Innovation Is Not Enough

Jun 9, 2016 Dani Rodrik

We seem to be living in an accelerated age of revolutionary technological breakthroughs. But the economic consequences of any innovation ultimately depend on how quickly it diffuses through labor and product markets.

CAMBRIDGE – We seem to be living in an accelerated age of revolutionary technological breakthroughs. Barely a day passes without the announcement of some major new development in artificial intelligence, biotechnology, digitization, or automation. Yet those who are supposed to know where it is all taking us can’t make up their minds.

At one end of the spectrum are the techno-optimists, who believe we are on the cusp of a new era in which the world’s living standards will rise more rapidly than ever. At the other end are the techno-pessimists, who see disappointing productivity statistics and argue that the new technologies’ economy-wide benefits will remain limited. Then there are those – the techno-worriers? – who agree with the optimists about the scale and scope of innovation but fret about the adverse implications for employment or equity.

What distinguishes these perspectives from one another is not so much disagreement about the rate of technological innovation. After all, who can seriously doubt that innovation is progressing rapidly? The debate is about whether these innovations will remain bottled up in a few tech-intensive sectors that employ the highest-skilled professionals and account for a relatively small share of GDP, or spread to the bulk of the economy. The consequences of any innovation for productivity, employment, and equity ultimately depend on how quickly it diffuses through labor and product markets.

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0 Comments on this paragraph, 31 Comments on this article

Michael Pettengill Nov 30, 2016

"Ultimately, it is the economy-wide productivity consequences of technological innovation, not innovation per se, that lifts living standards."

A typical bogus argument demonstrating the mood of economists to see economies as conveyers with inputs feeding outputs.

Living standards can only be lifted by workers being paid more in real terms. A living standard is ultimately defined by their work product coming back to the worker. Economic theory of markets does not eliminate the zero sum nature of the hunter-gatherer or yeoman farmer where consumption is defined by what is produced by their labor. Farming is an innovation that reduced the need to constantly move to find food and clothing raw materials. Markets are an innovation that allow specialization and thus higher productive workers to trade goods of equal labor cost.

Robots can not replace workers, unless robots become consumers buying goods from human workers. If a billion workers are replaced with robots, the only income those billion will have is from working to produce goods and services for other workers replaced by robots.

Otherwise, being replaced by a robot, innovation increasing productivity, means a much lower living standard.

And by the way, innovation lower costs of food and energy today cut living standards because consumption of both is at, near, or over maximum consumption. Price elasticity of demand is virtually inelastic. And paying more for leisure means leisure services become less productive - playing cards with friends in the kitchen cost time and snacks, so paying $50 to do so alone in bed is lower priductivity.
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Michael Pettengill Nov 30, 2016

Housing as share of gdp is about the same as health care, but has declined in productive contribution to growth, or in consumer value. Tied to housing is access to work, plus access to services like housing and child services, especially primary and secondary education. It's clear from this election that a large portion of working class housing fails to provide the incomes and investments the families living in them for decades expected based on the gains in productivity of buying those houses before say 1980.

A big portion of the operating costs of housing before 1980 was paying for investments in new schools, water, sewer, roads, and transit services. Since then, owners of housing have opposed investments in services, paying workers, in order to even maintain the productivity of existing housing. Schools age and decay, but residents oppose paying to rehab or replace the old schools.

That is in general, with select communities acting very differently to invest in services leading to much higher productivity for living there.

And in health care, far greater investments in innovation have occurred that benefit 60-80% of the population to a greater to lesser degree, but for the remaining 20% attempts to cut costs have not only limited services, but reduced access to 19th century innovation like pure water and decent sanitation, but at the same time raised the standard, and cost, of care for that 20% when the loss of services bring death near. After "saving" cost which leads toward death, innovation kicks in to forestall and reverse the decline from "cost saving" at extremely high cost.

Why hasn't innovation made housing more productive? Why can't I buy a house that costs less to live in, ie, lower utility costs, lower maintenance costs (eg 50 to 100 year roofs, no painting, leaky water heaters), plus a return to local schools and jobs just down the road so cars are not clogging up roads on a daily basis?

