Innovation does not equal GDP Growth

I’m way behind on this (it came out August 8th), but Joel Mokyr posted an op-ed in the Wall Street Journal about being optimistic regarding growth. I liked this particular passage:

The responsibility of economic historians is to remind the world what things were like before 1800. Growth was imperceptibly slow, and the vast bulk of the population was so poor that a harvest failure would kill millions. Almost half the babies born died before reaching age 5, and those who made it to adulthood were often stunted, ill and illiterate.

I’d like to think that growth economists are also here to spread this message. It’s easy to be pessimistic about the near-term economic future when we are slogging our way slowly out of a terrible recession. But extrapolating from the current situation to say that long run sustained growth is over is taking it too far.

Mokyr (and us mere growth economists) are more optimistic about things. Why? [Because we’re tenured professors who can’t be fired. But that’s only part of it.] Because the ultimate source of economic growth over history has been technological innovation, and there is still an essentially infinite scope for this to continue. Mokyr lays out a long list of innovations that are coming down the pipeline: driverless cars, nanotechnologies, materials science, biofuels, etc. etc. We aren’t running out of ideas, and just because you or I can’t think of what they could possibly invent anymore doesn’t mean that other people aren’t busy inventing things.

But will these new innovations really provide a boost to GDP? Maybe not, but that’s a failure of GDP, not of innovation. Let’s give the mike to Mokyr:

Many new goods and services are expensive to design, but once they work, they can be copied at very low or zero cost. That means they tend to contribute little to measured output even if their impact on consumer welfare is very large. Economic assessment based on aggregates such as gross domestic product will become increasingly misleading, as innovation accelerates. Dealing with altogether new goods and services was not what these numbers were designed for, despite heroic efforts by Bureau of Labor Statistics statisticians.

We measure GDP because we can, and because it gives us a good indication of very short-run variations in economic activity. But it is only a measure of “currently produced goods and services”. That is, GDP measures the new products or services provided in a specific window of time (e.g. the 3rd quarter of 2014, or all of 2013). If all the effort in producing a new product comes in development, but it is then copied for free, this means that there is a one-time contribution to GDP in the year it was developed, and then nothing afterwards.

Things like refrigerators, Diet Coke, and cars contribute to GDP every period because we have to make new versions of them over and over again. But in one sense that is a bug, not a feature. Imagine if, having invented Diet Coke, you could make copies for free. That would lower GDP, as Coca-Cola would drop to essentially zero revenue from here forward. But it’s demonstrably better, right? Free Diet Coke? Where do I put in the IV line?

Diet Coke is a good example here. Let’s say that you could replicate the physical inputs of Diet Coke for free, but that Coca-Cola still owned the recipe, and you had to pay them to use it. This would still lower GDP, as Coca-Cola would no longer be earning anything from the physical production of Diet Coke, only from renting out the recipe each time you wanted a Diet Coke. This is still a win, even though GDP goes down. Lots of current innovations are like making Diet Coke for free, but owning the recipe. They are worthwhile despite the fact that they do not necessarily contribute much to GDP, and might even detract from it.

17 thoughts on “Innovation does not equal GDP Growth

  1. Pingback: Economic Critique of GDP | Planet3.0

  2. EBay is a good example. Or AirBNB, or Lyft. If products are used more intensively, we need less of them. GDP goes down. Utility goes up.

    But if we lack the means to allocate the utility we have “unemployment”. That’s where things go south. I wish you would discuss how we function in an economy where labor is superfluous.

    How do we move to a slack economy?

    • I just came across this quote from Buckminster Fuller:

      “We must do away with the absolutely specious notion that everybody has to earn a living. It is a fact today that one in ten thousand of us can make a technological breakthrough capable of supporting all the rest. … We keep inventing jobs because of this false idea that everybody has to be employed at some kind of drudgery because, according to Malthusian-Darwinian theory, he must justify his right to exist.”

      Well, we enforce it because we have a setup where everybody needs to own a slice of production in order to allocate an adequate share of consumption. But increasingly human labor is superfluous to the production and so the allocation process breaks down. I’d like to see economists think about how to organize a society where most people are not employed. I think that they have to be allocated some capital – a sort of partial socialism. Norbert Wiener talked about this back in the 1950s. Most non-economists understand this point when it’s made, even if they are uncomfortable with it. But economists seem unwilling to engage on it.

      The idea that labor is fundamental is perhaps so burned in that when one asks, as this article leans toward asking and I have tried to make explicit, what happens when labor is essentially valueless, one is met with silence from the people who ought to have been thinking about it for a half century.

      • Michael – it’s a really interesting question. What if labor becomes replaced as a factor of production entirely? And by labor I really mean manual/routine labor. Presumably “labor” in the form of thinking of cool stuff to do with robots would still be used. Regardless, we never worry about this for something like horses, because we don’t measure, model, or argue about the utility of horses or the real horse wage.

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  6. These thoughts are simplistic. Products that you can copy for free is a very narrow category: software and digital media. And while the cost of replication may be essentially free, it is not the goal of their producers to sell them for free. So they do still effect GDP. The fact that they are low cost is a function that they require no human labor inputs. And in the real world, 99% of all cell phone apps add no actual value to an individuals life, which is why 65% of all smart phone owners never download a single app.

    Invention, not innovation, is the key driver of growth. Innovation is a result of invention. It is improvements upon inventions and often combining inventions to create new categories. And essentially all of the innovations listed in the article are simply substitutes for current products that created actual wealth and jobs. They will decrease both. And the loss of jobs and wealth will far more than offset the few lives that are improved by these innovations. Which will be measured in a lower (than otherwise) GDP.

    • Jon – a couple of thoughts in reply:
      1) Invention and innovation are synonyms, and there is no hard line between the two.

      2) The point is that innovations/inventions don’t necessarily lead to higher GDP. That’s it. Some inventions/innovations will lower the required inputs to production, and so GDP might fall but we’d still be better off.

      3) The fact that the marginal utility of a particular innovation/invention is small has no bearing on its effect on GDP. Period. It simply reflects the fact that we already invented all the really good stuff (e.g. toilets and Diet Coke).

  7. Correction: GDP is produced by the Bureau of Economic Analysis in the Commerce Dept., not by the BLS. If economists can’t state even such basic facts accurately, what does it say about the rest of their analysis?

  8. Dietz,
    Interesting – but if innovation frees up resources, what are we doing with the extra resources? To follow Mokyr’s own argument- driverless cars will reduce commuting times. What happens with that freed up time? I am presuming one could argue that it raises welfare by raising leisure time (unless we plan to spend that extra time working in which case it would show up in increased GDP). Furthermore, how would we actually figure out the effectiveness of R&D policy if we cannot come up with a proper measure of welfare (assuming we will no longer trust GDP)?

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