Saturday, November 29, 2014

Innovation Crisis or Financial Crisis?

CAMBRIDGE – As one year of sluggish growth spills into the next, there is growing debate about what to expect over the coming decades. Was the global financial crisis a harsh but transitory setback to advanced-country growth, or did it expose a deeper long-term malaise?

Recently, a few writers, including internet entrepreneur Peter Thiel and political activist and former world chess champion Garry Kasparov, have espoused a fairly radical interpretation of the slowdown. In a forthcoming book, they argue that the collapse of advanced-country growth is not merely a result of the financial crisis; at its root, they argue, these countries’ weakness reflects secular stagnation in technology and innovation. As such, they are unlikely to see any sustained pickup in productivity growth without radical changes in innovation policy.

Economist Robert Gordon takes this idea even further. He argues that the period of rapid technological progress that followed the Industrial Revolution may prove to be a 250-year exception to the rule of stagnation in human history. Indeed, he suggests that today’s technological innovations pale in significance compared to earlier advances like electricity, running water, the internal combustion engine, and other breakthroughs that are now more than a century old.

I recently debated the technological stagnation thesis with Thiel and Kasparov at Oxford University, joined by encryption pioneer Mark Shuttleworth. Kasparov pointedly asked what products such as the iPhone 5 really add to our capabilities, and argued that most of the science underlying modern computing was settled by the seventies. Thiel maintained that efforts to combat the recession through loose monetary policy and hyper-aggressive fiscal stimulus treat the wrong disease, and therefore are potentially very harmful.

These are very interesting ideas, but the evidence still seems overwhelming that the drag on the global economy mainly reflects the aftermath of a deep systemic financial crisis, not a long-term secular innovation crisis.

There are certainly those who believe that the wellsprings of science are running dry, and that, when one looks closely, the latest gadgets and ideas driving global commerce are essentially derivative. But the vast majority of my scientist colleagues at top universities seem awfully excited about their projects in nanotechnology, neuroscience, and energy, among other cutting-edge fields. They think they are changing the world at a pace as rapid as we have ever seen. Frankly, when I think of stagnating innovation as an economist, I worry about how overweening monopolies stifle ideas, and how recent changes extending the validity of patents have exacerbated this problem.

No, the main cause of the recent recession is surely a global credit boom and its subsequent meltdown. The profound resemblance of the current malaise to the aftermath of past deep systemic financial crises around the world is not merely qualitative. The footprints of crisis are evident in indicators ranging from unemployment to housing prices to debt accumulation. It is no accident that the current era looks so much like what followed dozens of deep financial crises in the past.

Granted, the credit boom itself may be rooted in excessive optimism surrounding the economic-growth potential implied by globalization and new technologies. As Carmen Reinhart and I emphasize in our book This Time is Different, such fugues of optimism often accompany credit run-ups, and this is hardly the first time that globalization and technological innovation have played a central role.

Attributing the ongoing slowdown to the financial crisis does not imply the absence of long-term secular effects, some of which are rooted in the crisis itself. Credit contractions almost invariably hit small businesses and start-ups the hardest. Since many of the best ideas and innovations come from small companies rather than large, established firms, the ongoing credit contraction will inevitably have long-term growth costs. At the same time, unemployed and underemployed workers’ skill sets are deteriorating. Many recent college graduates are losing as well, because they are less easily able to find jobs that best enhance their skills and thereby add to their long-term productivity and earnings.

With cash-strapped governments deferring urgently needed public infrastructure projects, medium-term growth also will suffer. And, regardless of technological trends, other secular trends, such as aging populations in most advanced countries, are taking a toll on growth prospects as well. Even absent the crisis, countries would have had to make politically painful adjustments to pension and health-care programs.

Taken together, these factors make it easy to imagine trend GDP growth being one percentage point below normal for another decade, possibly even longer. If the Kasparov-Thiel-Gordon hypothesis is right, the outlook is even darker – and the need for reform is far more urgent. After all, most plans for emerging from the financial crisis assume that technological progress will provide a strong foundation of productivity growth that will eventually underpin sustained recovery. The options are far more painful if the pie has ceased growing quickly.

