“We’re Economists. And We Don’t Care About Innovation”

In a Planet Money show about whether Super Bowls help host cities, a sports economist named Victor Matheson, a professor at College of the Holy Cross, described himself and other sports economists:

We’re economists. And we’re concerned about equity and we’re concerned about efficiency. And what most economists see . . . “

He didn’t say “We’re concerned about innovation”. The way he ignores innovation reflects the whole field of economics. Here’s the same thing from Christine Romer. In an editorial about whether manufacturing deserves special treatment, she considers only productivity and equity:

It might be better to enact policies that will make all American businesses and workers more productive and successful. . . Today, we face a profound shortfall of demand. . . .We need actions that raise overall demand. [She doesn't say we are in a period of profound stagnation in most industries, which is also true.] . . . More aggressive monetary policy that lowered the price of the dollar would stimulate all our exports . . . Moving is very costly for dislocated workers with ties to their communities. . . Manufacturing jobs are seen as one of the few sources of well-paying jobs for less-educated workers. . . . Public policy . . . should be based on hard evidence of market failures, and reliable data on the proposals’ impact on jobs and income inequality.

As if innovation (and lack of it) don’t exist. Here’s an example from Robert Reich, in a post “rebut[ing] the seven biggest economic lies”:

Shrinking government generates more jobs. Wrong again. It means fewer government workers – everyone from teachers, fire fighters, police officers, and social workers at the state and local levels to safety inspectors and military personnel at the federal. And fewer government contractors, who would employ fewer private-sector workers. According to Moody’s economist Mark Zandi (a campaign advisor to John McCain), the $61 billion in spending cuts proposed by the House GOP will cost the economy 700,000 jobs this year and next.

Nothing about the effect of shrinking government on innovation. Many types of innovation increase jobs.

This is like doctors ignoring the immune system. Ignoring the effect of this or that policy on innovation is likely to lead to decisions that reduce innovation in favor of something easier to measure or defend, such as productivity or equity. The cumulative effect of ignoring innovation is stagnation and decline, caused by problems that got worse and worse as, due to lack of innovation, they failed to be solved.

Tyler Cowen (The Great Stagnation) and Alex Tabarrok (Launching the Innovation Renaissance) are absolutely right to focus on innovation and the lack of it. The obesity epidemic is 30 years old — a good example of a problem that has gotten worse and worse. Judging by Tara Parker-Pope’s reporting, mainstream weight researchers don’t have a clue — in the form of empirical results — how to solve it. Outside mainstream academia, the dominant weight-loss idea is a low-carb diet. That idea is a hundred years old (Banting). How little innovation there has been. That Parker-Pope failed to criticize researchers for their lack of progress shows how deep the problem is. She appears not to grasp the possibility.

22 Responses to ““We’re Economists. And We Don’t Care About Innovation””

  1. Matt Says:

    Maybe I’m a little slow today (or a little overemployed?), but I’m not bridging a gap here. How would the loss of hundreds of thousands of jobs spur enough innovation to be more in favor of losing those jobs? This sounds like Mitt Romney’s ridiculous thought process that we should drive families into foreclosure sooner, so that the market could reset faster. No regard for the families that get wrecked in the fray.

  2. Nancy Lebovitz Says:

    In Murray Rothbard’s _Man, Economy, and State_, he assumes that businesses always have more ideas than they have resources to take action on, so the only limiting factor is the availability of capital.

    I don’t know what any other economists have to say about innovation.

  3. MikeW Says:

    Maybe economics needs a sub-field, “evolutionary economics”. Analogous to biology vs. evolutionary biology. One group looks at the way things are, the other looks at how things change over time

    From an evolutionary perspective, you could say a healthy economy is a lot like a healthy ecosystem. Species (businesses and individuals) continually adapt to exploit new niches or gain an edge over competitors. Some will thrive, some will go extinct (blacksmiths, elevator operators). And Stephen Jay Gould’s “punctuated equilibrium” is obvious when you look at the
    revolutionary impact of personal computers and the Internet on the overall economy.

