China could show benefits of harmonious society by not staking everything on business innovation

The Confucian idea of the harmonious society is one of the great principles of economic thought. Yet whether the concept is consistent with innovation, that essential engine of growth, is an increasingly significant question for any modern economy.

As home both to the philosophy itself and to the defining growth story of our times, China should have a particular interest in the answer.

We first need to decide what sort of innovation we are considering. Business innovation would seem to be the obvious starting point, not least because it tends to dominate most economists' thoughts and discussions.

Commentators and policymakers around the world often define business innovation as the successful application of new ideas. It appears reasonably safe to say this chimes with the harmonious society. There is, though, a second definition, one almost as widely used: Joseph Schumpeter's celebrated "perennial gale of creative destruction".

What Schumpeter was referring to, in the main, was the way in which an innovator undermines other companies and destroys some of their market share and profitability - or, in extremis, the way in which the companies themselves are destroyed. The economy and society alike can benefit, he reasoned, if old and inefficient firms are blown aside and their workers and assets are redeployed at new and more effective successors.

Sure enough, this makes perfect sense - but only if those assets and employees are re-deployed in such a way. If they go to waste, as is regularly the case, then "creative destruction", on balance, can hardly be said to be in keeping with the harmonious society.

Moreover, destruction can take myriad forms, some of them perhaps more brutal than Schumpeter ever envisaged. This much has been illustrated throughout the ages and is still manifest today. Many small-scale knitters were forced out of business and left to fester in crushing poverty, their skills suddenly obsolete and unwanted, when wide looms were introduced to the textile industry in the 19th century; books may nowadays be easily available online, but the function of bookshops as educators and social institutions has been all but lost; old computers that have been rendered redundant by endless software upgrades lead directly to the toxic problem of e-waste; and so on. The harmonious society is in little evidence here.

Thankfully, there are other kinds of innovation. This truth is too easily forgotten when policymakers and captains of industry alike appear determined to perpetuate the myth that business is the only wealth-creating sector of the economy. We would do well to remember that economics is about more than just production: it is also about how wealth is distributed, how it is consumed and how it contributes to well-being.

This brings us to what we might call "common innovation". The word "common" is used advisedly, much as a naturalist might employ it to describe modest, unexceptional flowers that grow everywhere. Common innovations are not comparable to the innovations of businesses and other professional organizations: they are the humble work of individuals, households, clubs and communities - ordinary people in everyday life.

As such, they are the stuff of non-business. They are directed explicitly at contributing to well-being rather than undertaken in the myopic pursuit of profits, revenues, market share or other strategic objectives. On an economic Beaufort scale, with Schumpeter's destructive gale occupying the more tempestuous territory, they might best be classified as a gentle and benign breeze.

As such, maybe inevitably, their reach and effect are frequently moderate - sometimes even confined solely to the home. Take, for instance, an act as quotidian as producing a fine meal from inexpensive ingredients or transforming a wasteland into a garden.

More widely, though, common innovation is capable of addressing socio-economic issues that its business counterpart is either unable or unwilling to tackle. Examples include the use of microcredit and ultra-local currencies; online facilities that allow people to conduct their own repairs; and the part played by citizens and civic institutions in the regeneration of derelict areas that business, its own interests no longer served to its satisfaction, has deserted.

It might well be that the neatest articulation of common innovation is that it creates where there is nothing. By contrast, business innovation routinely destroys what is already there. Common innovation is therefore not just more compatible with the harmonious society: it actually plays an active role in it.

To better understand why this is so we need to compare the relatively linear process by which business innovation purportedly creates material wealth and well-being to the much more subtle process by which common innovation lends itself to the harmonious society.

The linear model dictates that education, science, the arts and other sectors can make a difference only if they are channeled into business. Business makes innovations using these "inputs"; these innovations enable a company to offer a better deal in terms of products and services; consumers benefit from consumption of these better deals; and well-being is thus created. Nothing else has meaning, so the argument goes, and nothing else matters.

By way of illustration, consider a project to enhance a rundown district. Economic analysis shows that natural environment helps attract start-up companies, yet the alarming implication is that in the absence of this effect - that is, if business is not attracted - such a scheme is devoid of merit.

This is no fantasy. Take the United Kingdom for example. In 2011 it was revealed that senior Conservative ministers in the Thatcher government during the 1980s had advocated the "managed decline" of the northwestern city of Liverpool: spending public money on such "stony ground", they advised, would be akin to "trying to make water flow uphill".

This is the very antithesis of the harmonious society, which demands a much less blinkered model of wealth creation - one that acknowledges the possibilities afforded by a far broader range of interactions. Education, science, the arts, the socio-economic environment, the natural environment, health, the marketplace, consumption, well-being, business - each of these, at least in principle, should link to all the others. Everything should be connected to everything else.

In a fully developed harmonious society every such linkage would both exist and, crucially, be positive. That, after all, is what harmony is about. Common innovation can create most of them; business innovation can create some of them, but they are often negative.

China could be forgiven, of course, for reminding us that business innovation has powered the extraordinary economic journey of the past 30 years and more. This much is undeniable, and it would be foolish to claim otherwise. Equally, it would be dangerously naive to intimate that those with limited material wealth could survive - less still thrive - by relying on common innovation alone. The inescapable fact is that there remain many things that only business innovation can achieve.

Yet to dismiss the value of common innovation out of hand is just as foolish. In a finite world that craves sustainability, with the distribution of wealth growing ever more inequitable and the shadow of "austerity" lengthening, common innovation is likely to have an ever-larger part to play. It deserves to be encouraged, nurtured and treated with respect.

John Ruskin, one of the great Victorian polymaths, could well have had the harmonious society in mind when he remarked: "There is no wealth but life." Sadly, history suggests the path of economic development inevitably leads to the rejection of this credo. It would be heartening - not to mention potentially pivotal - if China could somehow stay true to such a precious ideal and so avoid the fate of the West, where business was once society's servant but is now indisputably its master.

The author is emeritus professor of industrial economics at Nottingham University Business School and the author of Common Innovation: How We Create the Wealth of Nations, published by Edward Elgar. The views do not necessarily reflect those of China Daily.

(China Daily European Weekly 08/28/2015 page12)