So, is the main cause of the recent slowdown an innovation crisis or a financial crisis? Perhaps some of both, but surely the economic trauma of the last few years reflects, first and foremost, a financial meltdown, even if the way forward must simultaneously treat other obstacles to long-term growth.

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    1. CommentedStephane Levasseur

      Mr. Rogoff,

      I agree with your idea but I suggest a simpler way of explaining it:

      In developped countries, 70% of the economy are services provided to humans by humans. Today's technological innovations are thrilling but are of less economic significance because they won't lead to a major increase in economic output. Science and technology can mainly improve the primary and secondary sectors of the economy. Its impact on the third sector (services) is limited.

      Growth in a service economy is achieved by improvement of human capital: education, research in social sciences, economics, psychology, etc. The economy will grow if we have better teachers, managers, policy makers, economists...

      What do you think of my view?

      Stephane Levasseur

    2. CommentedNathan Coppedge

      I would like to avoid the extensive use of mere words to symbolize what may be highly invisible and transparent factors, which may ambiguously represent both problems and solutions. We must realize that the word 'problem' is just a word, as useful as it seems. If increasingly global needs are provided for, this is a solid sign for GDP, in real terms if not in statistical terms.

      On the subject of Moore's Law-type thinking, I suspect that in the real economy what we know as technologies are only a small part of industry. Manufactured goods are a resource whether they are purchased or given away for free. Perhaps industry (real industry, which does not exist for most of us) should use its cheap production advantage to boost the middle class. Then a means can be found to interpret material resources as viable incomes. I suspect this has been done in the past. At any rate, it is likely that there has been too much emphasis on small-scale production, which dishonestly projects that all industries have high production costs. I suspect this is not the case. When considering invisibility, and the existence of cheap production for a select group, then (even in this developed case) it seems that Rogoff is right, that debt is the real factor that remains. Even with an exponential technology production, there is a reliance on pre-existing industries, which essentially define what is real and false, scalable to per-capita income, not GDP.

    3. CommentedBenjamin Hawkins

      Mr.Rogoff briefly touched on the issue of Intellectual Property Rights, which is surely a policy domain that requires closer scruitiny -- for a number of reasons. Perhaps most importantly in the context of this discussion, however, is the imposition of stringent TRIPS and TRIPS-plus IRP conditions on developing countries such as China and India through the WTO and free trade agreements. Such short-sighted policies ensures that the creativity and innovative capacities of over 2.5 billion people in these two countires alone is not being fully utilised.

    4. CommentedCher Calusa

      I agree with the economists quoted in this article in the respect that we have been treating the wrong disease. It's interesting that they believe that there is lack of innovation in the secular technology. Actually, there has been tremendous growth in the military technology sector . So by the reasoning cited in this article, we can draw a conclusion by artificially dividing the military economy and the general economy? This makes no sense whatsoever. These two parts of the world economy are not sequestered into some isolated scenario. There is no stagnation in innovation. We are simply not aware of every advancement in science and technology that is proceeding without the knowledge of the general public.. Our "disease" is that we imagine separations and situations that don't exist in reality and we formulate a theory or opinion and consider it valid, regardless of tested success. These fabrications come about due to our skewed perception of reality. An honest examination of the natural universe within which we live yields the same results repeatedly from the microscopic to the macroscopic levels. It's a fact that all life, and thus activities by living beings, coexist in a huge reflexive system. When considering every stable and unstable variable in living systems, progression and regression follow natural laws of cause and effect that tend to create balance. The closer we come to mimicking the natural balance among all living systems, the better quality of life and growth we'll have on every level. What we see repeatedly in healthy living systems is a level of cooperation that tends towards the integrity, sustenance and growth of each part of that system. Instead of imagining that we've created some new method of growth and balance that exists in a vacuum and then calling it "The Economy", we should begin understanding that mutual cooperation and development between and among all people and groups participating on this planet will yield predictable and consistent results. The natural economy has no deficits and is never stagnant. We create all deficits through our ignorance of the reciprocal system of which we are a part.

