Broken narratives of innovation

A post or two ago I briefly grumped that innovation was everything and everywhere. What that post may have been clumsily trying to get at was that the narrative of innovation is broken, that is the stories or interpretative structures that we use to describe what we think innovation might be and what its impacts are do not work any more.

This is a problem for academics, policy makers and anyone trying to apply innovation to their company. It probably isn't a problem for the industry of business books about innovation, as the confusion and overreaching probably serves that particular group well. But if you're actually trying to improve the performance and outcomes of companies and countries this is a real issue.

The dominant narrative for innovation is that it is uniformly good. Innovation, simplified as the introduction of new products or services, is a move forward, the arrow of progress taking us forward. Now here is where the first wrinkle comes in - some 'definitions' of innovation wedge in the word 'successful' (for example the 2008 UK government Innovation Nation paper). So something isn't an innovation unless it is successful, and the definition of successful is left as an exercise for the reader.

Macro policy talks of policy in these terms of successful introduction but the measurement of innovation takes a completely different position. The questionnaire for the 6th Community Innovation Survey carried out in 2009 uses this definition of innovation -

Innovation, for the purpose of this survey, is defined as new or significantly improved goods or services and/or the processes used to produce or supply all goods or services, that the business has introduced, regardless of their origin. These may be new to the business or new to the market.

So from the policy analyst or academic perspective (the results of the survey are used by academics to write many papers) innovation becomes something simpler or softer, as the criterion is new to either the business or the market. The approach here says nothing about whether the new product or service is successful, it just asks whether it is new. The questionnaire does go on to ask how the revenue of the company depends on new products, but this is not the same as the macro 'successful'.

Now don't get me wrong I'm as up for positive change, for improvements in technology and institutions, as the next policy wonk. I don't want to rip out the computers and to head back to the land without access to indoor plumbing or my treasured mobile phone.

I'm really concerned though that in painting innovation, in its broadest sense, as all change, always positive, that we're clouding the issues we really need to face. Specifically, how do we achieve growth that is sustainable and equitable? Because that slippery little 'successful' doesn't clarify who is benefiting. Is it just the company and its increased market share, or is it consumers getting a truly better product, or the national economy having increased GDP?

And here's the reason that this probably becomes too complex. When we talk about innovation it will have different meanings, processes and impacts depending on what country you're in, whether you're talking about technology companies or publicly provided healthcare. There cannot be one conversation or one narrative that encompasses productive changes in all of these contexts.

If you were very cynical you could say that the macro definition of innovation, the one that includes the successful rider, is self proving - by enforcing the criterion of successful you are by definition focusing on something that is positive.

So what may be a small step towards making innovation as a term have more bite again is to admit that some changes, some new products and services are negative for some stakeholders. I'm not asking for a measurement of that positive/negative balance, but at least to recognise that some of what we currently talk of as being innovation is marketing fluff at least or sometimes damaging would be an interesting change.

I'm sure some of you would agree that we could have done with a lot less financial innovation over the past decades.

Best

Finbarr

The (f)laws of economics

There was a period just after the credit crisis and recession in 2008 when it looked like we were going to look at the roots of our thinking on economics and especially economic policy anew. Having seen the abject failure of macroeconomics to predict the crisis, many thought that it would be a new dawn. Would that it were so.

Over the past year it feels as if we're back in the pre-crisis era, where the markets get to tell the government what to do and many sage heads with impressive titles like Chief Economist to the Uber Bank appear on news programmes and pat us all on the head, telling us to leave it to them as it's just too complicated for us to understand.

But this all does not get us away from the main problem - economics is not a science. Many other commentators have waded into this territory before (for example John Kay) and there is some outstanding academic work on the historical roots of economics in physics (the most notable being Philip Mirowski and his book More Heat Than Light), so there is little point in me trying to replay most of the arguments. 

However, as we are told that austerity is the way forward, that we will create new jobs in enterprise zones and there is no point in trying to raise the top rate of income tax (even though the sage of Omaha Warren Buffett has ridiculed this position beautifully) it seems that we cannot shake off the hands of living let alone dead economists. 

So two things to ask your local friendly (?) economist, or politician if you prefer. What exactly is growth, as money has separated from the physical economy, and when you say something is an economic law what do you actually mean? Is it like a law of the natural world, let's take gravity for instance? Or is it something you want to be true to make your world view hold together?

