Yesterday, I attended a discussion held at the Hudson Institute on the topic of innovation. I go to these sorts of things because every once in a while one hears a stimulating idea. Most of the time, one doesn’t, but for me the occasional gain makes up for the frequent loss.

This was for me one of the winners. I will assume a Chatham House Rule, and not associate ideas with names. Some ideas that came up.

1. The presumption is that more innovation undertaken in the U.S. would be better for us. The main fear is that innovation is being held back by cultural and regulatory factors. Assuming that you want the innovation to occur in this country, then encouraging highly-skilled, entrepreneurial immigrants would seem to be the most reliable, least politically fraught way to make that happen.

2. In the area of science, government funding is a two-edged sword. Perhaps we have gotten to the point where the academic community in this country now selects for grant-writers rather than for people who can think outside the box. The most extreme claim was that the last 30 years have produced a “massacre” of genuine innovative scientists at our universities.

I did not bring this up, but I would be happy to offer macroeconomics as an example to illustrate that the use of the term “massacre” may not be too strong.

It had not occurred to me that part of my inability to fit in with academia might be that I might be too willing to challenge the status quo. But it sure would be an affirming notion to believe. Indeed, given my memoirs, I am prepared to consider that perhaps my willingness to challenge the status quo was better received at Freddie Mac in 1988-1994 than it was in academia. Not that Freddie was exactly all gung-ho for innovation (nor should it have been), but compared with the DSGE cartel…and then, just when I was getting worn out from trying to be an “intrapreneur” at Freddie Mac, along came the Web, with the opportunities it opened up for challenging the status quo. hmmm….

3. Maybe where we need innovation is in the area of sovereignty and governance. No, I was not the one who brought this up–someone else did. From that person, I got a tip about some literature that was new to me. I’ll let you know if it proves interesting.

4. Is innovation the product of just a small proportion of the population, or does the entire cultural milieu matter? What if these days, in order to be a significant innovator, you need to be in the 99.5th percentile in terms of cognitive ability?

5. One participant claimed that the existing telecom regulatory structure (the FCC, primarily) has slowed digital communications progress by ten years. Although I often think that markets find a way around regulation, I am afraid that I found this estimate plausible. The FCC is one of the more evil agencies around, and I am afraid that libertarians are less aware of the FCC’s evil than they are of that of the FDA, for example.

6. Since 2008, the number of startups has slowed from 600,000 per year to just over 400,000 per year. This leads me to wonder–has the success rate of startups gone up? If so, then the decline it startups may suggest an unfortunate increase in risk aversion. If not, then it could be a rational responses to an adverse environment.

7. Is there a causal relationship between cultural attitudes toward innovation and entrepreneurs, and which way does it run? It was suggested that support for innovation would go up if somebody discovered, say, a cure for cancer or Alzheimers’.

8. Is innovation dominated by a few really important creations, or by the cumulative effects of lots of incremental improvements? Your answer to that probably is correlated with our answer to (4).

9. One scenario for the future is that perhaps 30 percent of the population is intelligent and adaptive enough to contribute in the work place. The rest enjoy the “narcotics” of digital entertainment, recreational drugs, and so forth, while being supported by, well, I wasn’t the one who made this point, but if I had I would have used the term Vickys.

10. How much has IT contributed to productivity growth? There were optimists as well as pessimists. You know where I stand, given my article on Diane Coyle’s book on GDP.

11. Is there too much separation between value creation and value capture? It was suggested that finance captures too much value, and one effect of that is to draw people with STEM aptitude and skills away from science and engineering. I admit to being sympathetic to that view, although I think you want to try to fight the bias that sees finance as entirely parasitical. It really is important that capital flow to its most efficient uses, and if that means that we need smart people involved in financial markets, then so be it.

I think where finance goes wrong is in allowing people to capture value from inflated prices. So my Internet company gets sold in 1999 for more than what it was really worth (good for me, great for our main backers, not good for whoever ended up owning shares in the company that bought us). Or WhatsApp gets $19 billion today. But if the problem with Wall Street is a lack of wisdom, do you want to subtract talent from Wall Street? If so, which talent?

