Saturday, August 19, 2017

"Is our economy still dynamic? A long-read Q&A with economist Fredrik Erixon"

From Pethokoukis at AEI, August 4:
Looking at the Silicon Valley today, you might think the US is poised for a technological explosion. That expectation is certainly animating many of the fears of mass joblessness once artificial intelligence arrives in the workplace, and why many people are beginning to advocate a universal basic income. But my podcast guest believes these techno-optimists have far too rosy of an outlook.
Fredrik Erixon is an economist and the director of the European Centre for International Political Economy, a Brussels-based think tank. He’s also the coauthor of the recent book, “The Innovation Illusion: How So Little is Created by So Many Working So Hard.” He joined me to discuss why we’re no longer as innovative as we used to be, why we’re not close to recapturing that dynamism, and what policymakers can do about it. Listen to our full conversation at Ricochet, or read an abbreviated transcript here.

PETHOKOUKIS: I’ll give you a chance to lay out your thesis, which I will try to sum up briefly. As the title suggests: innovation is not what we think it is. In fact, it’s been getting worse and worse, decade after decade since the 1970s. I wonder if you could explain that. Now, keep in mind that I would rather live — and I think this may argue against your thesis — in 2017 than in 1967, 1977, or 1987. And frankly, I’d probably rather live in 2017 than last year. So that to me suggests that maybe things are getting better. How can you say innovation, change, and progress have been slowing down for decades?

ERIXON: Like you, I would pick 2017 over any other year that you could come up with. The argument of the book isn’t that I’d prefer to live in the 1970s or 1940s or even 2006 or 2007 before the big economic crisis in the West. The point is basically that the innovation acceleration, or the pace of change in Western economies, has slowed down and that this slowdown is connected to our increasing inability to actually change our economies. And to change our economies in a way where we increasingly incorporate much more technology, much more human capital, and get people to stop doing things that they did yesterday in order to do something better tomorrow. That’s the whole point of the book. The point is to say we need more innovation, we need faster innovation. The illusion that the book is trying to counter is this perception, which has been spreading like wildfire over the past year, that we’re living in the most innovative age ever.

What we’re trying to say in the book is no, that’s an illusion. If you actually look at the pace of innovative change throughout history, you’re going to find lots of periods when change happened faster, when people were prepared to change in a way most people today aren’t. And the other part of the illusion is this perception itself provokes a lot of political reactions. It provokes human reactions and fears about technologies that are about to demote us to permanent low economic expectations. That we’re going to get unemployed because intelligent machines, robots, are going to eat our lunch, and perhaps our dinner as well.

And if you listen to Elon Musk, they might eat us as well. Or at least kill us. Before we go forward or even look at where we are today, just take one step back. So when was the golden age of innovation? And, whenever that was, why was it? Why can’t we just do what they did and follow that same recipe today?
The concept of innovation has basically two elements. The first one is technology creation; that we have scientists and inventors that generate new and bold inventions that are going to help to solve problems in better ways. That’s the first component. And I would argue at least that I’m not capable of making a judgment whether the technology creation we’re seeing today is better, worse, or similar to what we’ve seen in previous parts of history. But the other component of innovation, following the concept of innovation from economists Joseph Schumpeter and many others, is about the economy, and it’s about the capacity of the economy to basically take the technologies that are being created and run with them and make them basically ripple through the economy in a way which forces everyone — labor, capital, investors, governments — to perform better. And it’s in that second part where I think we’ve seen, in many parts of our modern economic history, we’ve been much better and where our economy has been much better equipped in order to run with these technologies and actually make something out of them.

So the problem here isn’t that we need to reinvent our economy, or start to come up with different economic systems. My argument is basically that we’ve had a system called capitalism which has been extraordinarily good at generating this type of economic change that I’d like to see more of. The problem that we’ve seen gradually growing over the past 50 years is that core concepts of capitalism have been eroded. And we have less of them in our economy today than we’ve had in the past. And that is the main reason why the economy isn’t generating that much innovative change or productivity growth as it did in the past.

You’re dividing things up. Maybe you have invention, the ability to come up with new ideas, new technologies, new ways of doing things. And then there’s the diffusion of those ideas throughout the economy, so they’re broadly helpful and broadly productive for people. So are you saying there’s a time when we did that better? These technologies or inventions or innovations, as you said, we were able to run with them better? When was that time? And if there wasn’t a time then maybe that’s just the way things are. When did we do it better? The 50s, 60s, 20s?
I think we can point to specific periods in economic history going back to the early 1800s, and point to decades or perhaps longer periods where we’ve seen faster change in our economy and our society. I think the period — it depends whether you look to America or Europe — before the early 1900s was a period of immense change in the European economy. We had the period just after the Second World War, a period when America as well as Europe saw enormous innovative change in the economy. Partly because the economy got better at exactly the thing you pointed to — diffusing all the new technologies that already existed and making organizations use them. I can think about my pretty short life, I’m just 43 years old, but I can point to periods when I think I’ve been living in far more exciting times than I do today. I’d say 1990s and 1980s was such a period, where the propensity of people to actually change and do something different than what they were doing was much greater than it is today....