Has Stagnating Innovation Led to This Economic Crisis? 18 comments
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Is the sequence of financial bubbles dating back to Japan in the late 1980s, via Asia in the late 1990s, technology stocks at the turn of the decade and followed in recent years by an accelerating series of bubbles in real estate, credit risk and commodities, all symptomatic of a deeper underlying economic malaise, rather than just incompetent monetary policy and an excess of global savings?
The key fundamental drivers of sustainable prosperity are technical innovation and productivity growth, and their interaction over time. It was the utter failure of the Soviet system to sustain technical innovation and to boost stagnating productivity (notably in energy production) that presaged the sudden collapse of their system. Could we be facing a similar fate and simply running out of sustainable growth?
It may seem strange in our world of ever sleeker wireless gadgets and broadband connectivity to question the pace of technical innovation, but in fact, R&D productivity has been slumping across many industrial sectors in the past couple of decades, and few recent developments are 'fundamental' in the sense that their loss would dramatically change our material living standards; our civilization could cope easily if we had to revert to the days of the telex/fax and fixed wire phone or a Walkman rather than an iPod (AAPL), but not without antibiotics or the internal combustion engine. Technological progress has become evolutionary rather than revolutionary, despite the huge growth in scientific knowledge.
We seem to have run out of radical, paradigm shifting, creativity, and in the few areas such as GM food or stem cell research where breakthroughs seem possible, irrational, anti-scientific sentiment has stifled progress. In the pharmaceutical sector, the number of new chemical/biological entities approved by the FDA for sale more than halved over the last decade, despite record pharma industry investment, leading to slumping R&D productivity (see chart below); remarkably, about half of the failures reflect a failure to beat a placebo in late stage trials. Such 'blockbuster' drugs as have broken through have generally been lifestyle products of marginal medical value, and there has been minimal progress in key degenerative diseases from cancer to dementia. Agricultural chemicals show a very similar declining trend of slumping R&D productivity.
Silicon Valley and the IT industry are not immune to the trend, and veteran figures such as Richard Elkus (Tencor, Lam Research) and Judy Estrin (ex CTO Cisco (CSCO)) are now warning of an impending innovation crisis; our internet age owes its existence to US government research investment at the height of the Cold War (notably at DARPA), and innovations spawned by a handful of giant private labs like IBM or Xerox as far back as the 1970s (there is typically a 20 year lead time for fundamental lab innovations to make it into mass market products; basic research pays off decades after investment, and neither politicians nor investors have the foresight to any longer make that commitment).
This spending has collapsed as investment horizons have relentlessly shortened and the political impetus of Superpower rivalry has waned; just in August, the famed Bell Labs, where the transistor and a host of other key innovations were invented, were closed by Alcatel-Lucent (ALU), as it pulled out of basic science, material physics, and semiconductor research. This is a potentially devastating trend. Silicon Valley got more federal handouts over several decades than Detroit will ever get and a further key windfall from the influx of mathematical and scientific talent as the Soviet Union collapsed, whose role in creating companies from Google (GOOG) to Paypal (EBAY) has been critical. The payoff from these factors is now abating fast.
So what's the core issue? It's a hugely complex area, but certainly the 'financialization' of our economies, particularly in the Anglo-Saxon world, has led both to shorter investment timeframes and distorted executive incentives, to the detriment of society at large. Additionally, the soaring pay gap between graduates entering industry and academia versus investment banking over the last 20 years has diverted intellectual talent from scientific research. In recent years, banks have recruited thousands of top level engineers and physicists from across the world, who have been responsible for the frantic 'innovation' in exotic derivative instruments which has now blown up in our faces.
A reversal in these trends would certainly be helpful. However, ultimately I think we have a more profound problem. The rational Enlightenment values of the 16/17th centuries in Northern Europe were an intellectual revolution that gave rise to the scientific revolution of the 18/19th centuries and the industrial/technology revolution of the 19/20th centuries. Scientific method, the endless tinkering of trial and error experiment, of continuous improvement, has remained essentially unchanged in its principles throughout.
The problem is that we have long harvested the low hanging intellectual fruit of this Enlightenment approach, and the economics of complexity mean that marginal returns from research are now in steady decline, very similar to the trend of diminishing marginal returns we are seeing across many economic activities such as energy exploration, for instance.
In a world of slowing technological progress and demographic decline, the sudden Soviet collapse may be a harbinger of things to come; interestingly, in a desperate attempt to promote faltering growth, the Soviet Union in its final years under Gorbachev boosted nominal wages and flooded the economy with money, igniting an inflationary spiral that quickly consumed them. There are no short-cuts to sustainable economic growth, and this crisis should be a wake-up call to that reality. The mindless consumption and leverage of recent years will have to give way to far greater investment in the future, from physical infrastructure to basic scientific research, if we hope to sustain our living standards in the long-term.
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This article has 18 comments:
If America could stop its love affair with liquidating itself just long enough to take stock, we would see exactly what you say; a decline in basic research that dries up the pipeline. And yes, lucky lenny, he is exactly right - go study the history of technology of innovation in the United States. Almost every basic electronic innovation we take for granted came out of government labs as part of military research or during the space race. The free market didn't, I repeat, DIDN'T, create those basic innovations. It may have put them in your hands, but it didn't make them from scratch.