    5. CommentedHenrik Ørsted

      The financial crises almost certainly does not have a single cause, but it certainly has nothing to do with a lack of innovation. Innovation cannot do away with the axioms of physics. They are here to stay, even though in the 1950ies there were science fiction artists who predicted that we would by now drive hovering cars without wheels. The problem of the financial crisis is in my opinion a total different one: namely the problem of Big Data and the incapacity of the players in the financial industry to be good at mathematics. Financial times series, Markov models are models brought up for convenience not having to crunch the real numbers. Every statistics package has integrated these models and even they are heavily used in physics, which in my opinion should be a rigid scientific discipline, they might not be valid. We have to stop to map our imagination onto mathematical models, they might lead to severe errors of judgement and impair our future substantially. We should rather place our hopes in a better mathematical education, transparence and accept that humanity is constrained my its physical boundaries.

    6. CommentedKen Fedio

      Rogoff isn't saying what he really thinks. He knows that this economic epoch is ending; not with a bang, but with a whimper. As for technological innovation: it only contributes to economic growth if it raises productivity AND living standards. The benefits of techadvan are so unevenly distributed that they are an impediment to general socio-economic advancement . Ask one billion Chinese ; or 100 million Africans; or 50 million Americans.

    7. CommentedAndrew Purdy

      No one who has commented on this article seems to "get it". The big innovations of the 19th and 20th century - electricity, powered machines, oil, petrochemicals, engines, flight, etc... were all about the ability to generate and utilize energy. Energy is required to have real economic growth. Money is nothing but a claim on useable energy. Current innovations in electronics, nanotech, etc.. are mostly about the manipulation of information and to some extent using energy more efficiently, but do not add much to the supply of energy or enable physical transformations to take place on a larger scale. Continuation of exponential growth requires ever greater sources, utilization, and transformations of energy, and the science to do this does not exist right now. As the fossil fuel era winds down to a close, one should expect more and more stagnation, and that stagnation will continue until either the energy of the sun or the full mc^2 of matter can be economically extracted and utilized. We could be in for centuries of stagnation unless Science comes up with some really radical breakthroughs.

    8. CommentedSuhan Gurer

      I think the main point here is not innovation but invention. We have been innovating a lot, but inventions or crucial ones at that are less in numbers.

      However, trying to create a make up for the current crisis based on lack of crucial scientific advances is in reality downplaying the blind optimism of the finance world which led us to the crisis in the first place.

      Throughtout the history, it has been debated that science has come up to its boundaries tons of times. Every time something came up and changed the world. No need to run around shouting we are at a dead end.

    9. CommentedCarol Maczinsky

      Innovation drives through challenges. The trick is for an economy to set itself challenges, such as to lower the consumation of energy and switch to renewables. Also disaster relief and protection are interesting endevours. It is interesting to see the example of Japan, an economy constantly challenged by natural disasters and natural constraints.

    10. CommentedCiril Bosch

      Mr Rogoff,
      I am surprised at such a piece, supported by such poor arguments.

      Do you really believe the question is "what does an iphone 5 add to our capabilities?" If so, I would suggest to have a look at pictures of Mogadiscio, and tell me what is surprising about them (hint: it has to do with cell phones...not necessarily iphone 5).

      I suggest you check the at&t campaign "you will" from the 90's ( It is hard to argue the technological stagnation idea after seeing how much more productive our tools are compared with just 10 years ago.

    11. CommentedJohn Brian Shannon

      Hi Kenneth,

      Fascinating piece.

      Economics, like democracy -- is always a 'work in progress'.

      There are no perfect economies and there are no perfect democracies.

      Each generation makes its mark to further protect union and enhance the economic realization of that union.