Does anyone want to argue that more than a half hour on clogged streets and highways to work or school every day represents increased productivity tied to 21st century housing? Does mandating one or more cars per house more than a century ago represent increased housing productivity?

I pick housing because it is as large a share of the economy overall as heath care, but a bigger share of the incomes of most workers than health care. And bigger houses to serve fewer people is not higher productivity, but less productivity.
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Rokon Zaman Oct 8, 2016

To democratise digital technology as productivity enabler across all segments in the society, we need to focus on software innovations. Due to the lack of policy support and risk capital finance, significant potentials of digital technologies are being under-utilised. Here is my extended opinion: http://techpolicyviews.blogspot.com/2016/10/why-is-digital-innovation-bottled-up.html . Look forward to sharing views of others.
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Rokon Zaman Oct 7, 2016

The threat for premature deindustrialization is real, due to AI and robotics. It's time for developing countries to prepare to turn it to blessing, instead of curse. http://techpolicyviews.blogspot.com/2016/10/is-threat-of-premature.html
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Tom Shillock Jun 25, 2016

"Ultimately, it is the economy-wide productivity consequences of technological innovation, not innovation per se, that lifts living standards. "

That is one of Robert Gordon's points / criticisms of today's technological innovations.
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Barry Rosenfeld Jun 14, 2016

Take a low-skilled worker. train the person for one day and provide employment in an auto assembly line. Terminate the person's employment but find a job in a fast-food restaurant or in a nursing home as an aide. measure the relative "productivity" in both activities.

Growth-reducing structural change has become a feature of countries that have opened their economies to imports from low-wage countries. The stagnation in real wages in the US, for example, is correlated with the relative fall in manufacturing employment and the relative gain in service sector jobs. It reflects the underlying shift in US employment, with a few high-productivity, high income jobs created, but also with a greater number of jobs created in the low-productivity, low wage industries.
Somehow, the trade advocates seem to ignore these effects. A perfunctory survey of industrialization in the US and Europe indicates that the rapid increases in productivity, wage growth and economic welfare occurred with relatively high tariffs and lower trade flows.
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Jose araujo Jun 14, 2016

If you drop the supply side bias, you can see a whole different world.

The problem is that we have regressed socially and are no longer capable of thinking outside the neo-classic box. All the technological revolutions were followed/determined by social revolutions, which pushed us forward.

We had this discussions before, remember Malthus, Ricardo (wages add to be at the subsistence level), etc. We are still experiencing the prevalence of reactionary forces, but the paradigm has changed, we no longer live on an economy of scarcity. All resources are abundant, capital is abundant, labor is abundant, the only problem is that we are limiting ourselves, but sooner or later we will change the paradigm.
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Patrick Marren Jun 13, 2016

This issue is one that has concerned me and my colleagues in our long-term planning consulting work. I noted it, with far less economic rigor than Dr. Rodrik, in an article for the Journal of Business Strategy in 2013, "Strategy's Main Failure: The Extermination of Livelihood?," referred to here (http://www.futuresstrategygroup.com/blog/pmarren/end-livelihood-part-2). I sense that the problem is even worse than you say here, because this form of innovation has rendered more and more human workers superfluous, without, as in previous eras (e.g. transition from agricultural to factory work), creating new and more remunerative jobs for the displaced workers. At some level, this is a titanic failure of strategic imagination, because not only is there no Henry Ford with the vision necessary to create a new economic entity that pays workers enough to consume the products they make; in the absence of such visionary private sector actors, there also has been a general tacit assent to the notion that there can be no authority above the level of the firm (e.g., a government?) whose job it might be to craft a future economic eco-system that will sustain society and its constituent humans. The United States (in particular, Alexander Hamilton) more or less invented this sort of large-scale national strategic economic thinking; now it has abdicated this role, as J. Bradford DeLong and Stephen Cohen write in their new book "Concrete Economics" (https://www.amazon.com/Concrete-Economics-Hamilton-Approach-Economic-ebook/dp/B00O92Q6C6). Entities that refuse to imagine a future for themselves and make material provisions for their own continuation are unlikely to survive, and are likely to give way to those who do.
- Steve Hurst Jun 14, 2016
  
