Missing the point on innovation


Over at the Economist blog there's what I regard as a bit of missing the point.

IF AMERICA does not continue to innovate, will its economy continue to grow? Basic growth theory teaches that capital and labour can only take you so far, and that the only factor providing increasing levels of prosperity is new technology. But an article in last week’s business section channels Amar Bhide in wondering if in a globalised economy America need innovate at all.

Innovation typically comes from scientists and engineers. China and India have arguably developed a comparative advantage in those fields. Mr Bhide believes America’s comparative advantage lies in the service sector. If we have a truly integrated global economy why not have India innovate and America provide the financing? That's an uncomfortable idea because traditionally countries that innovate are among the wealthiest. But of course the countries that play catch up often grow the fastest.

I'm really not sure that it matters who does the actual innovating....if we're defining the innovating as the science and engineering which leads to a new product or service. Yes, of course, Nokia and their domination of the mobile phone market is very nice for the people that own it and there are spill over effects into the rest of the Finnish economy. But those things are trivial compared to the value that we the users get out of being able to use mobile phones. That is, after all, why we buy them, because they are valuable to us.

William Nordhaus, in what might be my favourite economics paper of all time, outlined this here.

We conclude that only a minuscule fraction of the social returns from technological advances over the 1948-2001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers rather than captured by producers.

It's actually only 2.2 % of the value that goes to the innovators. The rest goes to the users of the products.

Which leads to an interesting policy conclusion. We shouldn't be worrying (or at least, not very much) about subsidising basic research, the creation of new products. Rather, we should be worrying about making sure that the economy is flexible enough that we can swiftly deploy those new ones, whoever they are created by. After all, that's where 97% or more of the wealth creation comes from so that is what we should be concentrating upon.