The superpowers of innovation… oh wait

Superheroes-2Innovation has become the industrial religion, the mantra of governments and corporations across the world. But what if innovation is just a passing fad, one of the many human delusions that fool humans from time to time?

In “Is US Economic Growth Over?“, Robert Gordon makes the case that economic growth might be a one-time event, and it won’t necessarily repeat itself in the future:

Since Solow’s seminal work in the 1950s, economic growth has been regarded as a continuous process that will persist forever. But there was virtually no economic growth before 1750, suggesting that the rapid progress made over the past 250 years could well be a unique episode in human history rather than a guarantee of endless future advance at the same rate.

Growth rate might fall to its long term rate of just about 0,2%, the estimated rate for centuries before the first industrial revolution. Why might that be the case?

Gordon Growth
Robert Gordon, Growth in real GDP per capita, 1300-2100, with actual and hypothetical paths

Because many fundamental one-time only inventions have already occurred: the conversion from rural to urban life, the speed of travel, the temperature of rooms, and the near-elimination of brute-force manual labour. The potential for a continuing stream of equally basic inventions might be very limited or just unattainable.

Robert Gordon recognizes that previous episodes of innovation pessimism turned out to be wildly wrong. However, he thinks that, whatever the future of innovation, the US economy still faces six daunting headwinds that will limit future potential growth and hold it below the pace which innovation would otherwise make possible.

In “The Entrepreneurial State“, Mariana Mazzucato argues that today’s generally accepted idea that the role of government in innovation must be restricted to investing in skills and a strong science base, and ensuring a strong legal framework within an amenable macro-economy, might be fundamentally flawed. She makes the case that the role of the government, in the most successful economies, has gone way beyond creating the right infrastructure and setting the rules. The government has been a leading agent in achieving a fundamental type of innovative breakthroughs: general purpose technologies. Why is this so?

Because technological change is highly uncertain: R&D investments not only take years to materialise into new products, but most lead to failure. The high-risk and serendipitous character of the innovation process is the reason why profit-maximising companies will always invest less in basic research and more in applied research. On the other hand, the state welcomes and engages with Knightian uncertainty for the exploration and production of new products which lead to economic growth.

The problem is that today there is a fundamental asymmetry in who is bearing the risks of innovation which is jeopardizing the prospects for new general purpose breakthrough technologies. In finance, it is commonly accepted that there is a relationship between risk and return. However, in the innovation game, this has not been the case. Risk-taking has been a collective endeavour while the returns have been much less collectively distributed. There is indeed lots of talk of partnership between the government and private sector, yet while the efforts are collective, the returns remain private.

Identification of who bears risk cannot be achieved by simply asserting that shareholders are the only contributors to the economy who do not have a guaranteed return – a central, and fallacious, assumption of financial economics based on agency theory. Indeed, in so far as public shareholders simply buy and sell shares, and are willing to do so because of the ease with which they can liquidate these portfolio investments, they may make little if any contribution to the innovation process and bear little if any risk of its success or failure. In contrast, governments may invest capital and workers may invest labour (time and effort) in the innovation process without any guarantee of a return commensurate with their investments. For the sake of innovation, we need social institutions that enable these risk-bearers to reap the returns from the innovation process, if and when it is successful.

In “The Archaeology of Innovation“, Sander van der Leeuw posits that innovation is hardly the panacea to get us out of the sustainability predicament that many claim it is. There is contradiction between ‘innovation’ and ‘sustainability and we are in fact facing a dilemma:

How do we use the human capacity to innovate, the unbridled use of which during the last three centuries has caused the unsustainability of our current mode of life, to attain a more sustainable society?

The root of this challenge lies in the relationship between the fundamental limitations of the human mind, whether collective or individual, and the complexity of the world outside us. Over the millennia that relationship has changed as a result of the innovation explosion itself. The last three centuries have seen an unbridled acceleration of our species’ innovative activity. Innovation has become endemic to our societies, and those societies, through their dependency on ever-increasing GDP and profit figures, have become dependent on innovation for their continued existence.

However, society increasingly suffers from ‘short-termism’. Tactics come to prevail over strategy in much decision-making. Narrowing the spectrum of adaptive options open to the individual societies, drives each of them to devise more and more complex solutions, with more and more ‘unforeseen’ or ‘unanticipated’ consequences that then need to be dealt with in turn. Every human action upon the environment modifies the latter in many more ways that its human actors perceive, simply because the dimensionality of the environment is much higher than can be captured by the human mind. Ultimately, this necessarily leads to ‘time-bombs’ or ‘crises’.

Each of the 3 articles lends itself to a positive reading, but they warn us against self-complacency and to have a closer look at the problems we are facing and re-think how to deal with them. Innovation can and will surely play a role but it is not a cure-all for our ailing economy.

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