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Let’s Keep America Weird
In “The Innovation Illusion: How So Little Is Created by So Many Working So Hard,” Fredrik Erixon and Björn Weigel argue neither a lack of scientific discovery nor technological progress is ultimately responsible for chronically weak productivity and output growth among advanced economies. We are not running out of good ideas.
Instead the problem lies in the mechanism for translating those advances into goods and services that meaningfully change how we live. It’s modern capitalism that’s busted, despite the limited illusion of innovation conjured by Silicon Valley. Blame the self-reinforcing combo of aging societies, too much institutional ownership of big companies, risk-averse execs, global value chains, and complex regulation. Together they create a defensive, cautious capitalism.
As Erixon and Weigel see things, “today’s capitalism and regulation has reallocated money from big or radical innovation to incremental and economically uninspiring innovation…. In our view, the existential challenge of today’s capitalism is to break the habit of corporate and political reluctance to foster, diffuse, and adapt to big innovation.”
And the results of that “habit” can be seen in weak productivity growth, lower business investment, greater spending on shareholders, and depressed startup rates among other worrisome stats. Well, those plus the notable absence of flying cars, hoverboards, and home fusion reactors. You can add the surge of populism into the mix, as well.
The Erixon-Weigel solution set is OK — pension reforms, dual-class stock structures, ending debt favoritism in tax codes, deregulation in labor markets and housing, among others — but I’m not sure it is a match for the headwinds of stagnation arrayed against it.
But I found one non-obvious fix particularly interesting given the need for entrepreneurial capitalism to be creative and imaginative:
Published in EconomicsThere is a final point to be made, but because it is more about culture than policy, it does not lend itself to a program of reforms. It concerns eccentricity, or the leeway given to those innovators and entrepreneurs who do not conform to the norm. And it is about dissent, and the freedom people enjoy to articulate and pursue their ideas. A culture of dissent and eccentricity is of great importance to innovation – and not just to invention or technology creation. For economies to be innovative, there has to be tolerance of the unknown and acceptance of experimentation.
These qualities have, for a long time, provided Western economies with a competitive edge. They were the result of great cultural and institutional changes around the time of the Enlightenment, if not earlier — changes that fostered a liberal tradition of knowledge and individual freedom. Gradually, however, the modern West is eroding these advantages through regulation and a censorious culture that reduces the freedom to dissent, experiment, and generally behave in ways that do not follow established formulas. Conformism is a sure way to stagnation and few trends can undermine the long-term ability of Western society to prosper through innovation as much as growing intolerance.
I have a different theory: “Hunger is the best sauce.”
People in the west are no longer hungry, so they are not forced to innovate to feed themselves. Except for our unsustainable entitlement programs, we don’t really need high productivity growth anymore. We are fat and happy. Diminishing returns and all that.
Finally I agree. He’s into micro and a Hayekian world at last. Yes it’s government. The rest is accommodation and rent seeking. And yes Z, huger really helps.
“And yes Z, Yuuger really helps.” Fixed it for you.
I had to look that up and I still don’t understand, there was a cartoon character. but it’s probably better than huger which presumable means more huge, so thanks.
The show Silicon Valley does a great job of skewering the problem.
Right on James! One of your best posts.
My only quibble is not enough emphasis on how hard it is to get money for start-ups – which is addressed but not emphasized.
My experience is VC/Seed money operates like a cartel now. They all chase exactly the same kinds of companies. The sharing econmy is hot, the AR space is hot, then X is hot. Now VCs only invest in what other companies are investing in. Totally freaking groupthink. It was a barely functioning system 10 years ago, now I have darker thoughts. Look at Spotify and Pandora, the latest rounds of funding are “convertible debt”. This just eats away at original shareholders equity. It doesn’t create value, it reduces value. And now “bridge” convertible debt is the new hot thing to invest in.
With this title, I was hoping James was going further into the rabbit hole on this one — perhaps applying a Growth Rate algorithm to the burgeoning 6-foot Bong industry.
Let’s not pretend like Andrew Puzder doesn’t owe this market everything…