Innovation - what Innovation?

Last year I was involved with a bunch of other smart but irreverent people and we wrote Big Potatoes - The London Manifesto for Innovation (over here). The prime reason for us writing the Manifesto is that our research showed us that Innovation today is not what it once was, in fact we found that Innovation today is typically pretty mealy mouthed - "continuous improvement of past innovations" is typically about as good as it gets. Innovation has in too many cases been sanitised, incorporated and de-risked so anything that rocks the boat is removed. Most R&D labs these days are short term "D" (if they haven't been closed down)

In fact my research showed that there was a LOT more innovation 100 years ago than there is today, and in fact real, radical innovation dwindled rapidly after the 1969 moon landing / 1970's oil shocks. Very little (compared to the across-the-board Innovation of 1911) that has happened since the early 1970's wasn't started in that period (Except financial innovation, which has brought a whole lot of problems, but that is another post).

That our view was unpopular in some circles puts it mildly, but I read an FT article tonight about a book by one Prof Tyler Cowen, that looks like he has done the same research and come to a similar conclusion. Cowen is arguing that we have a number of major economic problems today, and they are not going to go away in a hurry because:

...Another easy gain in days gone by was to enjoy the gradual roll-out of the staggering array of vital innovations developed in the late 19th and early 20th centuries, including electrification, refrigeration, aeroplanes, indoor plumbing, bulk chemical processing, the internal combustion engine, and the telegraph, telephone and television. Everyday life was transformed by these technologies between 1930 and 1970, Great Depression notwithstanding. Since 1970, we have the rise of computers and mobile phones – truly wonderful inventions – but not much else.

In short, if Cowen is right, there will be less growth in future unless a new wave of technology arrives, and our political institutions will have to cope, if they can. The same argument surely applies to western Europe too, and will come as no news to Japan.

Cowen's book is The Great Stagnation, he is an economics professor and blogger. It is only available as a Kindle e-Book, interestingly I cannot buy it in the UK off Amazon UK however (so much for the barrier-breaking power of digital media) so I searched Google for some reviews:

Here is part of The Economist's review:

There are two kinds of economic growth possible in this world. One can take good ideas already in use elsewhere, adopt them, and make use of underused stocks of people and capital. That's what China and India are currently doing, and we shouldn't mistake their rapid growth for something it's not. Or one can come up with new ideas and apply them in ways that allow the economy to grow.

The rich world has been stuck doing the latter for most of the last century, and lately they haven't been doing it as well. Mr Cowen looks at growth rates of output and median income over the last few decades and notes that there's a steady downward trend. And this trend is due, he says, to the exhaustion of the supply of low-hanging economic fruit.

.....

the big setback for society, according to Mr Cowen, is the end of the exploitation of the major innovations of the last two centuries. The 1700s and 1800s yielded revolutionary innovations in industry, chemistry, and electricity. Rich countries spent the 1800s and 1900s figuring out how to exploit those innovations to their fullest, and as recently as the 1950s and 1960s, these experiments were producing products that utterly changed the way people lived. During the lifetime of those born in the 1930s and 1940s, household technology changed fantastically: refrigerators, laundry machines, dishwashers, radios, televisions, electric light, air conditioning, cheap automobiles, and so on. But with a few exceptions (among them computers, on which more later) today's households don't look that much different from their 1970s counterparts. Products have improved, but the development of revolutionary new technologies has slowed substantially. The progress of technology has plateaued.

The Internet is not a great help:

The internet, on which he has a lot to say, has had enormous benefits, but a striking amount of online activity is free and internet businesses create few new jobs (and displace lots of others). The result is growth in utility without much of a contribution to GDP, which would be fine except that countries and people have bills to pay, on things like health care, pensions, and government debt. Complicating matters is the fact that the fastest growing contributors to measured GDP—the government, education, and health sectors—deliver returns that are very difficult to measure. This suggests, he says, that rich world GDPs are likely overstated; we're poorer than we thought. And that, Mr Cowen concludes, will make it very difficult for us to make good on the many, many obligations accumulated while we assumed that our previous growth trajectory would continue.

.....

....it's a little amusing to focus on the implications of the spread of cheap-to-free internet amusement. As Mr Cowen notes, the availability of good, free internet entertainment has allowed a lot of people hit hard by falling incomes or recession-induced joblessness to maintain relatively high levels of utility (though this available substitute has also made it easier to cut down on physical consumption, with nasty effects on GDP). This suggests that other forms of consumption, like that resulting from the status competition of the relatively well-off, now loom more important in supporting "real" consumer expenditures, of the job-creating, revenue-generating, GDP-enhancing sort.

The Economist's criticism is:

I think there's strong evidence that the most of the economic pain experienced from the summer of 2008 to now can be attributed to a big demand shock, and most of it was preventable. I also think Mr Cowen may undersell the potential of recent innovations. I see computing and the internet as revolutionary innovations, every bit as transformative as the steam engine or electrification. I think society is only beginning to reorganise itself around these technologies and huge changes will follow, many of which will produce rapid growth in output and jobs. That assertion isn't incompatible with Mr Cowen's thesis about slow recent growth, and it could be decades rather than a few years before the next acceleration. But I think the economic benefits that result from cognition-augmenting innovations (as opposed to labour-augmenting innovations) will be dramatic. (More disconcertingly, so too will be the expansions of government, as per Mr Cowen's thesis.)

I think we'll take that as a fairly good ratification of our hypothesis then. Cowen's view of the impact of this is interesting:

[Firstly], While America tries to wring additional innovative capacity out of an already well educated population, the developing world is home to billions of people, including hordes of potential geniuses and innovators, living in poverty and ignorance. Getting their economies rich enough to move people into classrooms and laboratories is far more likely to yield growth-boosting innovations than trying to get a marginal college grad to get a PhD. Mr Obama's State of the Union theme was precisely wrong, in other words; America needs to focus on helping the rest of the world catch up as fast as possible. Meanwhile, looser immigration rules in America would also provide a big boost to American growth potential.

Second, improvements in rich world living standards may, for the moment at least, come from the capture of policy low-hanging fruit. In other words, the rich world should focus on getting rid of blatantly foolish and costly policies. Moving from taxes on goods, like income, to bads, like traffic congestion, would be a good start. Not spending so much on medical treatments with dubious benefits would be another possibility. Cutting out policy foolishness like agriculture subsidies and the mortgage-interest deduction would be another positive step. Amid rapid growth, really silly policy choices could be tolerated, since surpluses continued to rise. As growth rates slow, the failure to cut out bad policies will mean continued stagnation or declines in living standards for some.

One of the Economist's commentators makes a point re Financial Engineering Innovation:

Third point, something that always struck me as odd at comparing this century to others is that we count as growth so much that is now being supplied on the market that used to be supplied for free. Is it really growth to replace the extended family, with both old age and child care supplied in the household unit, with paid childcare and elder care instead? This of course can be growth, if it allows the adults to go on do higher value added labor, but it can also be a net loss if the adults are going on to be fry cooks at McDonalds while Grandma is getting cared for by Medicare nursing home care at a cost of 4 times her daughters salary and the kids are running wild on the street. Simply moving something into a tradeable market good isn't necessarily growth, it's just accounting.

Could explain why neo-capitalists are so keen to privatise everything - gives an illusion of growth while in fact everyone is more impoverished - but that is an article for another day.