The innovation equation

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When George Stephenson invented the steam locomotive and then went on to build the Stockton and Darlington railway in 1821, he changed the way people and merchandise got around for good. Less than 100 years later airplanes were crossing the Atlantic, and another 40 years after that the Boeing 707 was in operation. According to Robert Gordon’s study on innovation published by North-Western University “the audacious idea that economic growth was a one-time-only event has no better illustration than transport speed.

Until 1830, the speed of passenger and freight traffic was limited by the ‘hoof and sail’, and increased steadily until the introduction of the Boeing 707 in 1958. Since then there has been no change in speed at all, and in fact airplanes fly slower now than in 1958 because of the need to conserve fuel.”

When women entered the workforce in earnest in the mid-20th century, significant gains were made in terms of growth. The same applies to increasing the level of education and training for workers. But extensive growth is limited, in that it is subject to diminishing returns. If this were the only viable way of growing, in the end incomes would result slightly above the subsistence level. Intensive growth is driven by the evolution of the way workers, capital and resources are made, which allows for enduring improvement in wages and can allow for growth to occur even as populations decrease. The main factor behind this type of growth is technology.

Over the last quarter century, computer technology has revolutionised global communication and scientific development

Innovation plateau
For Gordon the world has reached an innovation plateau. This slump is prohibiting future economic booms. At first it might seem counter-intuitive to think that innovation has died when smartphones and tablet computers are readily available on the high street, and robotic explorers are trawling the surface of Mars. But when pitted against the likes of electricity and modern medicine, recent developments have had a significantly lower impact on longevity, productivity and economic growth. If Gordon is correct, the consequences of this slowdown in innovation might be catastrophic.

Sustainable growth is generated by the increased production and consumption of more and more goods and services. But the continued increase of output per individual, which is the driving force behind growth, relies on people using the goods and services available in increasingly more productive ways; that is innovation. If the speed at which we innovate slows or bottoms out, it will inevitably affect economies’ ability to grow.

All it takes is one look around an average house or office to see the leaps that technology has taken in the last decade alone

For Gordon, as humankind has already produced so many ‘one-off’ innovations – steam engine, internal combustion engine, electricity, penicillin – the likelihood of other such revolutionary inventions coming into fruition becomes increasingly slim. “Heeding the warning of these forecasting missteps, let us assume that innovation continues, with such marvels as the driverless Google car on the near term horizon,” he says. “Research on the genome will surely make progress in the fight against cancer and other deadly diseases.

But research for new blockbuster drugs has encountered diminishing returns, with substantial numbers of failures and rapidly escalating costs of experimentation per successful drug found.” To Gordon, it meant that innovation is being caught in a cycle of more infrequent success, which leads to diminishing investment in research and development, which in itself hinders the chances of innovative breakthroughs.

Growing constraints
Gordon and other critics are not suggesting that there can be no more innovation ever, they are merely questioning if innovation as a driver of growth – particularly at the rate to which economies have grown accustomed – will remain viable forever. Like the speed of transportation, life expectancy is another good measure of the rate of innovation. In the US life expectancy has risen at a slower rate since 1980 than in the beginning of the 12th century. “Doubling the standard of living too five centuries between 1300 and 1800,” he explains. “Doubling accelerated to one century between 1800 and 1900. Doubling peaked at a mere 28 years between 1929 and 1957 and 31 years between 1957 and 1988. But then doubling is predicted to slow back to a century again between 2007 and 2100.”

That means that per-capita real GDP growth might slow down to a crawl of 0.2 percent by 2100, roughly the equivalent of what it was in the 400 years prior to the Industrial Revolution. For Gordon the key reason behind this is that the “low-hanging fruits of innovation” has been picked, and new advances will become increasingly few and far between. However, it might be too soon to tell the impact that recent innovation has had on growth and productivity.

It is undeniable that over the past quarter of a century, computer technology and IT have come a long way. A parallel can be drawn with the invention and spread of electricity, in that it might still be years before the use of computer technology is at its most efficient. Computer sciences have brought in the last 25 years technological developments that would have been unthinkable not so long ago.

