Keeping the 'magnificent machine' in working order


Innovation talk:When thinking about innovation, we understandably tend to focus on the latest developments, the newest computing devices, the most efficient electric engines, the breakthrough medical devices and so on.

In relative terms, however, this is the mere minutiae of progress, and it’s always worthwhile to bear in mind the bigger picture – the macro-effects of innovation, if you will, and how it acts as a cumulative force on our lives and economy.

That’s a tricky perspective for most of us to attain, so when Clayton Christensen articulates a theory for understanding how innovation impacts and drives the economy, it’s particularly valuable. Harvard-based Christensen is one of the world’s pre-eminent business professors, the man who reshaped our understanding of disruptive innovation with his 1997 book The Innovator’s Dilemma and who has demonstrated an uncanny ability to marry anecdote and data to provide real insight.

Last month, days before US voters went to the polls to re-elect Barack Obama president, Christensen contemplated the troubled state of the US economy in the pages of the New York Times. But he didn’t get drawn into an ideological debate between the merits of Keynes and Hayek, and nor did he get sidetracked by the so-called fiscal cliff, quite possibly the most inadequate of economic analogies.

Instead, Christensen outlined a simplified model for how innovation acts as a cumulative force. In his view, the economy thrives on the delicate interplay of three types of innovation, which he describes as “empowering”, “sustaining” and “efficiency” innovations.

The first, empowering type, “transform complicated and costly products available to a few into simpler, cheaper products available to the many”. Examples Christensen cites include the Ford Model T, the IBM personal computer and, more recently, cloud computing. Critically, empowering innovations are job creators, “because they require more and more people who can build, distribute, sell and service these products”.

The second, “sustaining” types of innovation are iterative rather than revolutionary, replacing old products with new ones rather than bringing new technologies to the mainstream – Christensen uses the undoubtedly innovative Toyota Prius as an example. However, no matter how innovative they may be, they are replacing yesterday’s products, and thus don’t offer the same growth benefits as “empowering” innovations.

The third type of innovation Christensen identifies are the so-called “efficiency” innovations, which streamline production and usually lead to a reduction in the net number of jobs. As such, efficiency innovations are sometimes more feared than feted, but they also allow for the emancipation of capital, as Christensen puts it, and for the reinvestment of that capital into developing more “empowering” innovations, which fuel growth.

A healthy economy, Christensen posits, is dependent on these three elements attaining a sustainable equilibrium – “Ideally, the three innovations operate in a recurring circle. Empowering innovations are essential for growth because they create new consumption,” he writes. “As long as empowering innovations create more jobs than efficiency innovations eliminate, and as long as the capital that efficiency innovations liberate is invested back into empowering innovations, we keep recessions at bay. The dials on these three innovations are sensitive. But when they are set correctly, the economy is a magnificent machine.”

This is, of course, a hugely simplified understanding of how the machine functions, and omits the economic impact of things such as tax policy or, say, banking regulation. But it is a valuable primer on how different categories of innovation affect economic growth with varying results. Christensen’s prescriptions, however, don’t seem to fully rise to the challenge of keeping the “magnificent machine” in good working order, though he does suggest a novel, time-related capital-gains tax rate that might be worth implementing.

But it’s also worth considering the possibility that the dials are not so easily reset, that empowering innovations can’t reliably be created through the power of investment alone. In his book The Great Stagnation, US economist Tyler Cowen suggests that the era of high-growth generating innovation might be behind us. “A lot of our recent innovations are ‘private goods’ rather than ‘public goods’,” he writes. “Contemporary innovation often takes the form of expanding positions of economic and political privilege, extracting resources from the government by lobbying, seeking the sometimes extreme protections of intellectual property laws, and producing goods that are exclusive or status related rather than universal, private rather than public.”

For all the transformative effects of the internet and smartphones and medical breakthroughs and so on, it’s important that we pay attention to the bigger picture, and ensure that innovation acts as a universally empowering force.

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