      Landing men on the Moon directly correlates with the invention of the printing press -- no printing press, no huge, available and constantly-upgraded knowledge base for thousands of scientists over the centuries since then, for our generations to draw from. (Someone from NASA said this)

      This proves that all the technology since the printing press is derivative of that original invention.

      Similar could be said about the invention of the wheel, the invention and the capture for use, of electricity.

      All the inventions these days are merely derivatives of earlier inventions.

      Although the global knowledge base doubles every few years nowadays, it is all knowledge being added to the existing knowledge base. It is not new, it is additional knowledge.

      With regard to economic policy, the same applies. It is certainly in our best interests to improve on economic thought, building on what we already know to be true as demonstrated by the many empirical examples we have seen.

      We have gone from learning the basics (the abacus) to multiplication tables, graphs, algorithms, Algorithmic information theory, Computational complexity theory, Complexity economics and Predictive Behavior Modeling.

      Now that we have arrived in the 21st-century and our economic thinking has advanced, we find ourselves grasping for a better understanding of what we see going on around us, economically-speaking.

      All of the foregoing are useful and can explain what has happened, but does not predict well what will happen.

      What is missing is human psychology. Economics is a form of human expression, how people feel is how they spend, how they react to different stimuli affects the economy, in large ways.

      When human psychology becomes fully integrated into the economics classroom, we will have fulfilled our hopes to predict every future economic indicator to an exact degree.

      Then, adjusting policy, rates, regulations and economic theory to match those patterns will become light-years more accurate and efficient.

      In short, the entire economy revolves around human psychology, which continues to happen right in front of us.

      Bull market, bear market, recession, housing bubble, recession, financial crises, etc... are all directly a result of human expression.

      "So, is the main cause of the recent slowdown an innovation crisis or a financial crisis?"

      No. It is a lack of full and deep understanding by economists and policymakers of the human psychology expressed in the trillions of individual economic actions every day -- combined with a lack of ability by economists and policymakers to enhance the positive aspects of human action/reaction and preempt and marginalize the negative expressions of human economic action, in order to better perfect our economic union and the economic status of the people in that union.

      As always, very best regards, JBS

    12. CommentedStéphane Genilloud

      Why does it have to be about productivity growth? Innovation can trigger a boost in demand as well. The post-war period was marked by fabulous inventions that everybody wanted to own, but with little effect on productivity: cars, fridges, tv-sets (they admittedly were invented long before, but technology suddenly made them affordable).
      Demand for individual goods may be saturated. Smartphones and the like are not going to make a long-term difference.
      If there is something demand for does not look saturated, it is public goods: education, transportation infrastructure, health care, etc. And that's what the governments save on. No wonder the economy is not taking off.

    13. CommentedShavonda Brandon

      The current state of the economy is clearly a result of crises. Although the idea of long term innovation droughts sound interesting, I would never credit changes in innovation for stagnation that is felt so severe and intrinsic. I feel that the crash brought us back to the realization the resources that we have are finite.
      I feel that the fundamental principles of economics are the culprits of this extended downturn: how we react and deal with scarcity and the uncertainty that coincidences with it. Sure, the goods have become more complex, but the same idea still applies. In the case of the most recent financial crises, the credit bubble was merely a result of people wanting more than what was presumably available. As prices of collateralized debt contracts spread farther and farther away from their true value, defaults ensued. Mortgages holders realized that they had taken on debt they could not handle, and the illusion of the indestructible financial market was gone.
      Our current economy seems as if it is suffering from an internal panic that is reminiscent of the fact that we can not demand everything we want with out consequences-- sometimes you have to watch the bubble burst.
      In all honesty, I feel that in order stimulate growth once again, we have to veil the reality of scarcity. Allowing credit market to increase again, and ignite a desire for new investment and innovation, in those who feel that economy is not in the proper state to initiate such a feat, but with awareness to the need for regulation and proper supervisor. Because it has become clear that facing the harsh reality over use of some resources, will promote only stagnating economy rather than a growing one.