Three-dimensional printing is on course to redefine the way goods of all shapes, sizes and types are manufactured and there have been almost incredible advances in the robotics that have revolutionised medicine. Though it might still be a number of years before the full impact of these developments can be felt, there is little question that there have been remarkable steps forward in innovation and development.

It is important to address that no invention of note had immediate and widespread impact on daily lives and on economic growth. It took years for electrical infrastructure to become widespread in homes, offices and factories after Benjamin Franklin hung the key from the kite that stormy evening in 1750. Moreover, increased productivity from the use of electricity did not occur smoothly over a period of time but rather in sputters, which have dropped-off since 2004, according to Chad Syverson of the University of Chicago.

The effects of information technology making industries more productive does not appear to have shown any real signs until the early 2000s

However, this slow-down might be more connected to the global financial crisis than to the death of innovation itself. As banks collapsed and lending has become increasingly hard to come by, companies have downsized or culled their research and development departments, which are seen as long term projects, in favour of investing in immediate returns.

But Tyler Cowen, an economist at George Mason University suggested that the financial crisis might be hiding signs of a deeper ‘great stagnation’. In his e-book, Cowen argues that this would explain why growth in real-income and employments in developed economies has been slowing for many years, and has barely risen at all in the past 13 years.

Like Gordon, he suggests that the traditional motors driving growth in the 19th and 20th centuries – like innovation and scientific development have been largely exhausted – and new technological advances will not have the same type of boosting effect on economies in the years to come.

Online developments
Gordon and Cowen question the assumption “that economic growth is a continuous process that will persist forever. There was virtually no growth before 1750, and thus there is no guarantee that growth will continue indefinitely […] the rapid progress made over the past 250 years could well turn out to be a unique episode in human history.” And this is perhaps the most important aspect of their theories. We can see innovation happening all around us, and while it may not be as fast or revolutionary as the technological developments of a century ago, daily life is evolving rapidly. The internet alone has completely altered the day-today life of the planet in terms of communication, processing, retail and sharing information, and that cannot be downplayed.

Innovation driven by cheap and readily available processing power is still in its infancy; all it takes is one look around an average house or office to see the leaps that technology has taken in the last decade alone. Computers can now easily understand modern languages, people control games and software through the movement of their hands and a 3D printer can produce everyday items from coffee cups to personal handguns, with minimal effort and investment.

Also the figures are not quite as dire as either Cowen or Gordon suggest. The global financial crisis makes recent data difficult to interpret, but it seems that the productivity surge in the 1990s at first attributed to the spread of computer technology, now actually seems to have been driven by the actual upsurge in the manufacturing of these tools, rather than in the use of the tools themselves.

Information overload
The effects of information and technology making industries more productive does not appear to have shown any real signs until the early 2000s. There has been another fundamental change in the process of innovation: government forces. According to William Janeway, a lecture in economics at the University of Cambridge, “the state has become central to the innovation economy’s dynamics.

“It funds the upstream research that generates discovery and invention;” Janeaway says, “supports the creation of new networks, from canals to the Internet; and serves as a creative customer for innovative products, as it did during the computer revolution’s nascence.”

He suggests that the states’ interest in preserving and developing the market economy is a major driving force behind innovation. Growth throughout much of the 20th century, particularly in the post-war years before 1970 was mainly driven by incessant investment in infrastructure and basic research. Military research and development is perhaps the best example of how governments have pushed innovation forward: the jet engine alone is definitely a major development.

But not everybody agrees. Some economists suggest that when governments are smaller, innovation is easier and less encumbered. There have been increasingly loud calls to reform the patent and intellectual-property system for instance, as both have been rendered virtually useless with the arrival of the internet.

It is likely that the way innovation and scientific development affect growth will change in time. Globalisation and modern technology collide to accelerate the ascent of emerging markets, putting downward pressure on wages and real incomes. But globalisation also increases the pool of talented inventors and scientists from developed countries, who now work alongside or compete with those from emerging economies, multiplying the possibilities for innovation.

There is great possibility for adaptation and development, it is just a matter of addressing and accepting the changing markets and environments, making full use of the technology, and opportunities in front of us.

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