Economics, Pethokoukis, U.S. Economy

Does innovation lead to prosperity for everyone?

Image Credit: shutterstock.com

Image Credit: shutterstock.com

Not all innovation is alike. Incumbent firms replacing man with machine is a kind of innovation that may lift corporate profits and boost stock prices without necessarily broadly raising prosperity. Such technological advancement and efficiency is already contributing to polarized employment markets in advanced economies. Jobs are created at the top for high-creative workers and at the bottom for high-touch workers. But jobs in the middle— especially those involving routine, repetitive, and rules-based tasks—are automated away. In other words, the executives and janitors at a bank keep their jobs, but tellers get replaced by ATMs.

But there is another kind of innovation, termed “empowering” innovation by business consultant Clayton Christensen. This is the sort of innovation generated by fast-growing startups offering new products and services. Empowering innovation is a job creator, not a job destroyer—though some jobs may shift from uncompetitive incumbents to these aggressive new challengers.

Both sorts of innovation have their place, of course. But right now efficiency innovation may be destroying jobs faster than empowering innovation creates them. So what is the key to generating greater levels of empowering innovation? Competition—and the more the better. As economist Joseph Berliner once put it: “…the effect of competition is not only to motivate profit-seeking entrepreneurs to seek yet more profit but to jolt conservative enterprises into the adoption of new technology and the search for improved processes and products.” Vibrant economies need plenty of fast-growing startups to generate empowering innovation and to also push incumbents themselves to become more innovative.

And if incumbents can’t compete, government needs to let them fail. Free and frequent entry and exit of firms is critical. Government has to make sure tax, regulatory, and spending policy is neither impeding the creation of new startups nor giving incumbents an unfair advantage.

Some politicians think “innovation policy” means spending taxpayer money on promising young firms favored by bureaucrats. rather, innovation policy means ensuring that the status quo is continuously challenged by upstart rivals and threat of failure. Those are the keys to the Schumpeterian “gales of creative destruction” that drive innovation, which in turn drives long-term economic growth and improvement in living standards.

As published in The International Economy magazine, Spring 2014 issue.

Follow James Pethokoukis on Twitter at @JimPethokoukisand AEIdeas at @AEIdeas.

9 thoughts on “Does innovation lead to prosperity for everyone?

  1. People have been afraid that technology would put people out of work and cause stagnation since the beginning of human history, but it has always resulted in great spurts in growth. An example. The printing press put the monks who were busy writing indulgences out of work. One press could print as many as all the scribes in a small country – did this lead to permanent unemployment of people. No – it led to a boom as books which were once made in the 100′s and extremely expensive, became affordable and printed by the 10s of thousands. Creating a huge market which employed many more people than were displaced. Same thing happened with agricultural innovation around 1000 AD (Horse harness, better plows) which caused unemployment among farmers but allowed them to create guilds in newly created towns and make specialized products to sell.

    Our problem today is not the innovation creating automation – that has been done for years (printing press, automatic looms replacing knitters, trucks replacing horses …) always expanding the economy. The problem today is we now have so much stifling regulation and government directing money to favored causes, that folks just can not innovate fast enough and when something new comes along, they have trouble starting businesses to take advantage of the new innovations. And these roadblocks have accelerated under the current administration.

    • Name some instances of the stifling of startups. You cite to the printing press destroying the jobs formally done by Monks. But it also created the need for more paper which created another series of jobs. Same with the car that did a number on a number of industries, I.e.buggy whip manufacturers but it also created the need for tire makers, gasoline stations, oil companies,etc. Now look at the newest post-industrial “disrupter” Uber. You call and get a cab-what new industry does that create. Even Facebook, what new industry does that create? Advertising – you see the point

      • You can look at several articles, even here on ae-ideas about how there is a dearth of startups and the number of businesses are declining. I am sure you can use your google skills to look up regulations stifling businesses. You can start with Obamacare and mininimum wage increases as simple examples.