    Where government policy fits in, I don’t know. But I think it would be a fun field to study if I were 18 again.

  4. Seth Roberts Says:

    How would the loss of hundreds of thousands of jobs spur enough innovation to be more in favor of losing those jobs?

    If it spurred any innovation, you should be more in favor of losing those jobs. I am not saying consideration of innovation effects would change every decision. Just some of them.

  5. Andy Says:

    It is incorrect to generally conclude that economist don’t care about innovation by citing researchers who aren’t in fields (sports and business cycles) that closely deal with innovation and whose research questions don’t appear to be greatly affected by the mechanisms of innovation one way or another.

    Industrial organizational economists and growth economists spent a great deal of time and effort thinking about innovation and productivity growth both at the individual/firm level and at the macro level.

    The evidence presented here is akin to accusing a cell microbiologist about ignoring macro-ecological considerations in their research and therefore condeming all of biology. While the first claim is likely true by design the conclusion does not really follow.

    I suspect that you would still find IO and growth economists’ attempts at studying innovation limited, but at least consider the attempts of those who are actually working on innovation before condemning all of economics.

  6. Jazi zilber Says:

    The expected value of innovation is hard to quantify. Hence, economistsmay have a hard time to analyze it,

    It is a common habit to ignore things that are not measurable.

    I wrote about it the academic bias

  7. Seth Roberts Says:

    Industrial organizational economists and growth economists spent a great deal of time and effort thinking about innovation and productivity growth both at the individual/firm level and at the macro level.

    Is there a book that describes what they have learned from all this “thinking about innovation”? I haven’t seen it, but you would know better than me. These efforts have not shown up in the introductory economics books I have seen, which devote very few pages to innovation. That makes me think that my overall summary is fair. Also the way some economists define economics (the whole field) as “how to allocate scarce resources”. Nothing about innovation in that definition.

  8. Seth Roberts Says:

    From an evolutionary perspective, you could say a healthy economy is a lot like a healthy ecosystem.

    Yes, in the sense of containing great diversity. Jane Jacobs made this point in her book The Nature of Economies.

  9. TMS71 Says:

    EconTalk with Russ Roberts did an episode on innovation with Alex Taborrok as the guest. You should check it out.

  10. js Says:

    I get the sense you don’t know much academic economics. Think of Paul Romer’s work on the economics of ideas and the huge subfield of endogenous growth theory, or the industrial organization literature on patents, or the economic geography work on agglomeration economies like in Silicon Valley. This is all strictly mainstream stuff, but there is also a rich Austrian tradition on this topic.

    I’m not sure what the quotation from the sports economist serves to illustrate. Your implicit demand seems to be that economists use the word “innovation” in every sentence they utter.

  11. April Harding Says:

    I think you may be misinterpreting the absence of innovation from Matheson’s and Romer’s comments (and implicitly, their conceptual framework for understanding the issues under discussion) as suggesting lack of attention to innovation across the whole field of economics.
    Until the past few years, economists’ training and research did pay too little attention to innovation. Even so, a number of economists have been doing useful research on the issue ever since Joseph Schumpeter’s work in the 1940s. And recently, interest in and research on the topic has increased dramatically. Here is a very brief overview of these developments http://en.wikipedia.org/wiki/Innovation_economics

  12. Seth Roberts Says:

    I get the sense you don’t know much academic economics.

    I’m sure you know more than I do. Could you refer me to an introductory economics text that spends more than a few pages on innovation? Or to a book about all the stuff that been discovered?

  13. js Says:

    You’re right, it doesn’t feature prominently in introductory textbooks. But introductory textbooks aren’t a good indication of what’s happening on the research frontier (and economics is hardly unique in this respect – the same is true of physics, for example). At the risk of sounding somewhat curt, perhaps you should explore the field beyond the introductory textbooks before you dismiss it entirely.