I am afraid that this is a trend that's not easily changed but I have hopes that Obama elevates science to a higher level of visibility and respect.
If we just look at who innovates well, and relatively efficiently, Apple rises to the top of the list. One can argue that they are a technology compiler and that they do little basic research, but for about $700 million a year (or around 2% of sales) they produce big innovations in the following areas: human/machine interfaces, use of wireless technology, organization and display of information, miniaturization, industrial design, and convergence of multiple technologies.
In any case, much basic research is funded by the government, mainly for military purposes. Much of the research done does have a spin-off effect which is that companies take the research and further it to make commercial technologies. This also has a back and forth feedback loop as some commercial technologies get integrated into military hardware, e.g. electronics. Some military/gov't hardware becomes commercialized, e.g. GPS, night-vision in cameras, etc.
The main reason the government spends money on the basic research is because of "extreme" requirements not usually seen by commercial technologies (i.e. military and space environments and needs). And since basic research is risky with little chance of payoff within a timely manner, many businesses cannot afford to do it since the time horizon could be decades. Much better to form ties to universities and gov't labs to license, or further the research into applied research and then onto development which are less risky, and have a shorter time-horizons to successful commercialization.
But to be a little cynical, although of late, much of the gov't basic research dollars have been pouring into healthcare related research which is okay, per se, but will also mean older people living longer placing more burden on the social security system but nonetheless being reliable voters (coincidence...hmmm?). I, for one, would like to at least be flying around in my jet pack (remember they promised us jet packs way back when?) when I retire.
On a related note, if the government wants to (partly solve) its looming budget shortfalls in the next generation, it should invest more money into basic research, as well as applied. How much tax revenue has the government been able to reap from the rise of GPS, and internet, and other such technologies which have spawned whole new industries? Where would the GDP be if there had been no internet?
I say partly solve, because I doubt congress would be able to keep its hands off any increased tax revenue due to new rising economic activity from its investment. But that's for another discussion...
I remember when someone said to a Philosopher (in the 70's, when philosophy departments were closing all over the place) that no one missed them... and the philosopher said...'not yet...but they will'. It's the same with real science. innovation comes from thinkers.
when you have a drug company that can make a zillion $ profit on a drug...they tend to want everyone on it...even babies!...instead of making a drug that's actually better and safer.
It's the same with the car companies; talk about lost chances, arrogance and complacency!!
i have hopes for the new administration because it seems actually focused on scientific achievement...somethin... American use to be the best at! it's time we admire intelligence, inspired research and pure science again.
Mass produced computing power and inexpensive software make the costs much lower than ever. Many years ago it took mainframes and many man-years to accomplish what can now be completed on a common laptop in a single man-month.
So if you are comparing "cost of R&D" it may not be a valid metric because the cost of innovation has decreased. Maybe you should count "number of patents granted" instead. That might be a more valid metric of innovation.
You make a good point regarding "in the few areas such as GM food or stem cell research where breakthroughs seem possible, irrational, anti-scientific sentiment has stifled progress." Not all countries are following this route. The anti-scientific sentiment regarding genetic engineering is a religious bias from Catholicism. Thus countries like Asia are pursuing this research because they do not have this religious bias. A comparison to high energy physics and the space program is appropriate -- the government and industry funds tremendous research in high energy physics and mathematics to find the origins of the universe and the workings of atoms (Rome gave up on the religious argument that the Earth is the center of the universe long ago, decades after Galileo), however when it comes to the origins of our own species -- in biology -- the religious bias clamps down hard against scientific progress. Check my blog to see how science will be ready within 10 years to show how life itself is created, creating synthetic life (synthetic biology), due to breakthroughs in genetic engineering and work on the genomes of many species. The cost of R&D towards this innovation is also decreasing rapidly (DNA & protein synthesis cost) while computational power is very rapidly increasing (size of bioinformatics databases adding new data on DNA and proteins).
It is not necessary to spend "big money" on R&D. It is better to spend "smart money" on R&D.
There has been no drop in R&D spending through 2007. In fact since 1950 the US has spent about 2.6% of GDP on R&D. Only Japan has a significantly higher rate of spending of their GDP over the US of any other OECD country. There is no want of innovation. Patents applied for are accelerating patent pendancy is at about 30 months. Knowledge is doubling generally about every 5 years more rapdid in computer science, materials science and nanotechnology. Government funding for R&D has fallen but the slack has been taken up by charities, industry and academia. See:
www.nsf.gov/statistics...
www.cbo.gov/ftpdocs/82...
Your premise is false.
The problem with R&D spending and US patent statistics is that we're not measuring quality of basic research -- only quantity of applied science and technology. Government subsidy of academic programs have worsened, not improved the situation.
I suppose it could be argued that there's nothing left to invent, but I'd be much happier to see more industrial research and -- well, nevermind -- the days of Edison bargaining with Gould or a farmboy from Utah trumping RCA are long gone. So is RCA.