Sunday, January 20, 2013

Where's the Innovation?

I blogged awhile back about my concern over prevalent economic forces and conditions that essentially are rendering the need for human employment unnecessary.  Traditionally, emerging markets and innovation have saved the day for capitalism as greater productivity and efficiency reduced the need for workers in established markets.  Last week The Economist tackled part of this serious issue in a splendid, if troubling, lengthy article.

The article is primarily a summary from an amalgamation of studies and papers from various economists.  It begins with a recent history of innovation and its implications for economic growth.  Essentially, there was a period of rapid and significant innovation for most of the 20th century contributing to a large generation of wealth and creating a thriving middle class - until things hit the skids about 1970.  I will quote extensively from the article...

For most of human history, growth in output and overall economic welfare has been slow and halting.  Over the past two centuries, first in Britain, Europe and America, then elsewhere, it took off.  In the 19th century growth in output per person - a useful general measure of an economy's productivity, and a good guide to growth in incomes - accelerated steadily in Britain.  By 1906 it was more than 1% a year.  By the middle of the 20th century, real output per person in America was growing at a scorching 2.5% a year, a pace at which productivity and incomes double once a generation.

But in the 1970's America's growth in real output per person dropped from its post-second-world-war peak of over 3% a year to just over 2% per year.  In the 2000's it tumbled below 1%.

The article references a recent eBook by Tyler Cowen of George Mason University entitled The Great Stagnation, detailing how and why innovation became more challenging around the 1970's and why it has never really recovered to its former glory, though there are reasons to believe innovation will eventually make substantial contributions again. The Economist stresses that innovation is not dead. Rather, the dynamics of innovation have changed. According to Robert Gordon, economist at Northwestern University...

There will be more innovation - but it will not change the way the world works in the way electricity, internal-combustion engines, plumbing, petrochemicals and the telephone have.  Mr Cowen is more willing to imagine big technological gains ahead, but he thinks there will be no more low-hanging fruit.

But Pierre Azoulay of MIT and Benjamin Jones of Northwestern University find that, though there are more people in research, they are doing less good.  They reckon that in 1950 an average R&D worker in America contributed almost seven times more to 'total factor productivity' - essentially, the contribution of technology and innovation to growth - than an R&D worker in 2000 did.

The original, rapid rate of innovative change is placed in perspective this way...

In 1900 kitchens in even the poshest of households were primitive things.  Perishables were kept cool in ice boxes, fed by blocks of ice delivered on horse-drawn wagons.  Most households lacked electric lighting and running water.  Fast forward to 1970 and middle-class kitchens in America and Europe feature gas and electric jobs and ovens, fridges, food processors, microwaves and dishwashers.  Move forward another 40 years, though, and things scarcely change.  The gizmos are more numerous and digital displays ubiquitous, cooking is done much as it was by grandma.

Highway travel is little faster than it was 50 years ago; indeed, endemic congestion has many cities now investing in trams and bicycle lanes.  Supersonic passenger travel has been abandoned.  So, for the past 40 years, has the moon.

Medicine offers another example.  Life expectancy at birth in America soared from 49 years at the turn of the 20th century to 74 years in 1980.  Enormous technical advances have occurred since that time.  Yet as of 2011 life expectancy rested at just 78.7 years.

Some of this is obviously due to physical limitations.  It seems silly to say that because we were able to add 25 years to the average life expectancy over 8 decades that we should be able to make typical longevity around 99 years by 2040.  Perhaps that is possible, but there are too many other variables besides medical innovation itself.  Further, there are equally obvious limitations to practical speed for passenger vehicles, while efficiency in the kitchen can only go so far.  It is hard to top "instant" meals.  Yet, there is hope that innovation will start to drive economic progress more rapidly in other ways...

By the measure known as Moore's law, the ability to get calculations out of a piece of silicon doubles every 18 months.  That growth rate will not last for ever;  but other aspects of computation, such as the capacity of algorithms to handle data, are also growing exponentially.

Across the board, innovations fueled by cheap processing power are taking off.  Computers are beginning to understand natural language.  People are controlling video games through body movement alone - a technology that may soon find application in much of the business world.  Three-dimensional printing is capable of churning out an increasingly complex array of objects, and may soon move on to human tissues and other organic material.

Globalization is one of the primary reasons for a guarded yet positive attitude...

...the rise of the emerging world is among the biggest reasons for optimism. The larger the size of the global market, the more the world benefits from a given idea, since it can be applied across more activities and more people.
Nevertheless, there are strong reasons to believe that a unique period in economic history might have already seen its best day....

The period from the early 1970s to the mid-1990s may simply represent one in which the contributions of earlier technologies of today and tomorrow remained too small a part of the economy to influence overall growth.

However, the article concludes with what was the central point of my previous post on this subject - the type of innovation we are likely to get in the future will not solve the need for markets that demand more employment.  In fact, it seems more likely that innovation will continue to make people rather redundant.

...technological advances...could be disturbingly rapid, leaving a scourge of technological unemployment in their technologies and the globalization they allow have already contributed to stagnant incomes and a decline in jobs that require moderate levels of skill.  Further progress could threaten jobs higher up and lower down the skill spectrum that had, until now, seemed safe.

I do not sense that anyone knows the way out of this fundamental dilemma facing the paradigm of capitalism.  You cannot predict nor can you manufacture innovation.  It is more akin to art than to goods and services.  I am not sure capitalism can survive in a world where the masses of people cannot find financially viable work despite increasing wealth and exciting technological change.

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