What drives innovation, the engine of economic growth?

What drives innovation, the engine of economic growth?

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Many economists today are arguing that the unprecedented era of innovation—the last 250 years or so since the industrial revolution—is going to be over soon, ending economic growth. Why should we care about economic growth?

We should care because our well-being depends on economic growth—the alternative is the subsistence living of the pre-industrial times. Human flourishing and all the values that enhance it—nutritious food, better medicine and health, longevity, labor-saving technology that gives us the gift of time, communications technology to conduct business and to keep in touch with family and friends—depend on economic growth.

Terence Corcoran wrote about the “peak growth theory” in the Financial Post last week.  It seems that the economists predicting end of growth are basing their arguments on analysis of trends. Economic growth rates which took off after the invention of the steam engine and industrial revolution, peaked in the mid-20th century, and have been declining gradually since, particularly in the United States. If you extrapolate from the declining trend, you will come to the conclusion that economic growth will end. But in order to understand any trend and to change it, we need to look at the fundamental causes behind it.

Economists understand that innovation drives economic growth. Big innovations based on harnessing steam power, discovering electricity, the computer revolution all have spurred economic growth. But what drives innovation? That is what the “peak growth” economists are either mute or mistaken about—some blame, incredulously, neo-liberal policies of deterring innovation and economic growth.

Mr. Corcoran, however, correctly identifies that we need freedom to boost innovation and economic growth. It is competition in free markets that pushes companies to outperform each other in coming up with new, better, less expensive products and services, and more efficient processes and technologies for producing them. (This is also amply illustrated in Matt Ridley’s 2020 book: How Innovation Works: And Why It Flourishes in Freedom. It is an excellent tour of the history of innovation. I highly recommend it to anyone interested in innovation and human flourishing).

Have you ever wondered why the rate of innovation is so much higher in consumer electronics and computer industries, than say, in health care? The first two are not strangulated with government regulations, the third one is. Overall, there has been less economic freedom in the U.S. since the (arguable) peak of growth and more government involvement and spending (witness the size of the U.S. deficit)—thus less innovation and growth. The economies liberalizing their markets—China, India—are witnessing growth.

But freedom, while a requirement of innovation and therefore economic growth, is not a fundamental cause. The fundamental engine of innovation—which can only run on the condition of freedom—is the greatest natural resource of all: the human mind. It is the first-handed adherence to reality that enabled the creation/harnessing and commercial production of the steam engine, electricity, computers, and all the modern innovations that stem from them. Only to the extent that we continue to use reason—to adhere to reality through observation and logic, and integrate what we acquire with the rest of our knowledge—can we come up with innovative solutions that contribute to economic growth.

Based on his brilliant analysis of today’s culture (from philosophy to physics to literature to education) in his new book, The DIM Hypothesis: Why the Lights of the West Are Going Out, philosopher Leonard Peikoff observes the end, or diminishing, of reason. He predicts the decline of the Western civilization—unless we change course and embrace reason again.

Choosing reason over evasion, mysticism, or any other form of irrationality (and ensuring that rational education is available to the young) is our first task in encouraging innovation. Fighting for freedom in every realm from education to markets is the second.

Photo credit: Max Pixel

Originally posted 8 October 2012

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4 Responses

  1. ‘Peak’ ‘[something] is a persistent fad of academics, including ‘end of history’ (John Ridpath soundly demolished that silliness), and ‘peak oil’ (which innovators showed wrong).

    Certainly there’s an anti-innovation mentality, exemplified by environmentalist shortage mentality, luddites, and violent people like ‘antifa’ who are not countered by elected Democratic Party politicians such as in Portland OR and Seattle WA. (Initiation of force blocks use of our minds, which are the source of innovation.)

    But the term ‘growth’ is poor communication.

    What matters is life.

    In particular cases shrinkage is good, such as prices of communication and food (from innovation in technology _and_ better leadership). Aging people downsize their residence, albeit building their new bunglalow leaves their old house for a growing family. Etc.

    ‘Growth’ is artificial, better capability and more people doing more for each other in trade is real.

    (I smell Marxism in the economists that Corcoran quotes.

    As for ‘better capability’, media have declined – there’s an obvious typo in Corcoran’s article.)

  2. Specifically, the 1% vs 99% meme is based on fixed pie economics and drive-to-the-bottom ethics, taught by Karl Marx based on denial of the human mind’s rationality thus productivity (which the ‘innovation’ buzzword is part of) and cooperation when values are shared (i.e. dishonest people will be shunned).

    It is denial of all productive societies, from tribal ones to here today. (In contrast to thieving slaving societies like the Haida were and Communist ones like the USSR, Cuba, and North Korea are – where an elite live in luxury compared to most residents.)

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Jaana Woiceshyn teaches business ethics and competitive strategy at the Haskayne School of Business, University of Calgary, Canada.

She has lectured and conducted seminars on business ethics to undergraduate, MBA and Executive MBA students, and to various corporate audiences for over 20 years both in Canada and abroad. Before earning her Ph.D. from the Wharton School of Business, University of Pennsylvania, she helped turn around a small business in Finland and worked for a consulting firm in Canada.

Jaana’s research on technological change and innovation, value creation by business, executive decision-making, and business ethics has been published in various academic and professional journals and books. “How to Be Profitable and Moral” is her first solo-authored book.

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