    14. CommentedZsolt Hermann

      Unfortunately both options, innovation crisis or financial crisis still presume that humans are stand alone creatures, completely independent of the system they exist in, who can do whatever they want and any limit of growth and development is solely dependent on human ingenuity and activity.
      This attitude completely ignores that humans as any other living creatures are part of the vast, surrounding natural system, and that our biological body, and psyche is fully dependent on the same natural laws and principles as any other life-form.
      The only difference between humans and other animals is the ego, this self-centered conscious mind, that separated humanity from the rest of the system. Human evolution equals the evolution of the human ego.
      As a result today we fully believe we are outside of the system and we can do whatever we want.
      The global economical and financial crisis, the growing number of social and international conflicts, the loss of future direction all stems from this fact that we left the natural system and now drove ourselves into a dead end.
      If we want to continue evolution and develop in a positive way we have to return within the laws and principles of the natural system, first of all thriving for balance and homeostasis, and we have to change the intention, direction of exploration and innovation. Today we explore, study and innovate in order to stuff ourselves, to exploit and self serve regardless of the system, ignoring any long term prospects whether our conduct is sustainable of not.
      In the future any exploration, study or innovation has to happen with keeping the general laws of balance and homeostasis in mind, only act within the boundaries of natural necessity and available resources.
      By becoming partners with the system we would be able to get to know it much deeper than we do today, and our life quality, and our future prospects would be infinitely higher, entering a qualitatively much better existence.
      Humanity's superiority over other animals is the conscious capability of exploring, getting to know this natural system and adhering, adapting to it by free choice.
      The choice of going against the system is not a wise one, it caused the deepening crisis and can lead to much worse, even existential problems.

    15. CommentedJose araujo

      First, we are very far from our production-possibility curve and further away from the technology limits, so the nexus between the current situation and Innovation is nonexistente.

      Yet we are used to SUPPLY sidders arguments to try to maintain alive a theory that should be extinct long ago, a theory that persists on the full employment DOGMA, when everybody can see that e are very far from full employment.

      This isn't a supply problem, we are living in a DEMAND crises. People don't have money to buy stuff, let alone technological stuff.

      Without demand, there is little incentive for innovation, firms over-exploit their assets and technology cycles are broken.

        CommentedPaul A. Myers

        Excellent points. I would go further and state that increases in public infrastructure spending improve demand in the short term while improving overall productivity in the intermediate term and beyond.

        Let's postulate that public investment is the base for long-term secular improvements in productivity and rising standards of living. If so, then the whole "government is the problem" hypothesis is wrong.

        What the fiscal cliff debate shows is that our problem is the concentrated political power of the top .1 percent of the wealth distribution since they want to go AWOL on funding public investment.

        The selfishness of the .1 percent indicates they misunderstand the fundamental driver of economic progress for approximately the past two centuries.

    16. CommentedThomas Haynie

      Predicting scientific futures is a little like trading for a living. You can’t see the future with certainty. What we KNOW is that in the past men have claimed that Science has given us it’s all only to be dead wrong. Technological progress in general is increasing.

      I would lend weight to the Kasparov-Thiel argument in as much as the recent bubble essentially stretched beyond just housing as so many do. We may have seen now .. as was seen in the late 20’s a market boom fueled by simultaneous industry sources.

      I think the author is dead right about coming dramatic changes of Nano Technology, biotechnology, healthcare and energy.

    17. CommentedMarc Laventurier

      Mr. Thiel's notable contribution to innovation, PayPal, could have been written in COBOL without loss in translation, though it's philosophical motivation was at least in part to provide an escape route for capital from the sort of 'financial repression' visited on populations by regimes bent on devaluing their currencies. This project seems not to have been realized, and Thiel's ministrations now seem dedicated to the growth of the libertarian lumpenproletariat's social graph, that and making money.

      Mr. Kasparov's idealism seems deeper, and mated to the kind of mind that could well defend the greasy castle keep of the chess world, though innovation of a specialized sort left him playing black and feeling blue in 1997.

