How Innovation Sustains Prosperity

A neat book by Amar Bhide called The Venturesome Economy is about innovation, but in quite a different way than the classic view presented by Joseph Schumpeter. It's an important argument, well worth reading, because if he's right, we need fewer engineers, and more B-Schoolers.

Bhide emphasizes not the courage or genius of the entrepreneur, but rather the unintended effects of all the various forms of knowledge generated by the massively multiplayer innovation game that sustains economic growth. These mid level innovations do not show up in patent counts, and individually they are small steps, but they add up, especially because there is so much unsung innovation across the American economy. Bhide emphasizes the mundane innovations from many people making prosaic modifications to the status quo. Think of Wal-Mart's (WMT) innovations in logistics, Apple's (AAPL) in design, or Procter & Gamble (PG) in marketing. Hardly something to get excited about, but these are the engine for prosperity.

He also highlights the importance of consumers taking risks when they buy, say, a new computer or software, as these risks have similar return characteristics as investments, and are essential for generating feedback to the producers. Innovation guru Joseph Schumpeter, in contrast, emphasized the entrepreneur (think Henry Ford), making it seem that we need to incent Unternehmergeist (entrepreneur-spirit) for specific technologies or companies.

Innovation is not so much from trade secrets that are regionally clustered, or deep ideas like the transistors, but rather from the willingness and ability of people to develop these ideas and technologies into products. Apple's successful iPod mainly came from technology outside the US as opposed to anything local in Silicon Valley, and was based on their great marketing and design expertise. Thus, maybe all those arrogant MBAs, who couldn't take the derivative of x-squared if they had a gun to their head, and got B's for showing up, are really the key to our economy? Clearly, if true, the first implication is there is no God.

Emphasis is everything and if the Bhide interpretation is correct, Schumpeter's books seem much less important. Schumpeter emphasizes brilliance, great men and great companies, whereas Bhide emphasizes the effect of a system where outliers are not so important.

Unfortunately, Bhide does not highlight exactly what kinds of policies, laws, morals, etc., are necessary or sufficient to generate a robust amount of mid level and consumer entrepreneurship. Thus, he does a nice job of convincing us that this is where the key to productivity lies, but is rather vague as to why it occurs more in some places than others. For example, he suggests emphasizing the service sector more, in contrast to technologies, noting that Wal-Mart type productivity is one of the US's true strengths. But when he discusses this application to US healthcare, he seems without a clue as to why the innovative and productive US service sector fails so massively in that one area. It's a bit like a great book on psychology where at the end, the author suggests we watch more sunsets or look into our heart, advice that is boring or useless. True wisdom should lead to better practices, not merely a good read.

Comments

[Stephen Str...:]

Interesting point about the iPod incorporating foreign technologies. One of these is the ARM CPU, designed in the UK, which has now outsold Intel x86 in units shipped. The original design was by two people, one did the transistor layout and one did the instruction set. Of course, now they have teams, and the original brilliance of the design has been diluted to some extent - even though the teams consist of very good engineers. There are many brilliant inventions though, and ARM is successful commercially because of their brilliant (and at the time, innovative) business model.

100% of people can drive a car, 10% can build a car, 1% can design a car. But remember the 1% can also build a car and drive it. Just because you don't know the 1% personally, doesn't mean they are not absolutely required. But the top 1% of car designers are probably not the top 1% of salesmen.

If we lost the top 1% of people, I'm sure society and the economy would slide into decrepitude and relative poverty. You can see example of this in action in former colonial countries (not the US ;-)) where the magnificent villas of the imperial masters lie in ruins with squatters eking out an existence in the grounds.

A more recent example of this in action is in South Africa, where at the end of apartheid they basically got rid of the 1% of expert whites who had the top jobs and replaced them with black political appointees who lacked the relevant skills. Ten years on, there are regular power cuts, water shortages and a higher murder rate than even Iraq at its worst. And if you're not familiar with SA, you may know about Zimbabwe and their economy, which is a much more extreme example.

Back to the iPod: many successful ideas bring in previously accepted concepts from different areas, which are traditionally segregated. The innovation comes from the integration of these ideas. The apparent US-centric focus of this book (and of much of the US) is a problem with the book (and for the US).

It is a major talent to be able to see things as others do.

Feb 28 11:39 AM

[k9s-4-k8:]

I think the opinion that US service sector has failed massively with healthcare is incorrect. While it has failed with regards to affordability, our best hospitals are shining examples the world over. Far too much is made of European and Canadian healthcare. Frankly, its rationed healthcare. If you are 70 and you need hip replacement surgery in Canada you will suffer long waiting in line. If you have money, you come South. In many European countries you don't automatically qualify for procedures based on need. It is strictly rationed as according to age and health. In certain situations they will basically wait your life out rather than provide necessary life sustaining procedures. Their is also little access to litigation if they screw up. This doesn't always make for an especially attentive service sector.