  @Erikwim
  That assumes work is evenly distributed which is unlikely
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- Erikwim During Jun 14, 2016
  
  'full employement' today (36 hour workweek, from age 20 to 60) is a far cry from 'full employment' in the early days of industrial work (70 hour workweek, from age 10 till death). So it coudl be expected that 'full employemnet' in future is more like a 24 hour workweek with regular sabbaticasl to retrain or get re-inspired.
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- Robert Avila Jun 13, 2016
  
  We need to answer a fundamental societal question: is full employment a political objective or simply an aspect economic activity. Historically, as far back as one wishes to look full employment is associated with political stability and large scale unemployment is associated with civil unrest. The Egyptians built pyramids, Rome had bread in circuses, the Scottish Enlightenment gave us free market economies and the industrial revolution. As Dr. Johnson said, “Never is man more innocently occupied than when he is making money.”
  If free market economies are no longer creating employment, if capital investment on the whole becomes a labor substitute rather than a labor compliment, than the political system will have to find another means of insuring domestic tranquility. From a political point of view, the economy is not the end but only the means to an end.
  This election year has shown us in the US and in Europe (and perhaps very soon in China) that without high levels of employment the governed become unruly and increasingly dissatisfied with the governing class. We are a long way from knowing what the political solution will be, but it should become more and more obvious that after 200 years of industrialization, it is not the economy stupid.
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Robert Carter Jun 13, 2016

Easy answer to those wanting Productivity growth, "Viability" same for Investment from FED low interest loans etc "Viability" = "Show me the Money" Banking rule domestic demand disposable income not there? Domestic demand must crash as has happened 2008 still not corrected, So USA always relied on exports, ditto all nations have same problem so no domestic disposable incomes there to spare for USA goods & service exports. No Viability for banks to grant expansion loans just renter so on.
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Florian Strahberger Jun 13, 2016

"But the question remains: What will these countries produce and export – besides primary products – to be able to afford the imported cellphones? "
My guess: they will export their work.
ICT-based collaboration in so called "virtual teams" will decouple the regional dependencies between work and workers.
Innovations focussing on advanced communication, and thus: advanced collaboration will bring us towards the next step of globalisation (Superior to face-to-face)...
...after money and goods its now on work to be a globally accessible asset.
Project-organizations & global staffing.
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Fred Phillips Jun 12, 2016

I see the opposite directionality. When "democratizing innovations" hit the market, they enable widespread, low entry cost entrepreneurship immediately. The sewing machine is a classic example. (Newer examples are the personal computer and ubiquitous wifi.) The boost toward income equality lasts until someone figures out how to get economies of scale and gathers enough capital to capture the biggest share of rents. The result is sweatshops, sub-survival wages, and business taken away from the small owners. The PC? First, small accounting and computer-repair businesses. Later, massive call centers. Cars? First gypsy taxis, then Über.
Fred Phillips, Editor-in-Chief, Technological Forecasting & Social Change. www.elsevier.com/locate/techfore
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Virgilio Alvarez Jun 12, 2016

I find this article very enlighten and brings us (non economist) to focus on this issue. As we see American jobs to go to the service economy with its low skills needs and low salaries, and our college cost raisin and creating all this debt, we wander what the future is going to bring to our sons and daughters.
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MarcH hurt Jun 12, 2016

Very interesting article. I actually published two articles on this matter in 2014, to express my « techno-worries » : http://www.lesechos.fr/idees-debats/cercle/cercle-110958-pourquoi-il-faut-decorreler-productivite-et-croissance-1047712.php (with other comments below), http://www.lesechos.fr/idees-debats/cercle/cercle-111598-incertitudes-sur-leconomie-du-partage-selon-j-rifkin-1049591.php
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Brian Hewes Jun 12, 2016

Sometimes I wonder if the choice against growth is deliberate. I have only anecdotal data, but again and again I have seen anti growth decisions made specifically for the decision-makers to stay in power. That is why the current election cycle bores me as the two main candidates live in the past. Anyways, it is good to see someone post something that discusses the structural changes that need to be made for productivity to rebound.
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James Pursley Jun 12, 2016

