many reforms those scholars, members of the Kauffman Summer Legal Institute (KSLI), propose in Rules are adjustments in U.S. immigration policies to open the door more widely to immigrants with entrepreneurial inclinations, ways that universities on their own (or with the prodding of the federal government) can accelerate the commercialization of faculty-developed innovations, and modifications of anti-trust doctrines to better accommodate globalization of commercial activity and the increasing importance of "network" industries (telecommunications, software, and the proliferation of Internet-based platforms and businesses, for example).

In the process of examining specific legal rules, the KSLI participants also stepped back to notice the astounding pace of change, not only in technology, but also in the ability of innovative thinkers to conjure products and services not contemplated by existing statutes. The implication of rapid change in economies and societies is that rules must be adaptable and flexible. In the Internet age, inflexibility impedes innovation as rigid rules become obsolete with the click of a mouse, a new digital chip, or an idea that may grow into a future Facebook or YouTube.

But, as we balance the tradeoffs between growth and other values, the odds of smart decisions will improve immeasurably if we understand the interaction between rules and outcomes.

More broadly, the law must accommodate socially useful innovations, while weeding out socially destructive innovations at an early stage. The world has just witnessed, for example, how opaque and highly complex mortgage securities proved highly destructive, nearly bringing the developed economies to their proverbial knees. But the crisis and recession to which these "innovations" led does not mean that government should be in the business of preemptively screening all future financial and other innovations. To the contrary, the default rule in our economy—with some notable exceptions in the areas of pharmaceuticals and nuclear power, where mistakes can lead to large losses of life—is that the market determines which innovations thrive and which do not. Regulation—ranging from disclosure, rules governing product design, or, in extreme cases, outright prohibition—is appropriate only with evidence that some innovations are causing harm, and that the benefits of specific regulations outweigh their costs. If a different default rule had been in place, namely that products or services that conceivably cause injury must be approved, changed, or even stopped from entering the marketplace, then it is conceivable that commercial innovations that now characterize modern society—airplanes, cars, and even electricity—might never have passed regulatory muster, or, if they did, their availability and utility to consumers might have been significantly delayed. In short, legislators, regulators, and judges should be open to change and not reflexively punish the new because it is not explicitly allowed for under the law or under some theory that it might cause some harm.

Economic growth, of course, is not the sole goal of public policy. Achieving other objectives, such as clean air and water or public health, may stand on the same plane as growth, and a societal desire for more equal distribution of income and wealth may require rules that tend to inhibit growth. But, as we balance the tradeoffs between growth and other values, the odds of smart decisions will improve immeasurably if we understand the interaction between rules and outcomes. Rules for Growth is written with that objective in mind, and so is the Foundation's continuing funding of research into the important and sometimes overlooked connections between law, innovation, entrepreneurship, and growth.

Rules for Growth is available for free download at www.kauffman.org/rulesforgrowth.

Kauffman Thoughtbook 2011This essay is an excerpt from the Kauffman Thoughtbook 2011. To see a listing of other excerpts, or to order a printed copy of the publication, please visit our 2011 Thoughtbook table of contents page