      Mr. Shuttleworth's innovation extended the highly technical and ethical contributions of Stallman and Torvalds to domesticate and distribute a free version of a powerful operating system, arguably the key kind of software running the world today. That is what growth and innovation really look like - for free - just add electrons.

      Prof. Rogoff could contribute to innovation by entertaining the idea that the recourse to limitless nominal economic growth may be more an artifact of capitalism than a unnecessary feature of human progress. His astute academic colleagues will be happy to explain it to him.

    18. CommentedFrank O'Callaghan

      Not all the past innovations were commercial propositions. Writing did not immediately generate a profit. Not much does immediately.

      The great problem for innovation today is that the criterion of immediate profit is the crucial one for investment in research. Would a cheap, non patentable, easily produced cure for cancer be a commercial proposition? Would a contagious viral agent that cured diabetes be an attractive business proposition? Clearly not! What about a nitrogen fixing, disease resistant, fast growing, easily propagated, nutritious plant that could grow in currently unusable environments?

      We need to fund innovation for the global benefits it has rather than the profits alone.

    19. CommentedJan Smith

      Slowdown in technology is not the only cause of secular stagnation or decline. Three other possibilities:

      1. Proliferation of lobbies, hence of monopolies and rents.
      2. Concentration of wealth, hence excess saving and volatile asset prices.
      3. Exploding population, hence exploding costs of plunder and pollution.

      Perhaps if we exclude these causes from our model, they'll vanish from the world?

    20. CommentedSergei Vorobiev

      I would prefer to attend a chess match between Rogoff and Kasparov rather than a celebrity economics debate between them. A sound suggestion for the next round of the Oxford University celebrity debates - pit Rogof against Mr. Burns or Mother Teresa. Well, they cannot do the latter than maybe they should pick Mike Tyson instead.

    21. CommentedProcyon Mukherjee

      I think there is a serious point that we are missing on innovation as path-breaking innovation seemed to have stymied. It is not necessary that for continuity of innovation, the pipeline of projects should deliver as path-breaking outputs as the steam engine. It is equally important that the benefit of innovation is passed on to a majority of people in a manner that makes economic sense for all stake holders. Innovation could be meaningless if it is locked in gains for a minuscule minority, thus we have a strong connection with the economics of innovation.

      Evidence is strong on both sides of the argument, that crisis emboldens businesses to innovate while the drive for profit maximization could be a strong deterrent if the market is swooned into believing the short-term thrust of ‘profit at all costs’.

      Procyon Mukherjee

    22. CommentedMatt Stillerman

      I completely disagree that today's innovations are of less significance than those mentioned. Consider:

      Each of the innovaitons mentioned has taken many years (or, in the case of running water, over 2000 years) to have its impact. So, we should be looking 50 to 2000 years down the road to see the impact of our current crop.

      Our electronics are truly remarkable. They are the most complex artifacts ever created by any civilization, by many orders of magnitude. Indeed our electronic "gadgets" by some measures are more complex than we are! Humans have some 30,000 genes. Perhaps there are three times as many regulatory sites in the human genome (a guess). But garden-variety microprocessors routinely have five orders of magnitude more transistors than that. And this explosion of complexity (i.e. Moore's Law) shows no sign of slowing down.

      For another example, consider current efforts to build quantum computers based on quantum entanglement. Purposefully entangled qbits represents a completely new state of matter that, as far as we know, has never existed before.

      Recent advances in biology and medicine have resulted in an unprecedented understanding of these subjects. Within just the last ten years we have gone from the comparatively primitive gene-protein equivalence view to a much broader understanding of biology that includes, for example epigenetics. Of course that starting point was, itself, a huge scientific triumph.

      Where will these scientific advances lead? We need to wait at least 50 years, and perhaps much longer to know the answer. For example, number theory, which currently secures a significant fraction of the world's wealth, was, until 35 years ago, an "impractical" branch of pure mathematics -- under development for roughly the last 4000 years!

      I have no doubt whatsoever that some subset of today's innovations will withstand this test of time, and will prove to be very significant to our civilization.

