Spitzer on Innovation

Economic growth is a fascinating topic and Eliot Spitzer adds to it in "Inventing a new Economy," in Slate (December 28, 2009).  It was impossible not to compare it to Arnold Kling and Nick Schulz's book, "From Poverty to Prosperity," which I continue to enjoy, savoring their insights and those gleaned from many great economists, and on which I recently posted ("Kling and Schulz: The Importance of Markets").  Spitzer's article is worthwhile reading, and his main point that the United States needs to remain a creative, innovative society is correct, but he makes several economic errors which perhaps can be forgiven because he is an attorney/politician/journalist, not an economist.

Spitzer describes ideas and the resultant innovations as an international competition in which countries win or lose depending on their ability to turn ideas into innovations. 

...America's overall economy, we are often told, is increasingly reliant on America's "innovation economy." Our national economic rebirth will be spurred by our historic ability to create new methods of production and new technologies, which will keep us one step ahead of the competition even as we lose the comparative advantage we used to have based on other factors, such as size of market or access to capital.

Kling and Schulz describe ideas and the resultant innovations as a public good, available to all.  Indeed, the government tries to protect inventors and innovators with patents, and entrepreneurs try to gain advantage over competitors by hiding innovations or learning by doing, but still the innovations and ideas that gave them birth, leak out and society benefits.  China has made great economic strides during the past thirty years.  Does anybody believe that they did so using only Chinese ideas and innovations?

Nobel laureate Paul Krugman goes to great lengths in "Pop Internationalism" to persuade readers that problems with the American economy are domestic in nature and not the result of international trade.  In particular, he believes that the view that trade is an international competition is not only wrong but harmful...   

The competitive metaphor--the image of countries competing with each other in world markets in the same way that corporations do--derives much of its attractiveness from its seeming comprehensibility.  Tell a group of businessmen that a country is like a corporation writ large, and you give them the comfort of felling that they already understand the basics.  Try to tell them about economic concepts like comparative advantage, and you are asking them to learn something new.  It should not be surprising if many prefer a doctrine that offers the gain of apparent sophistication without the pain of hard thinking.  The rhetoric of competitiveness has become so widespread, however, for three reasons.

First, competitive images are exciting, and thrills sell tickets...

Second, the idea that U.S. economic difficulties hinge crucially on our failures in international competition somewhat paradoxically makes those difficulties seem easier to solve.  The productivity of the average American worker is determined by a complex array of factors, most of them unreachable by any likely government policy.  So if you accept the reality that our "competitive" problem is really a domestic productivity problem pure and simple, you are unlikely to be optimistic about any dramatic turnaround.  But if you can convince yourself that the problem is really one of failures in international competition--that imports are pushing workers out of high-wage jobs, or subsidized foreign competition is driving the United States out of the high value-added sectors--then the answers to economic malaise may seem to you to involve simple things like subsidizing high technology and being though on Japan.

Finally, many of the world's leaders have found the competitive metaphor extremely useful as a political device.

Spitzer seems to view innovation as the introduction of new products, but may miss the point that many innovations are labor saving. He also demonstrates make-work bias described by Bryan Caplan in "The Myth of the Rational Voter,"  as "a tendency to underestimate the economic benefits of conserving labor...the production of more with less" by focusing on jobs rather than productivity. 

A patent application filed and granted in the United States by a U.S. company might not generate many jobs or much economic activity in the United States if the production and marketing of any resulting product or service took place overseas. So a critical question that remains is whether innovation in the United States will continue to have as significant and broad-based an economic impact as it has in the past. On balance, is it preferable to have Apple doing its R & D here, even if it manufactures the iPod in China? Of course it is, because the R & D here creates great value and wealth. But the loss of manufacturing jobs to the rest of the world has enormous economic consequences for the middle class.

In his last paragraph, Spitzer advocates increased investment in education as a method for promoting new ideas and innovations.

Historically, our economic growth has depended in large part on our ability to generate new ideas and innovations. In addition, while there can be substantial discussion about which policies will best keep our innovation engine churning, increased investments in education—especially in technical fields—and basic R & D seem critical to any agenda. If we want robust economic growth to return, then we had better figure out how to reverse some of the trends suggested by this quick examination of patent data.

I wish he had gone further to write about the role of the entrepreneur and protecting market incentives that intensify entrepreneurial activity.  Kling and Schulz describe the entrepreneur as, "The Heart that Pumps Innovation" and assert that his or her most important role...is to overcome resistance to change."