Thursday, June 9, 2016

Why is Innovation "Not Enough"?

Dani Rodrik has a Project Syndicate post, "Innovation is Not Enough", which in some respects is spot on:
...who can seriously doubt that innovation is progressing rapidly? The debate is whether these innovations will remain bottled up in a few tech-intensive sectors that employ the highest-skilled professionals and account for a relatively small share of GDP, or spread to the bulk of the economy. The consequences of any innovation for productivity, employment and equity ultimately depend on how quickly it diffuses through labor and product markets. 
Technological diffusion can be constrained on both the demand and supply sides of the economy. Take the demand side. In rich economies, consumers spend the bulk of their income on services such as health, education, transportation, housing and retail goods. Technological innovation has had comparatively little impact in many of these sectors.  
...The two sectors in the United States that have experienced the most rapid productivity growth since 2005 are the ICT (information and communications technology) and media industries, with a combined GDP share of less than 10%. By contrast, government services and health care, which together produce more than a quarter of GDP, have had virtually no productivity growth.
...On the supply side, the key question is whether the innovating sector has access to the capital and skills it needs to expand rapidly and continuously. 
Consider also, how the primary investment of recent decades has occurred. Where once the most important forms of saving were designated for capital other than time value, knowledge use - especially the value of which accrues to non tradable sectors - has gradually become the more dominant form of wealth. Where land value was once closely aligned with the value of basic food commodities, real estate now more closely responds to the nominal income representative of time value, and the spontaneous coordination of prosperous regions.

Human capital representation on economic terms is only partial, despite the fact investment priorities for time value begin early in life. Even public education attempts to determine what might augment human capital investment, before other forms of capital savings come into play. Thus far, however, only a fraction of time investment expenditure shows up as wealth gains - given today's partial representation of time value at an economic level. Consequently, additional savings for capital contribution (in the classic sense), are mostly limited to those who benefited from initial time value investment, as represented in general equilibrium.

Even though human capital is key to potential productivity, there's good reason why (what appears as) non productive sectors have yet to experience the broader gains of innovation. One reason these sectors seem non productive, is that technological gains have mostly generated wealth capture for greater administrative capacity.

Worse, the value of human capital (in aggregate) as a economic component, is at odds with a natural inclination for societal exclusion, which governments and private interests alike are able to tap for wealth capture. It is the struggle for economic access, and the many forms of signalling required to gain access, which pushes up the price of markets in ways that make costs of living higher for everyone. The time and knowledge based services of healthcare and education, are especially prone to these forces. Indeed, the natural tendency to judge can prevent the organizational capacity, which would otherwise result in product that generates good deflation and a freer, more open marketplace.

Oddly enough, perhaps the innovation most needed, is for the human mind to be willing to tap the potential of human capital - much as other resources have also been utilized in their turn. Granted, this is not something that either can or should be expected of every environment, given what have become vast differences in human capacity and lifestyle choice. Rather, human capital potential could be tapped in settings which acknowledge the importance of developing useful marketplace patterns along a continuum of income potential. This, as a viable alternative to today's default settings of relative rich or poor as the sole options.

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