Feb 28 11:47 AM

[Gem Hudson:]

Prosper in your own business and you will work out the business until the business work for you but be all for just us is to hyper-inflate into an socialism black hole. Hyper-driving on the impulse engine is crashing the currency. Paper money don't buy nothing and pruchase more of nothing.

Feb 28 11:58 AM

[Stephen Str...:]

k9s040k8 - Here in the UK we have a great NHS - but almost everyone with any money goes private, except for A&E. Free but rationed by waiting list, as you say.

If I spend my own money on myself, I'll make sure I get a good service, and it's good value. If I spend my own money on someone else (eg a present), I'll get good value for money, but won't be so good at spending it on what they want. If I spend your money on me (eg a grant), I'll get a great service, but I won't be too bothered about cost.

And if I'm spending your money on someone else (tax and spend), I'll probably not get the best service or the best price.

So, back to innovation - governments are not very good at picking winners or getting a good return. By its very nature, innovation is not something which can be directed from above.

Feb 28 12:14 PM

[nova:]

sleepless_on_wall_stre... ,

I totally agree that Bill was not the only contributor to the present financial catastrophe.

There was a lot of "help" from many post-WarII US presidents and the Congress.

Feb 28 12:23 PM

[morph366:]

Regarding innovation in general terms I have always been inspired by one of A.C. Clarke's thoughts on the matter -- The only way of discovering the limits of the possible is to venture a little way past them into the impossible.

Feb 28 12:39 PM

[Dave Wrixon:]

Innovation is key element and engineers are grossly undervalue but what actually sustains prosperity is investment. This table of Gross Fixed Investment per capita is quite telling:

en.wikipedia.org/wiki/...

As you can see China comes in third and is the highest ranked of the significant economies. The US comes in at 134 out 146.

Another important measure is FDI or Foreign Direct Investment.:

www.nationmaster.com/g...

It is noted that the so called basket cases of Easten Europe actually do quite well here as does the UK.

Feb 28 01:43 PM

[Dave Wrixon:]

Not sure what MBA stands for but guessing the last word is All, and the second one is not repeatable.

Feb 28 02:44 PM

[TinyTim:]

Sounds like another lame book by an economist. Does he have the data and math to back up this premise? Modern economic science uses these tools; armwaving debates went out in the '30's.

In B-school, these types of innovations are called operations management. In engineering school, they're known as operations research. Where do you think the real innovations are occurring?

The founder of FedEx got a D on his B-school paper describing the logistics concepts he went on to implement.

Marketing is applied psychology and sociology. Engineering is basically applied science.

Barriers to entry (what Buffet calls a moat) are necessary for any sustainable business. Competitive advantage can take many forms.
The kind of advantage this author describes sound more like those in mature industries.

Feb 28 03:25 PM

[Inventer:]

Huh, He sees no innovation in the USA regarding Healthcare.....!? Simply because: The Doctors are taught by Colleges sponsored by the Drug Companies, and are well taught about Death/Disease and Drugs; but, Pratically Nothing about Health Care!
From what I read, many drug companies are just "sitting" on Cures...NO Money in a cure.....and, the American Medical Association Banned a "Machine" that Would [DID!] Cure Any Disease.....back...abo... 1941. The Government agrees with the AMA, better to just treat symntoms==creates Much More cash flow. Laws enforce That.

Medical Insurance? In my opinion=Not worth having, except in case of accident emergency; then, may have to wait until "next week" to have a broken bone set. Statistics= 40% of the time You Are Worse Off After treatment by a Doctor/Hospital, than You were before going to the Doctor in the first place!!!
Health is a Personal Obligation; if you have enough brains to Learn, and enough willpower to do as needs to be done. Innovation [Medical] Not Allowed, By Law!
Daughter has Lupus, and in China for treatment. Why? Because doctors here [America] are so ignorant of Health, that "they" may want to put a person with, say, Lupus, in a Hospital for "Observation" [and experimentation..] at astronomical fees. [for a "few" months]
So Many Areas are going Down, here in the USA....example: USA Discovered the Internet; now, down to ....maybe 12-15th. of developed World.......NOT # 1 [anymore, regretfully]


On Feb 28 08:26 AM User 270430 wrote:

