Hayek, Keynes, Milton Friedman and Paul Samuelson disagreed about many things but shared one important belief: Their ignorance about innovation didn’t matter. Countless economics textbooks, which say nothing of interest about innovation, agree with them: ignorance about innovation doesn’t matter. This belief freed Hayek et al. and textbook writers to make sweeping policy statements. Had they realized that innovation matters, not just productivity — and, especially, that innovation and productivity are sometimes at odds — it would have been far less clear what policies are best.
If you ask how will this affect innovation? about any economic proposal everything changes, especially your certainty that it is right or wrong. I will give just one example. Libertarians — I hope I am describing Tyler Cowen’s “smart” libertarians — believe that government interference by and large makes things worse. People function best when given freedom, and so on. A smart libertarian recognizes the value of speed limits, and so on. An example of smart libertarianism, I assume, is Tyler’s recent view that a local increase of the minimum wage is “expressive voting at the expense of good economic policy.”
Libertarians and other economists neglect the possibility that government serves as a useful irritant. Government regulations are truly an impediment. No doubt about it. No doubt they make life harder for people with some power. The usual argument is they protect the weak from the powerful. Without them, the powerful would exploit the weak. Sure. They would. But that’s not all. What goes unsaid and apparently unnoticed is irritating the powerful makes them think. Pain produces thought — about how to avoid the pain. And thought increases innovation.
As a professor at Berkeley, I hated the government-mandated institutional review boards — the human subjects approval committee and the animal research approval committee. They didn’t just make research far more difficult due to paperwork requirements, they did horrible things to people based on misunderstandings and mistakes. And there was no appeal. How awful, right? Well, it was certainly painful. That pain is one thing that pushed me toward personal science, where I could be free of them. Pain pushed me to try new things — such as long-term non-trivial self-experimentation. The less I could do professional research (my Ph.D. is in animal learning), the more time I had for personal science. And I brought to my personal science the skill set of a professional scientist (an understanding of experimental design and data analysis, subject-matter knowledge, and so on). Innovation always comes from exploration. The more exploration, the more innovation. Pushing powerful people (such as a Berkeley professor) to explore is a seriously good thing.
Planet Money recently did a series on T-shirts. Planet Money reporters travelled the world — the Planet Money men’s T-shirt is made in Bangladesh — and encountered several things not in economics textbooks. One was the story of how clothing factories came to Bangladesh. That you could put a clothing factory in such places and make a profit was a discovery with great consequences, especially for Bangladesh. In the 1970s, American clothing companies felt endangered by imported clothes — from South Korea, for example. They pressed government for trade protection. This led to the passage of the Multi Fibre Arrangement (MFA) which regulated clothing imports. The agreement, however, said nothing about Bangladesh, which at the time did not make clothes. When South Korea reached its limit under the MFA, a Bangladeshi businessman approached Daewoo, a giant South Korean clothing maker, suggesting that they duplicate their factory in Bangladesh. The head of Daewoo — a powerful man pained by government regulations — was open to their suggestion. Daewoo helped open the first clothing factory in Bangladesh. There are now more than 4000.
When it comes to productivity, there is one set of rules, which economists have worked on since Adam Smith. Innovation has a different set of rules. Most economists seem barely aware that the two sets of rules often clash — what is good for productivity is bad for innovation. Let me sketch a few of the innovation rules. Innovation needs freedom, of course, and the ability to profit from your invention, which I’ll call benefit. It is also called self-interest. The importance of benefit/self-interest for innovation is the main point of Why Nations Fail by Acemoglu and Robinson. Innovation is also increased by resources, such as skills, knowledge, space, and equipment. After discussing this with Bryan Caplan, I believe many economists are well aware these three factors (freedom, benefit, resources) affect innovation. All three also increase productivity — for example, more resources, more productivity. Far fewer economists realize that two other things, which act against productivity, are also very helpful for innovation:
1. Pain. Not a lot — not debilitating or all-consuming pain — but enough to make you think hard. Necessity is the mother of invention is the aphorism, which isn’t quite right. Pain, not necessity. Government is useful here, as I said. So is war. Many innovations came from wars. A famous example is the greenback, which came from the Civil War.
2. Stability. To innovate, you need free time, which is different from freedom (ask any prisoner). Free time allows painless failure, very helpful for innovation. To have free time, you need a secure job. Government is useful here, too. So is tenure. Pain plus stability = peacetime military spending. The internet came from peacetime military spending. Professors were the first users. Stability also promotes innovation because it makes it easier to detect small improvements. The quieter it is, the better you can detect soft sounds.
My personal science had a good amount of all five factors. 1. Freedom. Studying myself, I could do whatever I wanted. 2. Benefit. At first, I benefited because my discoveries were very practical. If I discovered how to sleep better, I would sleep better. If I discovered how to lose weight, I would lose weight. Later I also benefited because others were interested (I like attention) and my discoveries helped others. 3. Resources. I knew a great deal about the relevant subjects (e.g., circadian rhythms, weight regulation) and how to do research. I could get whatever articles I wanted from the UC Berkeley libraries. And so on. 4. Pain. In addition to the pain caused by Berkeley IRBs, I wanted to sleep better and lose weight. My sleep was not awful nor was I especially fat — it was not intense pain. But it pushed me. I tried to improve my sleep for ten years before I started making progress. 5. Stability. My life was very stable. I rarely took long trips, for example. Failure in my personal science — a treatment that I hoped would improve my sleep didn’t work, for example — cost very little. Failure to publish cost nothing.
In contrast, professional scientists, who have plenty of resources, are generally low or at least lower on the other four factors (freedom, benefit, pain, stability). They lack freedom. They are constrained in many ways, which they don’t like to talk about. They lack benefit. A few papers that hardly anyone reads — the result of most research — provides little benefit. Almost all research has no practical use. Few scientists study problems that they themselves suffer from. A cancer researcher does not himself have cancer, for example. They lack pain. I cannot think of a single instance where professional research was motivated by the researcher’s pain or discomfort. If they don’t need a grant for their research and have tenure, they have stability; but if they do need a grant or don’t have tenure, they have less stability than I did. Most research grants are only three years long and renewal is rarely easy or assured.
I wrote about the same question — why was my personal science “unreasonably effective”? — here.
What does this say about economics and how to increase innovation? The importance of benefit and resources is already clear. But the remaining three factors — freedom, pain, and stability — are complicated. By and large they are corners of a triangle. The more freedom, the less pain and stability. The more pain, the less freedom and stability. The more stability, the less pain and freedom. You need all three — a point in the middle of the triangle — and where that point should be and how to put it there are exceedingly non-obvious. Once you realize this, your certainty about how to organize society, how run a government, and the best size of government should decrease. A problem with increasing inequality, which I have never seen pointed out (e.g., in a speech about why inequality is bad, Obama didn’t mention it), is that it makes the powerful (those at the top) more comfortable. When you make the powerful more comfortable, you reduce innovation.