Not that I'm taking sides or anything ....

One last note, for those interested in new thinking in economics it is worth taking a look at the Soros funded Institute for New Economic Thinking. 

Best

Finbarr

Innovation is everything and everywhere

Quibbling over language can be incredibly frustrating when all we want to do is get on and solve problems, especially problems as large as the looming threat of a double dip recession. But sometimes you do have to stop the lights and have the discussion whether or not it is all semantics.

I have a long standing problem with innovation. Nothing against the 'I know it when I see it version', the concept defining product or technology that comes along oh so rarely. My frustration is with the innovation is everything that is good, innovation as essentially all change. And as such it becomes useless as either a term, an analytical frame or a rallying call.

A frustratingly good example of this came along this week with the Hamilton Project at Brookings releasing a self styled policy memo entitled A Dozen Economic Facts About Innovation. What is pitched as a policy memo is actually a series of quotes selected I am assuming to fit the narrative from a workshop that was held in DC in June of this year titled PhDs, Policies, and Patents: Innovation and America’s Future. So there's no bias already in here, no selection bias on the people attending, the pitch they might give or the messages they were expected to provide?

So much for that. But as you read the 12 'facts' you get the sense that the writers let it all get away from them. The first fact elides productivity and average wage increases with innovation. We may want this to be true but there is no link shown, nothing other than a sense that innovation is good, rising productivity is good, so let's say the first caused the second.

The second fact really starts to go to town claiming innovation is the cause of increases in life expectancy. OK, better medicines, more machines are helping, but surely doctors have something to do with this, lifestyle changes might have something to do with this? And it avoids the polarisation of health outcomes between those who are becoming morbidly obese and those who are taking care of themselves. But again, innovation is good, it is all change and all pervasive.

I won't bore you with going through all 12, but I would nudge you to look at number 6 and see what you think. Have economists completely lost the plot when total factor productivity, essentially all the things we cannot explain through things like capital and labour, is equated to innovation?

Or is this the best example that innovation is being used as a catch all, a bucket in which to throw everything that is changing and we believe to be positive?

Unfortunately this may be a battle lost, as there is now a disconnect between the use of the term innovation, the attempts to measure it (for example through the Community Innovation Survey), and what we really want to get at - sources of growth. Maybe if we can start tidying up this language and stop being so all encompassing we might get somewhere.

Best

F

What kind of democracy do we think we have?

After the 2010 UK election, the AV referendum and even now with the debt ceiling negotiations in the US, I am struck that we are not clear what kind of democracy we either want or have. Essentially, are we confused on what we are doing when we vote? Do we agree whether we are electing representatives or delegates?

The nagging in my brain got to the point where I thought best to do something about it, so in partnership with YouGov@Cambridge put a survey out to look into this. This led to a piece in the Huffington Post, The Leaders We Deserve, which gives the headline numbers from the survey and some colour commentary.

The numbers from the survey frankly depress me (summary data here)- two thirds of people seem to believe that they live in some form of direct democracy, which is not true, but worse only a third agree it is their responsibility to find out about the issues.

A part of the survey that we have not put into an article yet is a set of questions on what should be decided by referendum and whether referenda should be legally binding (which they are not). However, 68% of respondents agree or strongly agree that they should be legally binding.

Throughout the numbers the impression for me is that there is a terrible conjunction of people wanting control but not wanting the responsibility that goes with it. While I was putting the piece together a good friend pointed me at one of Peter Cook's early and least remembered movies, The Rise and Rise of Michael Rimmer. The story follows Rimmer as he blags his way into a failing advertising firm, then into politics, and finally as Prime Minister where he asks the general public to vote on every decision in government. Here's an excerpt .... Maybe this is where we are heading?

F

Time for a rebranding of industrial policy?

If you'd like to get an immediate read on someone's politics, their age and where they are from just wander up to them and say 'industrial policy' or even use it in a sentence, like "There is a need for industrial policy in leading economies, just as much in developing economies". The reaction, usually extreme whether it is eye rolling, banging a shoe on the table or the sigh of the worn down, should tell you a lot.

This is a real problem. Right at the moment when we should be having a grown up debate on the role of the state in industrial development, how industry can play a role in national growth for G7 economies, and whether we've been misleading one another about the nature of competitiveness, the words act like a landmine. Step on them and boom there goes all rationality in the discussion you were having.