> " innovation does not sustain prosperity."
>
> Exactly... The ruling class does not want to discuss what most of
> us already know, capitalism, as an economic model practiced world
> wide, has now reached its "natural" conclusion: a crisis of over
> production. The methods of production have accumulated into too few
> hands so what we are experiencing is the culmination of the "success"
> of first regional capitalism, then nation state capitalism and now,
> finally , the "success" of global capitalism.
>
> About twenty years ago the capitalist ruling class was euphoric after
> the fall of the Berlin Wall and the proper demise of the caricature
> of socialism, built up by the monster Stalin, which was the USSR.
> We were promised a world of peace and prosperity, a new economic
> paradigm of constant uninterrupted growth, but now all those promises
> had been shown to be false.
>
> The last 20 years have been difficult for the working class, their
> average wage have shown no increase, after inflation, and were instead
> forced to resort to massive debt accumulation to maintain working
> class living standards and the continued smooth functioning of the
> globlal "free markets". In summary, for the working class, with the
> global economy came not prosperity but, as is clear now to most observers,
> global economic crisis...
>
> And yet, this planet still have many resources, there is still alot
> of work to do to meet the needs of civilized society. The only problem
> then, is not lack of resources or innovation, but PROFITS. The capitalists
> produce not for social need but for profit and as such only produce
> what they can sell. If the system can not work without sacking and
> impoverishing workers, then it is the system that is at fault. <br/>
>
> I am convinced that the colossal potential of the United States is
> destined to play a decisive role in the future world order. But it
> must also be admitted that at the present moment in world history,
> the role of the USA on a world scale does not reflect its real potential
> for good, but only the rapacious greed of the big multinational companies
> that own America and control its actions in their own selfish interests:
> the America of the big banks and monopolies, the enemy of freedom
> and progress everywhere.
>
>
> JudeJin said:
> innovation does not sustain prosperity.
>
> "balance" does. get rid of extremes in wealth gap, social inequality
> and keep a cap on human greed.
>
> we don't need too many dot com heros, wall street stars. most of
> them are trash in retrospect, charlatons at best.
>
> in the current environment, prosperity is just a mirage.

Feb 28 04:29 PM

[flipspiceland:]

One aspect that is overlooked is population. The world has too many people who need something constructive to do, nowhere to go to do it, and who don't have the skills, motivation or invention to do it with. At the rate some countries have been reproducing, abject poverty must surely be everywhere on an afterburner trajectory to the moon.

What are we to do with all the displaced workers and the millions a year, net of deaths, now being born?

There are hundreds of millions in China, throw in India, and Africa and we are looking at a billion people who are doing little more than turning oxygen into carbon dioxide.

There does not appear to be enough 'innovation' in the last 50 years to keep our billions employed. Now what?

The innovation we now desperately need is an 'invention' to put these people to work. The laid off autoworker and/or banking employee is but a speck in the eye of a newt compared to the number of jobs the world needs. The growth of government employment on the other hand is and has been attracting the 'least' of us and is growing like a virus and just as deadly to innovation.

Our next revolutionary invention had better be the creation of a variety of innovative techniques to avoid a bloody revolution on several continents. We can't all become grant writers in order to get 'free' money from the government (from ourselves).

Feb 28 05:33 PM

[TPMNeal:]

Not going to argue the veracity of the premise, because it fundamentally does not matter. You still need the ouvre of disciplines to both conceive and effect innovation, and without the full you limit your potential.

That said, there is a wonderful demonstartion of the premise presenting an innovation in Monetary Fiscal Policy thought up by a B school trained visionary. Offering a comprehensive new paradigm for a full economic recovery is...

www.theprosperitymanda...

Feb 28 06:52 PM

[bthomas:]

So was it B schoolers or engineers who created the derivative market with such convoluted complexity that rating agencies can't/couldn't properly assess risk? We need that type of innovation why? Go to engineering school kids. The world you.

Feb 28 11:44 PM

[bthomas:]

So was it B schoolers or engineers who created the derivative market with such convoluted complexity that rating agencies can't/couldn't properly assess risk? We need that type of innovation why? Go to engineering school kids. The world needs you.

Feb 28 11:49 PM

[WaitingForL...:]

Innovation will lead to prosperity and innovation will be done by B school passouts !!! How innovative.. How many MBAs will it take to discover a light bulb?