Another suggestion is that the “winners-take-most” nature of certain markets means that excess value gets captured. Think of Bill Gates in the heyday of Windows, or Google today. Maybe, although I would argue (and did) that, throwing consumers’s surplus into the mix, it’s not clear that the value captured by corporate winners is so excessive.

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17 Responses to Innovation

  1. Regarding #3, have you seen the “startup cities” project?

  2. J says:

    Its wrong to deal with innovation as something generated spontaneously by startups and so. No, innovation is a function of the demand for it, and the strongest way to create demand for innovation is necessity aka war. Organize me a good war (in the Nitzschean sense) and I’ll flood you with innovation.

  3. Andrew' says:

    The people writing the grants are never even in the labs…as far as I can tell, so calling them scientists is a stretch. It’s more like “this grant-writing job selects for grant writers who can pitch.”

    Once in the lab, what is selected for is people who can skim off the ideas of others. Again, this is something so obvious that I get a lot of pushback for it- all the formalities of academia emerged to combat this, so it is obviously a key problem. But people still push back.

    We didn’t need anything to change for academic science to be horrible, it already was, it was “designed” that way, but it doesn’t seem to be getting better. Another so obvious idea that people can’t believe it. You get paid nothing for 4+ years whereas the same you would be getting paid a lot elsewhere. That’s not luck, that’s a system.

    If you ever figure out how to monetize the thankless job of challenging the status quo, let us know, or write that book.

    • Andrew' says:

      I’ve asked this before. In a way it’s kind of comforting how no one is ever interested.

      How do economists get away with the “working paper” thing?

      Also, we have to put our advisor’s name on our papers and you guys don’t seem to do that. I wonder about that too.

  4. Andrew' says:

    As for finance, is the cost of money correct? I know there’s an interest rate curve, but do you have to pay more for higher systemic risk in a way that does not cause you to go bankrupt at the most systemically inopportune time?

  5. Daublin says:

    Fewer, better startups doesn’t mean they have become risk averse, because the education and technology for starting start-ups has gotten much better in the last decade. On the education side, there are companies like Y Combinator, which exist to train technical people on how to manage a startup. That is, they train geeks on the rudiments of wearing a suit.

    On the technical side, there is an increased emphasis nowadays on start-ups internally cycling through ideas on the cheapest budget possible. Instead of making a grand plan and immediately spending a year implementing it, they are more likely to do a one-month feasibility study using a drastically pared-down version of the system. The net effect is that a lot more ideas fail fast and do not lead to the whole startup going down.

  6. S says:

    Why is the presumption that it is important that innovation happen here? Assuming it is going to happen somewhere, why do otherwise globalists care so much for it to happen in their country? Consumer surplus of any new technology will happen through trade, so why does it matter so much if the handful of engineers who invented it happen to live in northern California?

    I am NOT saying it doesnt matter, I just done understand why it matter so much to the folks who always talk about it.

    • Andrew' says:

      Does China, for example, strike you as a place that is doggedly neurotic about innovation?

      • S says:

        Actually, it kind of does. But either way –
        “The presumption is that more innovation undertaken in the U.S. would be better for us.” But why?

        • Andrew' says:

          “The presumption is that more innovation undertaken in the U.S. would be better for us.” But why?

          Well, why not?

          I think that is the question, seriously.

          And I think we should be careful how we do it so it is harder for places like China to free ride. And that’s not a feature of China, that’s a feature of free riding.

          A Chinese advisor I know basically told me he came to the US because China does essentially no innovation. He wasn’t exactly exaggerating, although I understand those words would be considered wild exaggeration. And then there have been studies recently comparing the number of papers and patents to their underlying reality and they show that China is…how shall we say…catching up.

