I have often gotten into debates with some of my economist and “wanna-be” economist friends about whether the rate of innovation is quickening or slowing. No doubt, we are seeing tremendous innovation today. But is it at rates we have seen in the past (i.e., the 1980s and 1990s)? Is it enough to keep our economies growing and more importantly improving our standards of living?
Remember, innovation is the prime driver of productivity growth and its subsequent increases in the standard of living of an economy’s participants. Innovation is a difficult thing to define. It is even more difficult to quantify. One could argue that innovation needs to have user-perceived benefits – and not just another cool gadget. User-perceived benefits would show up in advancements in GDP and other statistics.
For example, there have been tremendous recent medical innovations. But these innovations today are not bringing huge user-perceived benefits as many before – such as life longevity of the innovations of the past. Another example is airline travel. The innovation of jet air travel brought tremendous productivity in allowing travelers to travel from point A to B in very short timeframes and at a reasonable cost. The more recent innovations, such as in-flight entertainment systems not so much.
In any case, the following report is one anecdotal evidence that suggests innovation is slowing down.
Epoch Times, back in March 2019, published an ominous special report entitled: Why the global growth model is broken. In it, we explained a troubling phenomenon: productivity growth in the world economy had stalled in 2011 and started to decline. They first noticed this in September 2017, and the situation has remained the same ever since – named the “Great Stagnation.” See this in the chart below.
The above chart shows the growth of total factor productivity (TFP) in the regions of the world from 1990 to 2021 (GnS Economics, Conference Board). TFP measures the share of GDP growth that cannot be accounted for by capital investment (in equipment and machinery) and the quantity and the improved quality of the labor force (skills and training). Effectively, TFP is the “unexplained” element of economic growth.
Some might argue that TFP may be measuring innovation GDP growth which is difficult to explain. Innovation of the 1980s and 1990s brought huge productivity gains in the Information Technology Age – similar to the Iron Age and the Industrialization Age of the past. The Information Technology Age has largely run its course, and recent Information Technology innovations have been marginal to productivity gains.
Epoch Times postulates that the continuous monetary and fiscal stimulus by central banks and governments has destroyed or seriously damaged two main forces behind economic growth:
- creative destruction, and
- the risk-and-reward relationship.
Much of the growth that was obtained since the “Great Recession” of 2008 has been financed through credit, which merely pulled forward GDP growth from future years into the present day. This is why the Epoch Times believe economies are so weak, and this is why we are heading either to complete socialization of the world economy or an epic economic collapse – perhaps both?
This phenomenon appears to have started after the response to the “Great Recession” back in 2008 by the Obama administration. This administration was largely the architect of the fiscal stimulus by central banks and governments. Outside of the transitory snap-back recoveries of the “Great Recession” and Covid, it should be noted that there was a beginning of pulling out of this stagnation for a brief period under the Trump administration with more pro-free-market policies and less stimulus.
Though one could agree with the Epoch Times thesis and somewhat related, there may be other factors at play that could also explain this phenomenon. Perhaps you can think of others that can be explained in the comment section below.
- Unfortunately, since WWII, due to increased wealth inequality driven by central bank monetary policies, each successive generation has had less wealth to realize any potential innovations. Learn more here. Less capital available to the innovators will mean less innovation.
- Another aspect of wealth inequality is that many of our business sectors tend to be monopolies, duopolies, or are, at best, a handful of companies in their respective business sectors. This means each of these business sectors has the ability to control and even block innovation to maintain their market positions.
- The issue could also be part cultural. The youth of today are less interested in “building things.” Instead, they are more focused on comparing what they have with others and figuring out what sex they are.
- Crisis (e.g., war, space races …) or the creation of a need, as need is the mother invention. Unfortunately, this can be abused and requires honest actors to have any good long-term effects.
With a decline in innovation leading to a declining TFP environment, the reality of this future of the world may play heavily into geopolitics as well as local politics. With more government accidental or planned mismanagement of the economy, perhaps the Epoch Times may be right when they say, we are heading into a world economy on the edge of an “epic economic collapse.”
Of course, it doesn’t have to be this way. It will take new leadership and new “real” free-market ideas to change this trajectory – as it has done in the past. This will only happen if people in “democracies” of the West wake up and understand what is happening culturally and economically in their countries and support those types of leaders.
See more Chart of the Day posts.
If you found this article informative, please consider a small donation to our coffee cup to help support Conservative Journalism – or spread the word. Thank you.
RWR original article syndication source.
Author: Tom Williams