One of the most significant forces behind economic growth is that of innovation. The consistent creation of new ideas and the perpetual improvement of existing products has led to unprecedented societal enhancements over the past 200 years. Since the industrial revolution happened in the 18th century, civilization has been introduced to numerous inventions that have pushed the boundaries of scientific knowledge and made our lives easier. The steam engine, the car, the telephone, and many others are examples of the groundbreaking changes that this innovative force has given us. It has inspired both people and societies to push the boundaries of what is possible. At the beginning of the 20th century, the brothers Orville and Wilbur Wright proved with their invention of the airplane that the human dream of flight was indeed possible. Years later, through President John F. Kennedy’s Apollo Program, humanity discovered that even the unexplored frontier of space was not out of reach. With the discovery of modern medicine, scientists made rapid progress in identifying and preventing illnesses, extending human life further than people would have thought possible. Clearly, this creative-destructive force of innovation is one of the most essential concepts in human history. However, the question of how much technological progress is currently happening has arisen. Has innovation gotten faster and faster, or has it actually decelerated?
Innovation has disappeared, and we are all going to feel its loss
According to Peter Thiel – co-founder of PayPal, Palantir Technologies, and Founders Fund – there has been very little innovation over the last 40 years outside of a few key areas. He gives the energy sector as an example: oil prices and energy costs, after accounting for inflation, have still not recovered from the 1970’s oil shocks. This is despite new technologies such as fracking. The biotechnology sector is not much different. Nowadays, about a third as many drugs get approved by The U.S. Food and Drug Administration (FDA) per year compared to 20 years ago. The excuse we hear when pointing this out is that humanity is on the cusp of a new golden age due to the few technology sectors that still have the innovative force in them. While it is true that industries such as robotics and computing have seen significant advances, these advances have still not led to the promised unprecedented innovation in other sectors. And even if these changes do happen, there is no good prediction as to how many jobs this will create or how much it would add to the GDP. Moore’s Law – the perception that the number of transistors on a microchip doubles every two years, although the cost of computers gets halved – has been a formidable driver of the computer revolution. However, it has barely been able to affect median income.
This general view of stifling growth is reiterated by, for example, the U.S. economy. From 1950 to 2000, their economy grew at an average annual rate of 3.5 percent. However, since the year 2000, it has grown at about half that number. The inability to innovate leads to the problem of sclerotic growth. With a 3.5 percent growth rate, the standard of living roughly doubles in a generation. This increase in economic wellbeing would be slowed down massively through the deceleration of technological advancement and compounds other societal problems such as the national debt. If the economy would grow rapidly and double in size over a 20-year period, repaying this debt would be no problem. If this does not happen, then repayment might become an issue.
Imagine that each industry is a circle, then what we see is that, outside of a few High-Tech sectors, these circles are not expanding. These parts of the economy are not innovating and thus not growing. Rather they are trimming around the edges and hoping people will not notice how similar these industries look compared to 20 years ago. One of the problems this lack of new and creative progress brings with it is that there is almost nobody left willing to invest in these firms, which leads to even less innovation. So, what is the problem that these industries face; have they run out of new ideas? Is there not enough demand for their product to push the innovation forward? Or have regulatory institutions made it too hard for them to get anything done?
The hopefully bright future of innovation
Has the well of new ideas dried up? The big growth innovations – the ability to harness oil, the washing machine, the assembly line – were all one-time events. Currently, the progress that is being made in the computer industry will cause—or rather can cause, if they are allowed to—significant disruptive changes in everyone’s lives. The driverless truck would constitute a massive transformation in the transportation business. If the promises that have come out of the High-Tech sectors do come true, this will lead to one of the fastest all-around innovations for all sectors. The world before and after this technological shift would be almost incomparable. Take, for example, gene therapy. The drugs that are being developed in the current world of medicine are one size fits all. The dosage prescribed might differ from person to person, but they’re the same solution for a particular disease. By using gene therapy – a process in which you “hack” a gene and put in a virus that is injected with the correct DNA, after which that DNA will fight off the disease – would change the pharmaceutical industry from mass production to mass customization. The cure would be individualized to the person, making it more effective than anything we currently have.
Historical evidence suggests that the highest level of innovation takes place in those sectors that are the least bound by regulations. Industries such as finance or computing had very little regulation until recently. This has led, in the case of finance, to the creation of securitizations, the development of venture capitalists/private equity firms, and new financial instruments. At the beginning of the computer revolution, the entire industry had minimal regulatory boundaries. It is hard to imagine Bill Gates being able to create Microsoft if he had to deal with massive amounts of red tape. This government legislation is the reason why computer engineering is a booming industry, but nuclear engineering is not. People say they want more science, but in practice, the idea of having private companies test new ways to use nuclear energy still makes them uncomfortable.
There is a cost to the safety and security politicians want to legislate into industries. In the 1970s, the average cost of developing a new drug and getting it approved by the FDA was $179 million. This cost has grown to approximately $2.6 billion in the early 2010s. Not only has this increased price tag meant that fewer drugs get approved, and that drug prices have shot up, but it has also made the entire biotechnology sector unprofitable for outside investors. Without external funds, it becomes very hard for an industry to try to innovate itself. There is even a question of whether the government will allow the robotics and A.I. industries to transform the global landscape in any profound way. The positive side of this situation is that if the government is willing to loosen its regulatory grip on the industry, it might quickly lead to massive innovation throughout the entire economy.
If we believe the optimists who say humanity is close to reaching its next golden age, it is almost impossible to capture in our imagination how different the world will soon look. Our modern-day gadgets have been highly effective at distracting us from noticing how similar the world around us has stayed. We’re amazed by inventions such as online streaming that we’re too busy to acknowledge that the public transport system we use is the same outdated transport system we used a decade ago. Perhaps if people were to look up from their phones and see the world around them, this demand for innovation could finally get the push it deserves.