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2016-09-01

Limitations of accounting and a requiem for productivity? The high cost of failing to innovate


Robert J. Gordon is a most interesting thinker in contemporary economics. In The Rise and Fall of American Growth: The U.S. Standard of Living Since the Civil War (2016), but already in his 2013 TED Talk, The Death of Innovation, the End of Growth, the globally renowned macroeconomist argues that, despite all the chatter about “disruptive” innovation, new ideas with powerful effect on productivity are just not forthcoming – not since considerable time. Gordon sees innovation limited by four principal factors: demographics, education, debt, and inequality.

A major poll conducted by Inc. Magazine among VCs in late 2015 asked what startups are most likely to take off in 2016. Given that Silicon Valley is likely the most innovative spot on this planet, the results are shockingly disappointing: the presumptive champion most likely to succeed through innovation turned out to be Vulcun, an online betting platform allowing users to gamble real or fictitious money on the outcome of online video games. Another top-ten contestant was Juicero – it sells an internet-based juicer capable of delivering “disruptively fresh juice.”

If one considers the great discoveries of the industrial revolution, say, the steam engine, the combustion engine, electricity, or assembly line production, it is fairly clear how and why they affected productivity. Alas, while the digital age has changed our daily lives, it is less clear if – and how – it has affected productivity and created greater prosperity. Following the 2008 financial crisis, stagnation has set in globally and has endured to date: the Euro zone and Japan grow at a rate barely reaching, much less exceeding one percent of GDP; even the U.S. situation appears dire if one discounts the effect of cheap oil and low costs of capital. But already before the Great Recession, increase of productivity barely hovered above zero.

There are many suspect causes: taxation, bureaucracy, public debt, public austerity, cost of regulation; the list goes on. But regardless of these factors, all industrialized countries find themselves pretty much in the same situation. They face a lack of innovation that results in growth: IT companies barely create any jobs. The world’s three most highly valued corporations (Google, Apple, Microsoft) collectively employ 250,000 around the world, while an industrial engineering conglomerate such as Siemens employs 350,000 while Walmart is home to 2,100,000 jobs. Nothing indicates that 3D printing, drones, robotics or self-driving cars will create growth similar to the automobile, electricity, or aviation.

Arguably, GDP is a deficient measurement for innovation benefits. IT changes lives and processes qualitatively but it does not measurably contribute to productivity. I have written before and elsewhere about the inadequacies of contemporary accounting standards, but this phenomenon fits straight into those arguments. Since redistribution of prosperity by growth seems to have reached its limits at least in the OECD, European socialists argue that personal time should be the new resource to be redistributed: if people are not afforded wage increases, they could be rewarded by having to work fewer hours. But it may take a generation or more to change work ethic and mentality currently fixated on measuring performance by one’s ability to put in long and hard hours. It is a safe assumption that the pursuit of material wealth has released an immense quantity of human energy. It will not be possible to abandon this priority without offering compelling replacements. It is not clear whether the most appropriate substitute may be reduction of global poverty, strengthening of social coherence or ending global threats to the environment, and society will need extended discourse to redefine itself and the individual’s place in it. While this vision will not materialize without lots of innovation, the character of it will likely pivot away from offering top rankings to betting platforms and online juicers.

Personally, I will sharply dispute the assumption that productivity is flat-lining or on the decline. Innovation as we have known it in recent decades has fundamentally changed almost all processes. A networked, Big Data - based society may very well require a fundamental overhaul of its valuation and accounting standards, but there is no denying that productivity, in the sense of greater efficiency as measured by cost, time, and quality is on the rise. It is difficult to measure the creation of intellectual property through R&D but it has never been at a higher level than today. Another undeniable fact is population growth despite statistically increasing averages of living standards. While it is true that R&D expenditures are rising, their product in terms of GDP does not. But this may well require qualitatively different valuation of innovative products and their utility for every task encountered in life. Productivity-based increases of prosperity in the last centuries largely fell into the comparably brief period from 1870-1940, the time of great inventions. But if a 19th century woman spent two days of her week doing laundry, the invention of washer and dryer and electric iron changed GDP-measured productivity not because of the quality or significance of those innovations but because women entered the workforce in large numbers, suddenly placing a monetary value on their time. Much the same was true of improved hygiene, with no directly attributable contribution to GDP. Gordon is likely right that productivity increases between 1920 and 1970 raised prosperity more than in 1,000 years prior. However, and to a not insignificant degree, this also had a lot to do with recognizing, valuing and compensating services that previous generations took for granted or considered a mere add-on. While entertainment and communication have limited influence on industrial production processes, and while it is true that digital devices amount only to a limited percentage of household spending, the picture is a lot more differentiated than that: practicability of many tasks that play a significant role in directly GDP-relevant production is inconceivable without digital technology – from recycling to fintech, from robotics to mass transportation and logistics. Concededly, some innovation may not be much of a job creator, or even indeed the opposite, a low-end job killer. But value creation is an altogether different matter more closely related to valuation and accounting standards than the references we inherited from the industrial age.

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