  14. Seth Roberts Says:

    Perhaps you should explore the field beyond the introductory textbooks before you dismiss it entirely.

    I’m not dismissing economics! I’m saying they nearly ignore something really important. I am saying the effects of any policy on innovation should be considered when deciding whether it is a good or bad idea. I almost never see that done. Am I wrong? And is there a book that summarizes all the work economists are supposedly doing on innovation? Or is it not just introductory courses, but also upper-level undergrad courses that mostly ignore innovation?

  15. A straffing critique from Seth Roberts « Economic Sophisms Says:

    [...] “We’re Economists. And We Don’t Care About Innovation” [...]

  16. js Says:

    Here’s some of the academic literature: http://www.nber.org/s/search?restrict_papers=yes&whichsearch=db&q=innovation

  17. Chris Says:

    Economists have been paying more attention to innovation albeit indirectly. There’s a lot more emphasis today on productivity as a key economic indicator than there was a few years ago. And economists can’t seem to answer why productivity increases over the long run, except…technology leading to innovation.

  18. Ragout Says:

    About half of Christina Romer’s article is about innovation. The entire section titled “Market Failures” is about the proper role of government in fostering innovation. Perhaps you feel that her discussion is lacking in some way, but you haven’t explained why. You’ve just ignored it, or perhaps failed to recognize what Romer is talking about.

    For example, the claim that Romer discusses productivity but not innovation is simply nonsensical. Innovation is the main way to increase productivity, so when an economist talks about increasing productivity, they’re talking about innovation.

    Finally, innovation does not “increase jobs.” Innovation can increase or destroy jobs in particular firms or industries, but not in the economy as a whole (excepting perhaps “frictional” and “structural” unemployment). So that’s something about innovation that economists know that you don’t.

  19. Andy Says:

    I don’t know of any good undergrad level text that covers these issues. That is partly my ignorance as I do neither growth nor IO and partly because I believe that the economics of innovation is underdiscussed at the undergraduate level. My recollection is that the basic coverage in undergrad is to tell students who Schumpeter was and briefly discuss the idea behind creative destruction and then discuss a simple stylized model of the reasons firm may invest in R&D and why patents may be socially desirable.

    For a richer coverage at the graduate+ level, Zvi Griliches edited a nice book “R&D, patents, and productivity” in the 1980s. Unfortunately I’m not enough of an expert to suggest any more recent work on the subject.

    Finally, on endogenous growth theory, I recommend ‘Wealth and the Knowledge of Nations’ which gives a good overview about how innovation and growth were understudied and how David Romer got a lot of people to pay attention to it (by providing a parsimonious model). It also gives an interesting viewpoint on the culture of academic economists.

  20. Seth Roberts Says:

    Innovation is the main way to increase productivity, so when an economist talks about increasing productivity, they’re talking about innovation.

    Another way to increase productivity is to spread innovations. For example, there was a time when only a small fraction of workers had knives. Spreading knives made the remaining workers more productive. Same for any tool. A third way to increase productivity is to increase employment. Giving someone a job makes them more productive. So it isn’t clear to me why you think innovation is the main way to increase productivity. Both of these other ways are very common.

  21. Ragout Says:

    Economists have found that innovation is the main way to increase productivity and I assure you that this is what Prof. Romer means when she talks about increasing productivity. Increasing inputs of capital or labor are alternative ways to increase productivity, as you suggest, but they are much less important. The key role of innovation in boosting productivity is mainly an empirical finding, although there are also theoretical reasons to expect this (i.e., diminishing marginal returns to inputs).

    For more, you could read about the Solow Residual, the Solow growth model, and growth accounting. For example, see the chapters on growth theory in an intermediate macro textbook, such as chapters 7 & 8 in Mankiw, “Macroeconomics.”

    http://en.wikipedia.org/wiki/Solow_residual
    bcs.worthpublishers.com/mankiw7/

  22. Seth Roberts Says:

    Thanks for referring me to the Mankiw chapters.