Martin Fransman1 is Professor Emeritus of Economics at the University of Edinburgh. He is the author of Innovation Ecosystems: Increasing Competitiveness.
At a general level, innovation is about doing new things. But that is very general. For a working definition, the best is the one given by Joseph Schumpeter, and followed by organisations such as the OECD. Essentially, Schumpeter said that innovation is about four things. The first is that innovation is about new products and services. The second is that innovation is about new processes and technologies. The third is that innovation is about new ways of organising people and things. And finally, innovation is about new markets, new forms of marketing and new business models. That is a very close working definition. And anything that falls into one or more of these categories is innovation. Now, why is it important? The answer is simply that innovation is the main driver of change, not only economic, but also social and political. We know that societies and economies are not static, they are always changing. And the main driver of change is innovation. So it is absolutely crucial and central. Of course, it doesn’t play the same role in non-capitalist societies because the determinants of who does what and how they do it are different in those societies. Capitalist societies function differently from non-capitalist societies. Generally speaking, the way a society is structured and who has power in that society will obviously influence the way in which innovation takes place and the kind of innovation that occurs. In capitalist societies, those who own and control the means of production have a determining role in the type of innovation that hapens. If we think of hunter-gatherer societies in the Amazon jungle or in parts of Africa, again a very different social structure exists and therefore innovation takes a different form in each of those societies.
At present there is a mantra —a rule of thumb, a way of thinking about things— about innovation and economic growth that is the dominant ideology, if you like, globally at the moment regarding this question. It informs policy making all over the world. The argument goes like this. First of all, we need to create innovation, we need to make innovation happen. This is step one. Step two, at the aggregate level, as innovation occurs so it increases productivity. Productivity is simply output per unit of combined input. So we take the total output and we divide it by all the inputs, and if productivity goes up, that means we get more output from the same inputs. And step three, if we get more output from the same workers and machinery and so on, that means that GDP (Gross Domestic Product) increases. And that is growth: output grows, the economy grows. So everyone is saying that the key thing is to increase GDP. If you go to the International Monetary Fund, if you go to the World Bank, if you go to the Treasury in the U.S., the GDP is the key measure to how an economy is performing. This is the conventional ideology, and clearly innovation plays a key role over time in driving growth. Now, the point I want to make is that this mantra has been rendered obsolete by the climate crisis. The climate crisis must make us very critical of this way of viewing the world. The reason is very simply that GDP is just growth in total output, i.e. it doesn’t distinguish between different kinds of output. The climate crisis tells us that the type of output is very important. In particular, there is a big difference between fossil fuel and non-fossil fuel based production. We know that fossil fuel based output contributes significantly to global warming, and that it is going to end all the life on this planet. So we have to distinguish between different kinds of output. We’ve got to look very critically at the kind of things we produce and their impact. My favourite example is superyachts. All the millionaires have superyachts that cost, I don’t know, a million or two million dollars. What’s the point of that? How does that contribute to anything? And the only reason we have superyachts is because we have a very unequal distribution of wealth and income. Maybe a growing GDP is not good for us. We can’t magically assume that more GDP is better than less GDP. It depends on what we produce. So maybe no growth is better, or even falling growth is better. So there are many other things that we have to look at that this mantra is not taking into account. We have to decide what the objective is, what we want to achieve. And one of the things we must try to achieve is to reduce global warming. And that means reducing greenhouse gases and everything that contributes to greenhouse gases. That is one key thing. And then come other objectives. In my view, a key objective that we must also have is to redistribute income and wealth more equally. The uneven distribution of income we have in countries and between countries is hugely problematical, and in my view leads to problematical politics. Now, people like Bolsonaro, in Brazil, would disagree with that, and so that becomes complicated. Among other objectives, there are other people who are talking about happiness. Happiness must be an objective. Human happiness and GDP are not well correlated —GDP per capita goes up but happiness doesn’t. So, the point is that we have to think far more specifically when it comes to assessing the value of outputs. We should still continue to measure GDP, I’m not saying we shouldn’t, but much more is needed than just GDP. To rely only on GDP as we have been doing is dangerous. Of course, policy making becomes much more difficult, but we have no option. If we carry on the way we are now, human kind will be extinguished.
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