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2016-12-01

Accounting for the value of innovation


Readers of my blog[1] and other writings[2] have reliably identified the shortfalls of accounting methods as one of my passions-in-interest. And, sure enough, I am ready to take a stab at it again.

Innovation is arguably one of the few nearly unlimited renewable resources. The human collective has proved capable of accumulating an incredible quantity of knowledge over the past 300 years, setting out to transcend new horizons like a mountaineer that reaches summits only to discover ever taller peaks. Humans as a species continue to increase their dominance, but in an elliptic fashion reminiscent of ‘three steps ahead, two steps back’ – a perpetual pendulum swing between solutions and their unintended or, most often, unforeseen consequences. We burnt a lot of coal and later hydrocarbons to fuel the industrial revolution, only to discover that CO2 is now accumulating in the atmosphere and not going away that soon. Europeans discovered in the 19th century that they did not have to import sugar from the Caribbean but can grow sugar beets domestically. Prices plunged as everyone could suddenly afford it. Then came a surprise: sugar ruined people’s teeth. They discovered how to protect and harden teeth with fluoride rather than cut back on sweets. Tap water and certain foods in many countries are now spiked with fluorides. Next, it turned out that sugar promotes obesity and diabetes. Nature hits back at every progress, forcing continuous innovation so as not to fall behind in the innovation game where no solution is ever final.

For example, innovation in terms of robotics is now at a similar stage as computers were in the 1960s: at that time, it had become clear that there would be computers, but not quite obvious what would be done with them. Similarly, we are just beginning to discover the potential of robotics without having a tangible sense of the journey’s destination. Robots will take all kinds of shapes and sizes and take on helpful tasks not conceivable to date. There is research on nano-sized injectable robots programmed to attack cancer cells, but it has barely scraped the surface yet.

Another area is genetic engineering. It has been around since the dawn of humanity. Think of horses – the breeds we have are not “natural,” they were bred by protracted human interference and selection. God did not create poodles – people did. But breeding is a slow and crude tool for genetic engineering. Genetic modification can achieve results a lot more expeditiously and with greater precision. It will be essential because climate is changing faster than “natural” breeding will, and since it does not appear to be possible to reverse climate change, it is living species that will need to be re-engineered to adapt to a changed environment. It is less likely that humans will be modified anytime soon, but plants, animals, grain, fish, mammals, penguins will be. European resistance notwithstanding, genetic engineering will be done, in the U.S., in Asia or wherever. Somebody will do it because there is a benefit to innovation.

More recently, innovation primarily creates “growth” by creating “progress” – allowing the same output to be produced with less input (of time, knowledge, skill, or other factors). It adds new products that had not previously existed: ten years ago, smart phones did not exist. While all this is “growth,” conventional metrics fail it. Products improve continually – vehicle safety in automobiles improved dramatically compared to some decades ago, although the task, speed limit, and traffic rules remained essentially unchanged. All these evolutionary changes form part of “growth,” but metrics for accounting purposes ignore qualitative aspects. Take anesthesia – a vast improvement of the quality of patient experience that became common since the 1860s. Yet, the change it brought is not reflected anywhere in GDP statistics. The same is true of antibiotics and many other innovations: as their price comes down, and it typically does rather quickly, it ceases to appear as a blip on GDP metrics entirely – although there have been studies putting the price tag for resistance to antibiotics by 2050 at “$100 trillion.” Our post-millennial observation of “shrinking growth” almost certainly reflects profound flaws in methodology of measurement and valuation.

Another, probably even crasser failure of valuation and accounting metrics is its treatment of time. A great measure of innovation and progress creates efficiencies of time, freeing up considerable human resources in the process. Leisure time is valuable, but not to GDP accounting, and therefore not to “growth.” An economy can “grow” without producing more goods, by creating the same output with considerably lesser input. In the future, many people will work considerably less than they do today – a process that has started already. While it continues to be ignored by regulators and managers, there is no question that it will profoundly change the work place. And it is happening already as we speak: at the beginning of the twentieth century, the average worker spent 3200 working hours a year. Today, the average is half that number. This is a form of growth. Once robots will produce our food and garments, we will work even less, trending toward a world where work is optional and almost exclusively creative, thoughtful and intellectual. “Growth” in terms of “progress” may mean that we produce more steel or pump more oil, but it may also mean that we have more time to enjoy and reflect on our existence.

Technological innovation took off in Europe at the dawn of the modern age when people became less respectful of tradition and the knowledge handed down by previous generations. A certain respect for the wisdom of ancestors is natural and necessary. In ancient China, it was believed that truth had been revealed by mystical means to people who had lived in the distant past. Similar traditions existed in Judaism, in Islam and in medieval Christianity. Aristotle and the classical canon had answers for everything. But their answers did not hold up to verification. The enlightenment led people to think for themselves and seek evidence for the teachings in ancient scriptures. Galileo, Torricelli, Tycho Brahe all discovered things wholly inconsistent with the ancient canon. Concluding that nothing should be believed that had not been tested and verified, innovation started with the realization that one’s ancestors had been wrong on many issues. Only this realization unlocked the prison of respect for established tradition and knowledge and liberated the human mind – but nothing to date has liberated it from the constraints of valuation methods that insist on ignoring supremely qualitative aspects.

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