      • Andrew' says:

        Or India? And it’s nothing about these countries per se. It’s just more convenient that a list of other entities that cover half the world’s human beings. And we know the non-humans aren’t worried about where innovation comes from.

        Is our own government worried about nurturing innovation? It doesn’t look like it to me. Just take patent trolling for example. Is our government doing anything other than screwing up the innovation ecosystem? Or take Bill Ackerman using the power of DC to make his short on Herbalife pay off.

        Also, I was told that ephedra products actually worked really well for weight reduction. In a world of tradeoffs, was ephedra deaths by pro athletes or obesity our big problem?

        I guess if we were awash in real innovation or had confidence somebody was looking out for it we might not worry so much about it. But if you aren’t producing innovation, then your plan is to copy it? What is the guys’ incentive for producing it then?

        Don’t take this as an attack, but there is a weird “it will all work out because markets are efficient” vibe I sense from economics.

    • Jeff R. says:

      Part of it is probably a pride thing: people want to live in a country where cool stuff is made. I can tell you from experience that natives of Pittsburgh were once very proud of the fact that so much of North American steel production took place there. I assume the same was true for Detroit with auto manufacturing.

      But from a practical standpoint, all things considered, wouldn’t you rather have Silicon Valley in your jurisdiction, where the abundant employment opportunities and social services funded by tax revenues provide extra benefits? Wouldn’t you rather be in a labor market with more opportunities for working on cool projects rather than fewer?

  7. Ryan says:

    Re: 6, I’m curious about the data here. According to the BDS, the number of startups peaked at 560,000 in 2006. In 2008 there were 490,000. In the most recent year available, 2011, there were 410,000. BDS covers the universe of private, nonfarm employers. It does not include non-employers, so we miss a lot of sole proprietorships.

    In any case, this startup decline is not a recent event. Several measures of startup activity have been on a downward trend since at least the late 1970s. This is true for startups as a share of all firms, startup job creation as a share of all job creation, etc. See

  8. Andrew' says:

    General reply:
    A billion or so Chinese people are learning fossil fuels are good. Are we waiting for them to come up with alternative energy? Oddly, they do have a lot of roofs covered with Chinese manufactured evacuated solar tubes.

    I’d love to free ride, I’m just not sure we’ll be able to.

  9. Andrew' says:

    Hey professor Arnold. Have you noticed this: I’ve found that a need to be authentic is a drawback in a lot of places. The place where this is exquisitely palpable is academia, which should seem wildly ironic to academics…but I’m afraid to bring it up.

  10. Thomas DeMeo says:

    As innovation propagates, it changes the environment for future innovation. It creates various forms of infrastructure, legal frameworks, capital commitments and powerful interests. People become rich, and have things to lose. Things change faster than ever. As innovations pile up, new innovations become harder and harder to monetize. This happens even if the quantity or quality of the innovation taking place increases.

  11. JKB says:

    No. 3 is interesting. Democracy, even as a fetish, has only really taken off worldwide in the last few decades. Reading Huemer’s book, it occurred to me that while even as old as America’s Constitutional governance is, we still have institutions adapted from the monarchial period. Government’s change, the bureaucrat marches on.

    Innovation in governance and sovereignty is happening but it seems all slanted toward usurping liberty and freedom rather than protecting and defending them. Take the innovative use of consent decrees by the EPA to avoid the messy regulatory process or the moves toward regional taxation for examples.

    This is impacted by what has led to the problem in No. 11. Those with a “STEM aptitude and skills” migrate toward interesting problems. They also seem to avoid problems where “innovating” requires a lot of paperwork and approvals. Innovation in finance is lightly regulated. Innovation in software and computers has slowed not least because it now requires a lot of “by your leave” from regulators both civil and government. And innovating in governance and sovereignty is deep in the frustrating paperwork/approvals process.

    This does not, however, preclude innovation in government. If we take “STEM aptitude and skills” to mean more a problem-solving mindset than good at math, just opening the topic of innovations in governance and sovereignty might draw more innovative thinkers into the field.

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