Innovation by Inches and Decades

A handful of interesting points on innovation this morning. First up is a link (via Tyler Cowen) that describes the Depression years of the 1930s as the most innovative in recorded history, a conclusion from Alexander Field's September 2003 paper in the AER:

The hypothesis does not imply that all of the effects of the advances registered in the decade were immediately felt in the productivity data .... Rather, it draws our attention to the probability that progress in invention and innovation in the 1930’s was significant, in ways not well appreciated ....

This is not as surprising as it seems, given that progress is defined as the growth rate of MFP (multi-factor productivity). One should expect that a severe reduction in output would cut the least productive capacity (labor and capital) first. A more severe downturn yields a more severe MFP increase. Likewise, you might think that the most booming of years would reflect low MFP growth. The paper includes data tables on compound MFP growth rates which indeed show this:

The weakness of growth in 1972-79 is well known, and explanations for it range from critical (new regulatory burdens hampered GDP growth) to apologetic (quality improvements in safety and the environment resulting from 1970s regulations are unmeasured output).

Measuring Innovation

A new line of research is exploring if GDP has been correctly including intangible value in a broader sense. Fields comments on this, but the "innovaion metric" movement is bigger still. Ed Prescott, for example, believes the intangible value of things like brands deserve much more attention. A commission created by the Commerce Department and headed by Kauffman's Carl Schramm explored the measurement of innovation with recommendations for improving such, published in this 20-page report in January 2008.

It must be said that the economists and staffers at the Bureau of Economic Analysis are constantly improving the measurement of GDP. Our thanks to them. In fact, I discovered today this study: "Toward Better Measurement of Innovation and Intangibles" of measuring innovation, published in January 2009 by BEA and published on its main page:

Expenditures on software, for example, have been treated as investment in the core accounts since 1999. And in 2006, BEA launched a research and development (R&D) satellite account, to explore investment in R&D and its larger economic effects.

My prediction: the measure of R&D will be extremely helpful, but will also reveal that the bulk of growth is still mysterious. Growth by innovation may itself be intangible and far deeper in human creativity than can be captured by research budgets.

So does all this mean the depression of 2007-2017 will be perversely good for the long-term economy. It would be nice to think so, wouldn't it?

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I've always felt like trying to "measure" innovation with GDP, productivity numbers, etc. is like trying to measure love by the number of marriages and divorces.

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