        In a more laissez-faire system technology does not cause job losses – it increases growth, as societies turn more socialist it becomes harder to create new jobs fast enough. As an example – agriculture grew – but didn’t really take off in Europe until the socialist like feudal system was replaced with personal land ownership.

  2. Since the 1990s we have undergone a transformation in the economy with the decline of commununism in Europe, the development in Asia, globalization, and computer technology (e.g., the decentralizing effects of the Internet, etc.). We are still feeling the effects of this transformation and it is still on-going. What results?…wait and see.

    When that happens you can judge how well “innovation” has served “everyone”.

    The real effects of the changes in information technology need to be viewed, not from within the industry sector, but among the commerical/industrial sector — how the changes will be implemented by the very large companies with global reach, like GE, Catepillar, Boeing; and, how smaller companies (many that interact with the larger companies) fit in with the overall picture.

  3. Since the 1990s we have undergone a transformation in the economy with the decline of commununism in Europe, the development in Asia, globalization, and computer technology (e.g., the decentralizing effects of the Internet, etc.). We are still feeling the effects of this transformation and it is still on-going. What results?…wait and see.

    The real effects of the changes in information technology need to be viewed, not from within the industry sector, but among the commerical/industrial sector — how the changes will be implemented by the very large companies with global reach, like GE, Catepillar, Boeing; and, how smaller companies (many that interact with the larger companies) fit in with the overall picture.

    When that happens you can judge how well “innovation” has served “everyone”.

  4. Economic well-being and growth comes from removing the dead hand of the king, the conqueror, the komrade and the bureaucrat.

    Where is the tremendous growth happening now? Where communism and socialism has been abandonded.

    Where has economic growth, previously strong, been cut in half, or halted, or put into depression? The western nations where all-seeing, all-knowing bureaucrats now run well over half of each nation’s economy.

  5. Yes, James, innovation is a good thing. But, new startups arent the only place it can happen. There are very few jobs, from secretary, to machine operator, to construction worker to government clerks that can’t be made more efficient through innovation. And the innovation does’t have to come from microsoft or MIT…. The workers themselves inside big organizations are capable of innovating too.

    Problem is the incentive for the worker to do so. When you are paid by the hour, there is none. As a practical matter, slowing down will yield more money and job security than innovating for hourly-paid work. Ever notice how long it takes an hourly-paid construction crew to build a road?

    Pay for performance and you’ll get exactly the kinds of innovations that produce actual wealth for all.

  6. There was an interesting podcast on Redstate.com’s “Coffee and Markets” podcast series some months back. They made the following points:

    Here in America, we are seeing less and less of the kind of innovations that used to create new markets, and new job opportunities.

    Instead, most of the investment that companies have made in the last 20 years has NOT been to expand into new markets, but to cut costs in their existing markets.

    And cost-cutting means one thing: Layoffs and replacement of American workers with automation and outsourcing to foreign countries.

    Why has this happened?
    They didn’t say, but I think it’s just one more symptom of America being eclipsed.

    An orgy of cost-cutting and layoffs is something you normally see in a recession, when the economy is in decline and companies have to tighten their belts for the moment. It usually stops when the economy recovers. That was the case in the late 1930s, the 1980s and the 1990s.

    But here we are, 4 years after the recession officially ended in 2010, and companies are still cutting costs like crazy. That’s a symptom that the recession never really ended. Companies still don’t regard the American marketplace as profitable as, say, the Chinese marketplace.

  7. Efficiency innovation does create new jobs, as other commenters have pointed out. However, today, those jobs are being created in China and other developing nations, where workers can churn out these new innovations faster and for less money. Before rapid globalization, innovations which stole jobs in a country’s economy gave those jobs right back, and a lot of the time to the same workers. For example, innovations during the industrial revolution took away jobs from farmers, yet many of those farmers ended up moving to the city and taking a job at a factory.

    The problem today is that if an automated machine replaces human workers in the US, the jobs needed to make that machine won’t be found here. They’ll be in China.

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