Richard Florida
by Richard Florida
Tue Jul 14th 2009 at 9:35am UTC

Innovation Interrupted?

In a widely read cover story published earlier this month, Business Week’s chief economist Michael Mandel asks, “To what degree has American innovation been ‘interrupted’?” Mandel argues that the economic crisis is partly the result of America’s failure to generate high-impact commercial innovations.

What if, outside of a few high-profile areas, the past decade has seen far too few commercial innovations that can transform lives and move the economy forward? What if, rather than being an era of rapid innovation, this has been an era of innovation interrupted?

The crux of his argument is that many, if not most, of the big breakthrough innovations that were supposed to occur over the past decade or so have failed to materialize. His article provides a raft of compelling examples of once-heralded innovations – in areas from biotech to micro-machines – that have simply not panned out. This failure to commercialize and diffuse these new breakthrough innovations – America’s inability to set in motion the great gales of “creative destruction” identified long ago by Joseph Schumpeter as key to capitalist growth – he argues, is a key contributor to both the financial bubble and the economic crisis.

But since there is compelling evidence that the figures are overstated by the credit bubble and statistical problems, we can construct a plausible narrative for the financial bust that gives a starring role to innovation-or rather, to the lack of it. It goes something like this: In the late 1990s most economists and CEOs agreed that the U.S. was embarking on a once-in-a-century innovation wave-not just in info tech but also in biotech and many other technologies. Forecasters upped their long-run growth estimates for the U.S. economy. Consumers borrowed against their home equity, assuming their future incomes would rise. And foreign investors lent America money by buying up U.S. securities, assuming the country would come up with enough new products to pay off the accumulated trade deficit.

Mandel lists four areas in which America’s recent performance has been lackluster: stock market performance in the pharmaceutical, biotech, and life-science sectors; declining real wages for highly educated workers; a mounting trade deficit in high-tech sectors (which grew from $30 billion U.S. surplus in 1998, turning into a $53 billion deficit by 2008); and little improvement in the death rate (which he sees as a measure of the failure of breakthrough medical technologies to materialize) as evidence for the failure of American innovation.

It’s no secret that I’m a big fan of Mandel and I find his general thesis about lagging U.S. productivity and job growth over the past decade or so to be both intriguing and plausible. And since so much of my own work focused on the relationship between innovation and American competitiveness was flagging, I find myself particularly drawn to his most recent “innovation-interrupted” thesis.

My first book, The Breakthrough Illusion, written with Martin Kenney in 1990, argued that the U.S. system of venture capital-backed breakthrough innovation was skewed to encourage short-term super-returns from new breakthrough innovations, and was structurally ill-suited to capturing the longer-term wealth derived from developing these innovations into successful products and industries. That work drew upon the intriguing thesis of innovation theorist Henry Ergas, who argued that the U.S. had developed a shifting system of innovation geared to near-constant development of new products through new firms, as opposed to a deepening system (think of German cars) which continuously adds technology to upgrade existing industries. According to Ergas, the key to long-run prosperity lies in synthesizing both strategies – cultivating an economy which could deploy new technologies in new sectors while at the same time deploying them to upgrade and revolutionize old ones.

I opened my 2002 book, Rise of the Creative Class, with a time-traveler experiment. Someone traveling from 1900 to 1950 would be blown away by the varied technical marvels that surrounded them from televisions to airplanes. But while someone who time-traveled from 1950 to the 2000 would see a few new technologies, like the personal computer and the cell phone, he or she would likely be much more amazed by sweeping social changes. And in my 2004 book, Flight of the Creative Class, I argued that America’s innovative edge in the late 20th century was inextricably tied to its ability to attract foreign scientists, technologists, and engineers. The combination of mounting U.S. immigration restrictions and growing efforts by foreign countries to retain their own best and brightest (and attract others from around the world), I suggested, was an under-appreciated threat to U.S. competitiveness and prosperity.

