The Wall Street Journal ran a series of articles on Tuesday about the “Innovation Paradox”. The first article was written by Greg Ip, and was titled “The Economy’s Hidden Problem: We’re Out of Big Ideas”.
I could not disagree more. But before I dive in, let me mention what the article is about. Ip shows that a larger fraction of Americans work in science and engineering today than ever before. Research and development spending is booming. Patent counts are climbing. And yet productivity is nearly stagnant.
All of those statements are true, as far as I can tell. Here’s the catch though. When we measure productivity, just as when we measure gross domestic product (GDP), we’re measuring the output of our economy. And economic output might not be what we’re most interested in.
A little background on economic output
Output is simply the dollar value of goods and services. All else being equal, if we buy and sell more stuff, our economic output goes up. Say you’re going to lunch. You’ll generate more output if you buy a soda with your hamburger, rather than taking a free cup of water.
Another way to increase output is to make higher value transactions. Again say you’re going to lunch. You’ll generate more measurable economic output by buying a $5 hamburger than a $1 hot dog.
The important part here is that output is dependent on both the transaction count, and the average transaction value. Those are the two ways innovation can translate to more economic output. Either cause people to execute more transactions. Or cause people to spend more dollars in transactions they already make.
If an innovation doesn’t affect the transaction count, or the transaction value, then that innovation won’t affect output. Further, if an innovation reduces the transaction count, or the transaction value, then that innovation could actually reduce economic output.
Examples of innovations that affect output in different ways
First, let’s take the iPhone. I know. You’re sick and tired of the iPhone as a textbook example of innovation. But we’ll dispose of it quickly.
When it first came out, the iPhone was so much better than other phones that people were willing to spend more money to buy it. Instead of paying $100 for a cell phone, people might pay $200, $300, or more. It gets a little messy when you account for the subsidies offered by carriers. But the point is that the average phone transaction involved the exchange of more dollars.
In this sense, the iPhone lead to increased economic output. The U.S. GDP increased, because more people were buying phones, and these people were also spending more money on the phones they bought. It was a doubly whammy, in the helpful sense.
Second, let’s take Facebook. I’ll argue that Facebook’s various innovations have actually led to a reduction in economic output.
Think about how Facebook affects its users. Rather than paying for entertainment, users can entertain themselves endlessly on Facebook, largely for free. Free games. Free articles. Free interactions with friends and family. These people are forgoing transactions they might otherwise make, reducing economic output in the process.
Think about how Facebook affects its advertisers. Part of the reason Facebook is so valuable is that it works so well for advertisers. Advertisers can spend much less money than they’re spending today, and get the same results. That’s because Facebook allows them to target consumers so effectively. This comes from Facebook’s relentless innovation around capturing and monetizing the identity of its users.
So on both sides of the equation, users and advertisers, Facebook has likely contributed to reduced economic output. Are we worse off? Does Facebook’s innovation not count? That’s what happens when you try to measure the effectiveness of innovation using economic output. You don’t always learn what you think you’re learning.
I’m really turned off by the “we’re out of big ideas” mindset
Pardon me while I go on a brief personal rant. People fall into two camps. Some people are slaves to the status quo. And other people keep a contrarian streak alive, looking to zig when everyone else is zagging.
This “we’re out of big ideas” nonsense is a perfect example of the trap of conventional wisdom. Coming out of the global financial crisis, we’ve been in an extended period of less than stellar growth. And as a result, the conventional wisdom is that we’ll be stuck in this new reality forever.
The argument takes different forms. The WSJ articles argue that society is too risk averse. We’re too quick to seek protection from regulation. We’ve solved all the easy problems. We’ll be lucky to make much progress from here.
Again, that’s nonsense. It’s ridiculous. People in every era thought they had reached the end of progress. Remember the story of early 1900s physicists? They thought they had already solved all the interesting problems:
So profound were these and other developments that it was generally accepted that all the important laws of physics had been discovered and that, henceforth, research would be concerned with clearing up minor problems and particularly with improvements of method and measurement.
And that was also nonsense. They weren’t out of big ideas. The progress they were going to make in the future would look different than the progress they made in the past.
As long as we do the work, we’ll be fine
That’s the thing about human beings. We’re so inept at imagining futures that look different than the status quo. That’s one of the reasons that we should stay out of the prediction game, as much as possible.
Rather than wasting energy predicting, or worrying, we should spend our time doing. That’s how we’ll make progress. That’s how we’ll innovate.
Malcolm Gladwell made this point in a New Yorker article back in 2011. He wrote
They believe that Britain dominated the industrial revolution because it had a far larger population of skilled engineers and artisans than its competitors: resourceful and creative men who took the signature inventions of the industrial age and tweaked them—refined and perfected them, and made them work.
Sometimes we’re too worried about the “big ideas”. Make the ideas we already have work better. Tweak them. Tinker. As scientists and engineers, that’s mostly what we do. It’s when we overreach for the glory of the visionaries that we let ourselves, and everyone else, down.
The Wall Street Journal article I linked to at the beginning of this post really frustrated me. It’s just a harmful way to think about the world, about the possibility, and how we can make a difference.
Avoid people who think like that. I don’t care if they’re junior analysts or senior executives. You don’t have to be a pie in the sky nut case. But don’t get so bogged down in the constraints of the status quo.
Too many people feel like reality has changed. Things that used to be possible no longer are. And that’s garbage. It’s a ridiculous way to think. It’s the sign of a limited mind. And if you have any interest in building the career of your dreams, limited minds are the last things you want in your company.