Perhaps innovation in services has not spawned productivity because we've not yet seen widespread adoption of robots iin health care, education or government. We still have one on one doctor visits, teachers teaching classes (though sometimes aided by electronic transmission of their voices and lessons and government clerks are still doing what they've always done - count people, keep the pulse on the economy, collect taxes, keep the peace etc. So Be careful what you wish for. It's not beyond today's AI reach to equip robots with diagnostic skills to serve at least as triage and first contact, for robots to teach at least parts of classes, if there is a need for classes when we've developed a one on one robot-student relationship and so forth. But what happens to the doctors, nurses and teachers? Do they go the way of factory workers? Are they needed only for curriculum development, for surgery supervision? What will the huge brainpower trust in the professional services industries do when they've been replaced by robots? What will it mean to earn an income? If robots can produce much of the goods and services we need, will we even have or need incomes? We need to look to big questions, I think - the issues of productivity are second order issues in my mind - effects of a huge wave of enhanced machine ccapabilities. Economics as we know it - based on scarcity - will need to give way to the issue of what people will do with themselves when they are no longer needed as workers? Could we have an entire population engaged in expanding the frontiers of knowledge via vast communication networks? What will government look like in a mass leisure world? As dogs have been "man's best friend" for eons, so may it be that our 'bots will be our biggest buddies in the future. So few people will be needed for goods and services in the post mass tech world that the population will need to find other pursuits, enabled by, perhaps, 3D printing for free of all of their material needs. The way to the eventual destination will be bumpy indeed.
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Greg Feigel Jun 12, 2016

Why is it that economists never address the perverse effect of government on the real economy in general, and productivity in particular?

Answer: At heart they are all Keynesians, where the government is always seen as good.
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Martin Screeton Jun 11, 2016

Time for QE-UBI (Qualitative Easing-Universal Basic income) to all adults (18 to death) set by each county's perspective federal reserve bank to the poverty rate of one person ($1270 monthly in US currently) ... Let's get these economies actually running and doing something! :)
- Florian Strahberger Jun 14, 2016
  
  At first: I like the idea to finance the cycle via an UBI - it's a solution to manage the problems in financing the demand in a world with such an unbalanced distribution of wealth and income.
  But: I doubt you can keep the trust into the central-bank's money if you want to finance it this way.
  Especially, if you are in a de-industrialized country with a hough trade-deficit...
  Today, the USD is backed by the financial-”products” of the world's biggest ponzi-scheme ever – but friggling around on such a fragile, trust-backed construction might lead to a loss in USD-confidence.
  My suggestion: a capital-income-backed UBI.
  And the source of the capital?
  → a well-designed inheritance-tax.
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Michael Public Jun 10, 2016

The optimists are correct for the lucky few. The pessimists don't understand bad statistics. The worriers will be right in 30 years time but not their own lifetimes.
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Hamid Rizvi Jun 10, 2016

I fall within the Techno worrier class. You are right innovation per say is not enough to fuel productivity and growth. And as you correctly mentioned in the tech industry innovation is the new norm because it feeds planned obsolescence. These are residual innovations the effect of which remains miniscule at best. AI the next big go around that everyone thinks will be the game changer will in my opinion be nothing more than to make my lazy @ss even lazier and contribute to an even higher unemployment rates. It would have a devastating effect in the so called developing World especially the old BRICS and the new MISTs.
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Procyon Mukherjee Jun 10, 2016

The problem is even bigger. When the telescope was invented it did not add anything to the GDP, much later the entire cosmology and space research today adds $20 Billion to the world economy. The seeds that we sow now would be yielding fruit much later; if we are bent on taking the growth-reducing structural orbit, we would be creating an economy in the future that would have more idle hands fed by a minuscule portion of the population.
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Robbie Jena Jun 10, 2016

Deep Thoughts: With BAD Governance, Innovation is NOT Enough.
- Robbie Jena Jun 10, 2016
  
  ... But the question remains: What will these countries produce and export – besides primary products – to be able to afford the imported cellphones?
  