In fact, I found Mandel’s essay so compelling that I decided to take a look at the actual data. Mandel rightly says that we currently lack a comprehensive “innovation index” that tracks commercial innovation: “There’s no government-constructed “innovation index” that would allow us to conclude unambiguously that we’ve been experiencing an innovation shortfall. Still, plenty of clues point in that direction.”

True enough. But research into the economics of innovation has discovered at least one reasonable measure of innovation – patents. There are problems and biases with using patents as a measure of innovation, as economists who specialize in the subject have pointed out. Patents measure certain areas of technology more than others. In some areas of commercially important R&D, patents are rarely used. Other areas, including less commercially relevant ones, are awash in patents for minutiae. And patents are not synonymous with commercially relevant innovations. That said, patents do provide a consistent, broad-gauge indicator of the level and rate of innovation – one that can be tracked over long periods of time and be broken out by nation, city, and region, and by U.S. resident versus non-resident or foreign inventors.

With my Prosperity Institute team – Charlotte Mellander, Scott Pennington, Dieter Kogler, and Patrick Adler – I’ve taken a look at the trends in U.S.-patented innovations. In a series of posts this week, I will report our findings. Tomorrow we’ll look at the trends in U.S. patents over time. Wednesday we’ll explore patenting by U.S. resident versus non-resident (foreign) inventors. Thursday we’ll examine the geographic distribution of innovation – tracking the rise of some innovative regions and the fall of others. And Friday we’ll discuss the longer-run historical relationship between innovation and economic crises.

9 Responses to “Innovation Interrupted?”

  1. Wendy Says:

    Very thought provoking post.

    Richard, in your work and thinking about assembly lines, would you say that (a) Americans (Henry Ford in particular) invented the assembly line and perfected it for large, durable goods to 1950. Then (b) overseas innovators in Japan, then Korea and now China re-invented the assembly line for mass-producing consumer electronics (and then perhaps applied their knowledge to other consumer durables such as automobiles and non-durables such as clothing).

    But, aren’t those two foundations of global economic flows done in the sense that’s not where the next innovations will happen?

    So, could you now say we are in the post-consumerist economy in the sense that the innovations are now in how we experience the electronics — software broadly defined (MP3 playing programs, video games, tv content, computer, telephone and internet applications, etc. Americans firms are quite good at producing and distrbuting this content.

    But software innovation and production likely doesn’t follow the exact model of 20th century industrial production in that it’s not really an assembly line process nor about patents (from what I understand)?

    So the question is back to: how do you measure 21st century innovation? and whether your country or region is underperforming?

    A decline in patent applications in the US might be a sign that the economy is shifting into this knowledge, creative “software” era. Maybe it’s not so bad.

    Further thought: a lack of growth in incomes for creative workers might be masking a choice to participate more in the experience economy rather than use all one’s time “working.”

  2. Creative Class: Innovation Interrupted? | Lies My Gantt Chart Told Me Says:

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  3. Tim McNulty Says:

    Richard,
    Great post. I think Mandel has hit on the core underlying economic challenge–particularly in terms of the pace and nature of the recovery. Your team is uniquely positioned to advance an understanding of all the dimensions of the issue.

    One of Schumpeter’s assertions was that periods of creative destruction were unleashed by a convergence between technological advances and innovation in models of business financing. But in their work on innovation and education Goldin and Katz highlight how major periods of technological growth have also been linked to innovations in education and workforce development at all levels. Perhaps a stagnation in the capacity to tap and engage the creative talent of broader segments of the population is at much at work in this interruption as breakdowns in the R&D infrastructure.

  4. RF Says:

    Tim and Wendy -
    Thanks for the comments. Actually,as it turns out, I’m working through all of this stuff, right now, for my new book on the crisis, and even more so the reset and recovery. I’ve now been able to look closely at the literature and studies of the Great Depression of the 30s and the Long Depression of the 1870s.

    Both conform to Schumpeter’s general theory. Both were times of accelerated innovation. A number of researchers have done detailed work to test these claims.

    Joel Mokyr’s detailed study of the Long Depression finds massive innovation in a range of technology. He argues it ushered in the second industrial revolution. But it also caused even more important innovations in the organization of production and in the infrastructure of cities. These organizational innovations had huge paybacks.