Mar 01 02:54 AM

[Jade Queen:]

I am reminded of the story of George Washington Carver, one of the most amazing geniuses the U.S. has ever had, as acknowledged by other geniuses of the time. Edison and Ford made pilgrimmages to see him. Carver would discover and invent stuff, but he could not have cared less about commoditizing what he discovered. He let others do that. He wanted to be off on the next discovery, to Booker T.'s frustration, because Booker T. was trying to pay the bills. People who did commoditize Carver's discoveries and inventions would send Carver checks, which often didn't get cashed because he would lose them in his lab. Genius is important for prosperity. Carver is often credited with saving the soil of the South by using peanuts to replenish nitrogen robbed from the soil by cotton monoculture. He discovered a blue pigment in clay, he used plant fiber for the precursors to laminates, he healed people with oil massages, a thing just being re-discovered. The list of his contributions go on and on, but it was important that he have patrons or he might have forgotten to eat and some of his innovations would have been lost. The culture of the U.S. enables good cooperation between various types of people, so long as levels of taxation are not too confiscatory, and as long as information is shared well enough across geographical and other boundaries. My concern about the present is the sharing of information. I believe it to be badly impaired, and that's a challenge to our prosperity. I posit that we need more than genius and MBA's. We need good sharing of information.

Mar 01 03:11 AM

[reefsaver:]

Is Bhide recommending more of the same b-school geniuses that just wrecked our financial system?

Instead, how about a system that rewards innovation more evenly? Our system is already too top-heavy, and it's getting worse. Bhide's work is good for marketing b-schools, but that isn't what drives our economy.

No, if this article represents Bhide's viewpoint accurately, then he has it wrong. The b-schoolers need someone's coattails to ride. And those coattails belong to the innovators. Go to work in any technology company and you will see that quite clearly. That being said, I've really enjoyed b-school...

Mar 01 09:13 AM

[sleepless_o...:]

flipspiceland:

You touched on a complex subject when you wrote:

"One aspect that is overlooked is population. The world has too many people who need something constructive to do, nowhere to go to do it, and who don't have the skills, motivation or invention to do it with. At the rate some countries have been reproducing, abject poverty must surely be everywhere on an afterburner trajectory to the moon."

You are talking about the under developed parts of the world, but we also have a problem in the developed parts of the world. There we have developed too much production. This over capacity provides goods and services that actually go to waste. Since our productive capacity is too great, some of it necessarily goes idle and unemployment increases. Demand decreases as a result and the over capacity increases further.

So we not only have a problem because some parts of the world do not have the productive capacity to adequately support their populace at any level but abject subsistence level poverty. We also have a problem because other parts of the world do not consume what they have the capacity to produce.

Now, I can just hear someone say: Sleepless can go take a nap - the solution is simple: just improve distribution so that everyone gets what they need. But that would not solve the problem I see.

The problem is that we have too many people who have nothing to do. Yes, the productive capacity in the world is sufficient to support a comfortable basic life sustenance for everyone. But man does not live by bread alone.

Until there is sufficient innovation and education throughout the world so that all mankind can find fulfillment in occupation in some meaningful way, this problem will persist. We will have idle young men (and a few women) who, through frustration and boredom, turn to crime and terrorism. We will have older men (and a few women) who have nothing better to do than to train the younger ones in the ways of crime and terror. We will have legions who spend their idle time blaming everyone else but themselves because they have nothing useful to do.

flipspiceland, your comment has sparked a huge intellectual fire in my brain. We have the "idle rich" and the "idle poor". Both are too large in number, but the problems in the world are arising more and more from the idle "everyone else".

I think there may be readers on SA who would be able to expand on these thoughts, and probably express them better. Unfortunately, this is so far down a long comment stream that few will probably read it.

Mar 01 09:46 AM

[kruser53:]

flipspiceland and sleepless, great thoughts. What the world needs is a new renaissance. This has been a great comment stream to read and your comments are the crown jewels.

Mar 01 09:54 AM

[TheDownward...:]

On Feb 28 02:22 AM John Lounsbury wrote:

> Eric - - -

>
> Finally, I think you are taking too narrow a view when you say: "...if
> he's right, we need fewer engineers, and more B-Schoolers." The implication
> is that engineering is the chosen field of genius and the b-school
> the domain of the less gifted. Maybe that is not what you intended,
> but I can see that interpretation.

As an engineer who is contemplating a MBA I would have to say I see that line differently and as one not degrading a Bschooler but acknowledging the different ways of thinking. An engineer can create an invention that he thinks can change the world but if there is not a market for it, it is pretty much worthless.

Walmart, Apple, and Henry Ford did not invent anything they just took existing ideas and developed different ways to assemble and put products to market better then anyone else.

Nova mentioned the industrial revolution but what made the revolution possible? There was an invention that helped but the accumulated applications was the revolution.

Mar 04 01:31 PM