Can We Look Forward to a New Decade of Innovation?

Can we  look forward to a new decade of innovation, asked The Economist in its January 16 issue. “The 2010s were marked by pessimism about innovation,” notes the issue’s overview article. “Productivity growth was lackluster and the most popular new inventions, the smartphone and social media, did not seem to help much… Promising technologies stalled, including self-driving cars, making Silicon Valley’s evangelists look naive.”

“Today a dawn of technological optimism is breaking,” adds the article. Some giddily predict a new decade of progress, - a kind-of 21st century roaring Twenties. While some of this optimism may be overblown, “there is a realistic possibility of a new era of innovation that could lift living standards, especially if governments help new technologies to flourish.”

The Economist cites three key reasons:

• First is the flurry of recent discoveries with transformative potential, starting with the speed at which Covid-19 vaccines have been produced. “Humans are increasingly able to bend biology to their will, whether that is to treat disease, edit genes or to grow meat in a lab.” Artificial intelligence is also seeing major advances after decades of promise and hype. AI is now being applied to vision, speech recognition, language translation, and other capabilities that not long ago seemed virtually impossible but are now approaching or surpassing human levels of performance. “Eventually, synthetic biology, artificial intelligence and robotics could up-end how almost everything is done.”
• Another reason for optimism is the rapid adoption of new technologies. “We’ve seen two years’ worth of digital transformation in two months, … in a world of remote everything” as companies adapted to stay open for business, said Microsoft CEO Satya Nadella in April of 2020. For years, companies found all kinds of reasons for not embracing telemedicine, online learning, work from home, virtual meetings and other digital applications. But, the pandemic has now accelerated the technological transformations that institutions were forced to make to help them cope with the crisis.
• The third source of optimism is the tech investment boom. “In the second and third quarters of 2020 America’s non-residential private sector spent more on computers, software and research and development (r&d) than on buildings and industrial gear for the first time in over a decade.” And, perhaps most important, after declining for the past 40 years, government spending in R&D has started to increase in the US and across the 24 OECD countries.

“Rich-world governments currently spend, on average, a bit over 0.5% of gdp on r&d; a couple more tenths of a percentage point could make a big difference,” noted a second Economist article on The case for more state spending on R&D. “In 2018, though, the most recent year for which data are available, figures from 24 oecd countries showed government spending on r&d rising by a healthy 3% in real terms following a particularly lean period after the financial crisis.”

According to a 2019 task force on national security, US investment in R&D as a percentage of GDP peaked at 1.86% in 1964 but has declined from a little over 1% percent in 1990 to 0.66% in 2016. The Biden administration has promised to increase its R&D budgets. Part of the reason is the expectation that increased R&D spending will drive economic growth. But competition with China is another. China is rapidly closing the technological gap with the US and investing significant resources in key technologies. By 2030, China may well be the world’s largest spender in R&D. Although not likely to match US capabilities across the board, China is expected to be a leading power in key technologies including AI, robotics, clean energy, energy storage and 5G cellular networks.

But, it’s not a given that increasing R&D investments will lead to productivity and economic growth. “There are voices which would temper this,” warns The Economist. Northwestern University economist Robert Gordon is one of the most prominent such voices. Gordon argues that the rapid growth and rising-per-capita incomes we experienced from 1870 to 1970 was a unique episode in human history. Innovation is now stalled and there may well be little productivity and economic growth for the rest of this century. “Moving from the internal-combustion engine to electric motors in order to move vehicles is both impressive and necessary, but it is not in the same league as moving from the horse to the car,” notes The Economist.

Another concern is that is that investments in R&D are yielding decreasing returns. In a recent paper, Are Ideas Getting Harder to Find?, Stanford and MIT economists showed that, across a wide range of industries, research efforts are rising substantially while research productivity is declining sharply. Based on empirical analysis, the paper found that more researcher time and money are now needed to get the same improvement in outputs as before. In the case of Moore’s Law, research productivity has been declining at a rate of about 6.8% per year. The number of researchers required to double chip density today is 18 times larger than those required in the early 1970s. For agricultural yields, research effort went up by a factor of two between 1970 and 2007, while research productivity declined by a factor of 4 over the same period, at an annual rate of 3.7%.

Moreover, emphasizing government supported R&D ignores the changing nature of innovation in the digital economy. Innovation breakthroughs are no longer just based on science and technology coming out of R&D labs, as was the case for most of the 20th century industrial economy. Increasingly, we’ve been seeing a new kind of market-facing innovations, whose purpose is to create appealing and intuitive user experiences, new business models, highly scalable platforms, and compelling market-based strategies.

“What matters to the economy are not scientific discoveries or the innovations at technology’s cutting edge, but the technology people and firms make widespread use of - not papers in peer-reviewed journals or even cool lab creations, but things which pervasively improve the everyday and generate economic activity in doing so,” adds The Economist. “And there is no simple production line which, fed with new scientific understandings, produces such technological change.”

“Although the private sector will ultimately determine which innovations succeed or fail, governments also have an important role to play. They should shoulder the risks in more moonshot projects. The state can usefully offer more and better subsidies for r&d, such as prizes for solving clearly defined problems. The state also has a big influence over how fast innovations diffuse through the economy… If governments rise to the challenge, then faster growth and higher living standards will be within their reach, allowing them to defy the pessimists. The 2020s began with a cry of pain but, with the right policies, the decade could yet roar.”