    Field has looked in detail at the Great Depression. He dubs it the most technologically progressive decade of the 20th century, even when compared to the 1990s high-tech boom period. It was far more innovative than either the 20s or the great post war boom as well. Like Mokyr he finds organizational innovations, in addition the individual technological innnovations to be key. The development of broad systems of innovations are what really boost productivity in a big way.

    Interestingly enough, Field weighs the evidence and suggests it is more Schumpeter and less Katz and Goldin that matter.

    There is a fabulous University of Toronto stud which also covers the Depression. Instead of using patents or innovation counts or total factor productivity measures, it uses the Library of Congress catalogue to identify new technology books. It too confirms the Schumpeterian notion about the Depression and supports Field’s notion of the 30s being the most technologically progressive of the century.

    Now onto the present: I agree with Mandel. The past 20 years have not been great across any measure. Productivity stalled and wage growth was flat. The rich got way richer, as capital and especially banks and financial institutions increased their draw on wealth so to speak.

    I think the crisis will help to reset all of that more or less in the way Schumpeter and Marx before him laid out. The crisis should reroute capital eventually away from finance and bubble and toward productive investments in innnovation and technology. Mandel is right to say the bubble more or less crowded out these investments.

    But there is one complicating factor that I’ll get to in a post later this week.

    Innovation has become globalized. A huge share of US innovation is being done by non-resident, foreign inventors. Without their contribution, the real US level of innovation would be about half what it is.

    Love your thoughts on what that might mean.

  5. Creative Class » Blog Archive » Whatâ Says:

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  6. Chris Rhodes Says:

    Hi

    I am very interested in hearing what Richard has to say about a few things that really concern me. My name is Chris Rhodes, I live in Pittsburgh PA. I am a very creative person, I fabricate concrete countertops, sinks, water-features, sculpture etc. I am also very much into innovation, I have been engineering, prototyping, and testing a new streamlining tool for the decorative concrete industry, which will severely cut cost of labor and material. I agree to an extent that innovation is very important. That being said, certain things about it scare me.

    I have recently read the new Popular Science Magazine, which I love by the way, and what I got from it was that I think we will collapse if we keep going in certain directions with innovation. We now have this Global Economy, which is broke, but we have huge ammounts of private and government funds going towards some, I think, bad innovation. For example, Carnegie Mellon just received $28 million from the USDA to fund a robotics project to pick fruit from trees, which will be slower than a human. Why are we not smart enough to work together, that money could pay allot of unemployed people to pick the fruit.

    The US is now funding a $21 million project to retrofit an old submersible called Alvin to reach ocean depths of 21,000ft, the Japanese can already reach 23,000ft and are working on 26,000ft. Why are we not smart enough to work together, share technology and knowledge, to SAVE money.

    Take an ant for instance, we now know that ants are masters of all trades. There was a study (in popular science) they use to think that individual ants were specialists and responsible for one task, however each ant is capable of doing any specialized task. Humans on the other hand, usually specialize in one trade, or body of work, which makes them specialists in one thing, that is why, for instance I found two business partners to help me run my company, they were specialists in the back end of the business, and I was a specialist in the creative end of the business, it was a good mix while it lasted.

    There is also engineering of plants at a non profit company seeking to make super rice, which will allow pores in the plants leaves to close sooner during the process of taking in co2 so the plant can keep more moisture. This means they will not suck up as much co2, that to me seems like a bad idea since we already have a co2 problem.

    Why is there not a governing body at the pattent office or the government to think these innovations through, and to seek other individuals in the same fields of work to (a) stop what I think are bad ideas, (b) create global teams to create one thing with the highest global technologies, (c) Be efficient with global money and research to reach global goals that we are now competing for.

    Dont get me wrong, I love innovation, but I just think it needs to be tweaked a little.

    Please pass to Richard Florida, I would love to have a conversation about this or just hear what he has to say about it.

    Thanks for your time
    Chris Rhodes


    Christopher Rhodes
    Edgewise
    412.670.6231
    edgewise.concrete@gmail.com

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