Innovation is NOT Dead — It’s Destructive!

The pundits are at it again. Last week the Wall Street Journal introduced its series “The Innovation Paradox.” The first article, “The Economy’s Hidden Problem: We’re out of Big Ideas,” bemoans the notion the US has been in an “innovation slump” for the last decade. Frankly, I’m irritated by the media’s recurring, and, let’s admit, misleading Chicken Little theme about the current state of innovation. The author, Greg Ip, starts his article with the proclamation, “By all appearances, we’re in the golden age of innovation.” However, he quickly counters with, “The innovation slump is a key reason the American standards of living have stagnated since 2000.” Later, he even refers to the situation as an “innovation drought.” Are appearances that deceiving?

Indeed, readers are probably greatly puzzled by the assertion that we lack innovation today. Even if you discount for the fact the dictionary definition of innovation (anything new or novel) is not real innovation (socially adopted new value), a majority of society would say innovation is alive and well. Just look at all the emerging applications of Virtual Reality hardware and software. Big data analytics are providing insights we could not otherwise see. Consider IBM’s Watson and other artificial intelligence applications – an innovation which is of itself aiding in the development of future innovation. While we may not be in a truly “golden age” of innovation, the situation is not nearly as dire as the business and trade rags tell it – and I’m not buying what they’re printing.

One problem with Ip’s indictment is the way we measure innovation’s contribution to the economy. I understand that it’s complex to quantify, and I don’t have a better method, but using the questionably relevant GNP (gross national product) and the highly problematic “total factor productivity” as indicators of innovation’s contribution are not helpful. We are probably missing a great deal by categorizing economic growth entirely on the definition and conceptual understanding of “productivity.” The truth is we struggle to measure what is of value to society in a meaningful way, and more so the impact of new value. Ip cites a Stanford study that suggests the “payoff” from breast cancer research has slowed significantly since its peak in 1985. According to Ip, the study claimed that for each published clinical trial in the decade before 1985, there were 16 years of life added per 100,000 people, which fell to less than one year (per 100k) by 2006. However, this assumes only one perspective in the concept of payoff – the reduction in mortality. This point of view completely excludes the generous feeling donors to breast cancer research realize when they contribute, often in the hope no other close to them will fall victim.

Our perspective still suffers from the industrial age influence where most innovation was primarily technological rather than social. Today we see much more social innovation, which is much harder to measure. Frankly, as smart as economists are, they just haven’t developed effective methods to measure the contribution of all innovation – economic as well as social.

The most significant impediment to finding a good way to measure innovation’s impact is also what these naysay articles are overlooking. Innovation is the proverbial double-edged sword. While innovation brings new value to the world, it also destroys old value. Because there are often alternatives, innovation rarely creates exclusively new market value. Innovation frequently and eventually replaces old value, most often as an alternative. Economist Joseph Schumpeter (1883-1950) called this phenomenon “creative destruction” – hence the proverb, “Out with the old – in with the new.”

This destruction of old value with the adoption of innovation is not hard to see. Electronic media are displacing printed media. Wireless technologies are replacing most wired communications. Travelers are staying in other people’s homes rather than hotel rooms. People are riding in other people’s cars instead of calling a taxi – and I could go on and on. Most innovation is simultaneously constructive and destructive, and who can say how we calculate the net effect.

Most innovation eventually delivers increased value at a lower cost/price. Conventional wisdom says a reduction in GNP is an unhealthy sign. Quite conceivably, that reduction could be indicative of prolific innovation. So how might we quantify a net gain economically or improvement socially? I wish I had solutions, but as yet, I do not. I can tell you the measures offered by Ip and his colleagues are at best meaningless, and frankly, pure nonsense. GNP is the Oldsmobile of economic metrics. It got us around for a while, but economically we’re headed places we’ve never traveled before, and we need better measures to take us there. Unfortunately, until we develop meaningful measures, the media will misuse the available pseudoscience to spread FUI (fear, uncertainty, and ignorance).

This post first appeared here on the FutureSmith website.

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