  Well CHINA did very well...from our teaching
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Richard H. Serlin Jun 9, 2016

"This is a model of what Cowen calls “cellphones instead of automobile factories.” But the question remains: What will these countries produce and export – besides primary products – to be able to afford the imported cellphones? "

And, as one writer said, you can't eat a cell phone. And it won't give you a decent home, or medicine, or sanitation plants,... Obvious, but Cowen is constantly looking to fool people into greater support for libertarianism.
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Dual Process Jun 9, 2016

What about the effect of the global liquidity trap on investment? Fiscal spending booms can be unsustainable, but they also tend to uncover important discoveries that have long-term impacts on growth when responsibly managed. Growth in inequality might be a consequence of a conservative investment bias or tendency toward rent seeking. Take for example Google capitalizing on advertising to the gullible and disadvantaged, and parlaying this into a status contest within their internal ranks. Animal spirits swayed by the techno-elitism narrative might be an important contributor to unrealized economic growth potential.
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Steve Hurst Jun 9, 2016

Robots / AI is the big unknown

Citi and Oxford University predict that 77% of all jobs in China are at risk from automation.
57% of jobs across the 34 OECD countries are at risk of automation, according to Citi and Oxford.
The World Economic Forum has predicted that 5 million jobs could be destroyed globally by 2020.
IBM claims it has created a computer that is better at diagnosing cancer than a human, for example.
Even journalism is not immune - the Associated Press is already using AI software to write up company results.
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Jerry F. Hough Jun 9, 2016

I wish I had any faith in GDP and productivity figures.

I know I think that inegalitarianism in the traditional sense of the word is not the issue. Krugman only speaks for the top 5% who are jealous of the top .1 of 1%.

Average people don't mind if the rich get richer. They worry about stagnation in their own living standards.

The income distribution that average people worry about is that near them. They want better paying jobs above them that they can aspire to, and they want to be rewarded for working harder and being more skilled than those below. They want well-paying jobs for their children if they go to college.

Trump and Sanders will have made a real contribution if they have taught the Establishment (including economists) why people are angry. The Establishment, including economists, have very thick skulls and still has no idea.

Obamacare is a disaster because it benefitted only the poor and, as Schumer recognizes, not the middle income.

The minimum wage is a political disaster. $15 an hour means $600 a week and $30,000 a year. Two illegals, a husband and wife, working at McDonalds earn $60,000. I know a person at $15 now as asst. manager of a fast food place. She is absolutely convinced that if her near minimum wage coworkers get $15, hers will rise only marginally. She is angry at the thought. So is the white working class who now vote for Trump and Sanders and are extremely likely to elect Trump.

Those in the middle must at least get cheap Canadian health care. We must move away from supply side taxation that only encourages the highly innovative sections and those already benefitting from them.

And what developing country economists such as Rodrik must worry about is that the US must seriously limit legal and illegal immigration, including work permits.
It must change a supply-demand relationship in labor in which the supply of labor through immigration and outsourcing is infinite. Or maybe outsourcing can be made palatable by taxing foreign earnings for something specific like health care.

But the political pressures in the West are enormous and a wide range of European parties are going to copy Trump and Sanders. Those who have seen the Dow go from 750 in 1982 to 18,000 while wages stagnate are saying "Let them eat cake" when this is 1785 in France and 1928 in Germany. We, for sure, need a Trump now.

But what are the implications for the developing world and the peculiarities of technology there today? What are the examples of Trump going to do to their politics. Developing economists have a lot to think about.
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Petey Bee Jun 9, 2016

In rich economies, consumers spend the bulk of their income on services such as health, education, transportation, housing, and retail goods. Technological innovation has had comparatively little impact to date in many of these sectors.

Wow, that's a hard one to let go. Maybe there hasn't been great change in the % of GDP associated with each of these sectors, but that form of measure in this case is like giving a ruler to a blind man. Health (pharma/biotech), transportation (auto tech and supply chain), energy, IT/comms, higher education/research, and most of all retail goods (both manufacturing and supply chain) have seen a huge outward move in the price-quality curve, their availability greatly increased, and development greatly accelerated by technology in the past 2-3 decades.

None of this has anything to say about distributional issues, with the exception of goods becoming cheaper.

Other comment is supply of skilled workers in developing countries. Problem isn't training them there, problem is retaining them -- brain drain.
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