        CommentedStephane Levasseur

        Mr. Stillerman,
        In developped countries, 70% of the economy are services provided to humans by humans. Today's technological innovations are thrilling but are of less ECONOMIC significance because they won't lead to a major increase in economic output.
        Science and technology can improve the primary and secondary sectors of the economy. Its impact on the third sector (services) are limited. Increase in economic output is achieved by improvement of human capital: education, humanities research, etc.
        What do you think of my idea?

        Stephane Levasseur

        CommentedAndrew Purdy

        Real economic growth is not sustained by complexity. It is sustained by the ability to generate, transform, and utilize ever greater amounts of energy. Today's electronic devices have already passed the point of diminishing returns here. It does not matter how complex it is if it can't power engines, make things fly faster up to (and maybe beyond) the speed of light, move more earth, build buildings cheaper and faster, build colonies in space, or expand toward Galactic Empire. The only way exponential growth can continue indefinitely is to expand into the galaxy and beyond. If we remain confined to the earth with present day energy sources, economic stagnation is an absolute physical requirement.

    23. CommentedJules Pierre

      I am inclined to think that there is an absolute correlation between scientific/technical knowledge and GDP. In that case, as the pace of knowledge growth is to be measured in decades, and that knowledge can only pile up, year-scale GDP or growth downturns would be due to chaos in the economic system.

      This doesn't mean, though, that the long-term pace of innovation isn't slowing down.

      Another explanation for the current situation would be that the high growth rates of the second half of the XXth century have built a "growth debt" that must now be reimbursed and hinders current growth. Much of the economy 50 years ago wasn't durable. Now progress is needed even to maintain production levels, and increasing them requires even more of it. Global inequalities is another type of debt, one that used not to matter much but that became apparent with modern communication means and must now be serviced.

    24. Commentedarnim holzer

      I agree with Professor Rogoff but would also add that one needs to take a very long look at development cycles and periods of "darkness", for which the recent credit bust recession hardly qualifies, in order to diagnose the types of implications Thiel and Kasparov are submitting. Additionally, while many scientific discoveries are adapted and recycled for commercial use in the tradeable goods sector, the service side is less systematic and quantifiable. The service sector and the power it manifests in an economy can be overwhelming and high value added in its impact for global advancement. Unfortunately, service sector innovation is not something that can be formulaically developed but thrives in the free market of incentives and ideas. While the recent economic recession and its impacts have served to slightly diminish the focus on the next "new new thing" in services (as cost containment and efficiency have been of greater import), I believe service innovation will once again drive the US economy. One needs only think about when companies like FedEx, Starbucks, and Apple arose and how much of their genius was in service, not technology.

    25. CommentedJohn Nick

      In a competitive economy innovation can be a major factor in maximizing the profit. But the main goal is always maximizing the profit. Can innovation and profit be contradictory at some point ? Of course they can. This is the case of self-sacrifice profit. Meaning that short term positive balance is incentive enough to sacrifice the future. And if true competition is not active anymore (too big to fail positions on market) incentive for innovation is once more reduced.
      Such phenomena are already present. It's the case of banking and financial sector.
      We live an era of profit maximization and less market competition.

        Commentedradek tanski

        What incentive is there to invest for a founder when fast followers just take over the idea?

        Too many fast followers. No protection of founders.

        Until China is in a position where innovation would generate more then it gets from western business mimicry at a lower cost, no real point for the west to innovate.

        The little guys reckon why bother if 3 months down the road the opportunity is feeding asians.

    26. Commentedjim bridgeman

      I'm just extrapolating on an idea of Richard Roll's, but how about this? Financial values (including those deriving from real estate values) are validated by future incomes, and in a highly leveraged way by the growth rates of future incomes. A widespread realization that future income growth rates could not be expected to be large enough to validate financial values at the time is a plausible explanation for the financial crisis. Roll hypothetically attributed the realization that income growth rates weren't going to be as anticipated in financial values to emerging political circumstances (leftward drifts.) But maybe it was some sort of emerging realization of the innovation deficit?