Tuesday
Feb052013

The End of Low Hanging Fruit?  

The argument that innovation and technological progress have been slowing down has been making the rounds. It was recently articulated in Robert J. Gordon’s work and in Tyler Cowen’s influential short book, The Great Stagnation: How America Ate All the Low-hanging Food of Modern History, Got Sick, and Will (eventually) Feel Better. It jumped from obscure academic discussion to public debate when The Economist Magazine turned it into a memorable cover.

The idea is simple and has something to it: in the early 20th century there were many — what Tyler Cowen calls — “low hanging fruits” for the world economy to collect such as antibiotics, electricity-powered factories, radio, TV, planes and automobiles, and not least the great innovation featured on the cover of The Economist, indoor plumbing and sanitation. But these have all been exploited. As we run out of low hanging fruit, the argument goes, we are likely to run out of rapid technological progress and growth will slow down.

Two things are absent in this debate, however.

First, much evidence shows that what determines technological innovations isn’t some sort of “exogenous innovation capacity,” but incentives. This point was stated forcefully by the great economist Jacob Schmookler in his Invention and Economic Growth where he argued (p. 206): 

invention is largely an economic activity which, like other economic activities, is pursued for gain…

Schmookler illustrated these ideas vividly with the example of the horseshoe. He documented that there was a very high rate of innovation leading to improvements in the horseshoe throughout the late 19th and early 20th centuries because the increased demand for transport meant increased demand for better and cheaper horseshoes. It didn’t look like there was any sort of limit to the improvements or any evidence of an “exogenous innovation capacity” in this ancient technology, which had been around since 2nd century BC. Then suddenly, innovations came to an end, but this had nothing to do with running out of low hanging fruit. Instead, as Schmookler put it (p. 93), it was because the incentives to innovate in this technology disappeared because

the steam traction engine and, later, internal combustion engine began to displace the horse… 

Plenty of other examples illustrate how technology responds to incentives, and when incentives are there, great innovativeness follows. Amy Finkelstein’s research, “Static and Dynamic Effects of Health Policy: Evidence from the Vaccine Industry”, shows that when the government increases the demand for some vaccines, pharmaceutical companies respond by starting more clinical trials to come up with these vaccines. In a related paper, “Market Size in Innovation: Theory and Evidence from the Pharmaceutical Industry”, Daron and Joshua Linn show that expansions in the market size for different types of drugs driven by demographic changes lead to sizable changes in the discovery of new drugs.

Recent research by Walker Hanlon of UCLA, “The Necessity Is the Mother of Invention: Input Supplies and Directed Technical Change”, provides another telling example from the 19th century. After decades of focus on American cotton and no technological improvements in, among others, Indian cotton, Civil War-era disruption of U.S. cotton supplies to the British industry led to rapid improvements in textile processes using Indian cotton. 

But, because where incentives for innovation will be strong is difficult to forecast, where the new innovations improving efficiency and consumer welfare will come from in the future is also difficult to predict. Who could’ve predicted a decade ago the ecosystem of innovations related to applications surrounding the iPhone and Android platforms? And yes of course, this doesn’t compare to indoor plumbing, but it illustrates both the rapid response of the economy to incentives and the difficulty of forecasting the areas where new innovations will revolutionize.

And this difficulty feeds into a potentially incorrect line of argument: we know the great innovations of the past and they were great, and we don’t know the ones of the future and thus they can’t be great (though it has to be said that the opposite incorrect argument has been voiced probably more often: we don’t know the great innovations of the future but we are sure they are great!).

All in all, the future is not ours to see of course, but it seems like the responsiveness of innovation to incentives so far suggests that so long as incentives continue so should innovation.

This brings us to the second important issue absent from the debate: the main argument of Why Nations Fail is that innovation stems from inclusive institutions. Hence the debate of whether innovation and technological progress will continue to rapidly improve our lives should center on whether inclusive institutions will spread or will retreat. The great innovations of the Roman Empire, for example, didn’t come to an end (and in fact fall into oblivion) because the Romans reached the limits of innovative capacity but because their institutions turned extractive and then collapsed. But institutions have been notable in their absence in this debate, and we would argue they are the key. (For a take on the future of innovation emphasizing institutions, see here).

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