Monday, June 13, 2011

Thinking about innovation more broadly

It seems clear that innovation is the key to increasing total factor productivity. New industries and new products are important sources of economic growth. Technological innovations lead to increased productivity of labor and of capital.

I wonder whether our current system is providing all the innovation that the economy needs. For example, does civil society spend enough on research and development, and is it sufficiently focused on innovation? Are the incentives for civil society innovation sufficient to achieve the socially optimal rates of innovation?

Similarly, think about the public sector. Military expenditures on innovation are high, and indeed military support for dual use technological innovation (e.g. innovations that can be used for civilian products as well as military products) has been important in the economic growth of the United States. On the other hand, has innovation been adequate in education and public infrastructure? What is the level of public investment in research and technological innovation for the public sector, and what are the incentives for public sector innovation and diffusion of innovations?

Thinking about the private sector, I wonder if our system for the financing of innovation does not emphasize the search for innovations that increase the productivity of (and thus the return to) capital without attending equally to innovations that increase the productivity of labor. Do company executives work equally hard to increase productivity (and thus potential returns) to labor as to capital? Do the systems of angel capital and venture capital have corresponding and complementary systems promoting technological innovations increasing labor productivity or new products providing primarily jobs for workers? I doubt is.

Do we spend enough money in government funded R&D to develop new "natural" resources, or to develop better technologies for the exploitation of those natural resources? It was once widely recognized that economic productivity was dependent on capital and labor applied to the exploitation of resources, and indeed the first government science agencies in the United States were devoted to locating mineral resources and developing technology for the improved exploitation of land and water resources.

Note also that our industrial production is also largely responsible for the productivity of our energy, transportation and communications infrastructures. Does our innovation system focus adequately on developing and providing incentives for innovations that improve the total factor productivity of industry, civil society and government as served by infrastructure? I doubt it.

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