A great example of how the label of 'industrial policy' is misused and is divisive is contained within the recent PCAST report to the President on how to maintain the USA's claimed leadership in advanced manufacturing (full text of the report here). As Clyde Prestowitz has discussed in his Foreign Policy blog, the argument is well made that the US (akin to countries like the UK) had a lead in this area but that lead has been eroded. But then we get on to what to do about it.

According to the PCAST report -

"We do not believe that the solution is industrial policy, in which government invests in particular
companies or sectors. However, we strongly believe that the Nation requires a coherent innovation policy to ensure U.S. leadership support new technologies and approaches, and provide the basis for high-quality jobs for Americans in the manufacturing sector."

This to me is a misinterpretation of what industrial policy can be, as well as a desire to live in the narrative of the 1990s. As long as we have a strong innovation base (for many oversimplified to high R&D spending) all will be well. This ignores how the value chain operates, that research is not the preserve of the West, that R&D spending is an incredibly blunt measure of innovation, and that innovation without control will lead to nothing.

Overall the PCAST report is a depressing example of how old labels get in the way and that we have not advanced at all in our discussions on economic growth and renewal since the credit crisis in 2008. We are failing to shed ideas which do not apply in the current context and failing to adapt to the realities in front of us. Somehow we have to find a way to stop having old debates and move on.

F

What is a balanced economy?

The phrase ‘balanced economy’ has been thrown about a lot in the past year. It trips off the tongue easily and insinuates itself into the discourse on growth for countries like the UK. According the BBC it has become a mantra across Whitehall and in economic think tanks. David Cameron used it as the focus for his first major economic speech after the election. In the speech he fairly tied himself in knots - 

Today our economy is heavily reliant on just a few industries and a few regions – particularly London and the South East.  This really matters. An economy with such a narrow foundation for growth is fundamentally unstable and wasteful – because we are not making use of the talent out there in all parts of our United Kingdom.
We are determined that should change.  That doesn’t mean picking winners but it does mean supporting growing industries – aerospace, pharmaceuticals, high-value manufacturing, hi-tech engineering, low carbon technology. And all the knowledge-based businesses including the creative industries.

But what does a balanced economy mean? Are we looking for a 50/50 split between services and manufacturing? Do we want to have exports and imports in perfect balance?

No one really knows. 

Answering this question means answering some much harder questions on what growth really is, where it comes from and how nation states and companies large and small interact in the highly globalised world. 

The economic consensus that prevailed before the credit crisis has not been replaced by a new narrative. There is no clear model for how the economy is supposed to sustainably grow and that is the greatest weakness for policymakers at the moment. In some ways an overconcentration of belief in a watered down version of economics (free the market, get small government, the market will adjust etc etc) still remains. 

Unfortunately taking on these questions requires significant time, leadership and patience. None of these commodities is in great supply at the moment, so rebalancing looks like a phrase that will continue to be abused as it slips into Economist articles and speeches.

Until we're willing to have open and engaged debates on how we think about growth, the relationship between countries and companies, and the adjustment to the emergence of new economic powers we'll not be able to move this discussion forward. Here's hoping that there are some enlightened voices in Treasury and No 10 able to see the forest for the trees.

F

Writing while watching Made in Britain part 3

Just for fun I'm tapping away as Evan Davis warbles away on BBC2 in the third part of Made in Britain, talking about the service sector, so called. Apologies if this post is therefore a little staccato, but I'll type as I react rather than trying to put a smoother piece together after the fact.

So first things first, Evan has started by referring to the UK as a 'unique experiment' - total rubbish if you look at the service content of most developed economies. For the numbers see Dirk Pilat's paper on structural change in the OECD economies from 2007 (I think, will check later).

Very interested in the overall trade balance debate, 100 billion pounds trade deficit on goods ... what did we export in services last year? Come on Evan, show us the numbers ...

Evan's example of a service is a classic- Inmarsat satellite communications. This is not intangible, it is a service completely dependent on manufactured goods, massively complex and high quality goods, with an engineering team keeping the satellites ticking over correctly. The interconnection between manufacturing and services is clear ... ah there is Evan saying that all services need manufactured goods, and he sneakily says that manufacturers use services as well. Correct but not a parallel.

The point is not services versus manufacturing! Again and again people make this error - it is about the interplay of the two and how companies can use a mixture of both to attain a strong position in a value chain, capturing as much value as they can that is created across the value chain from end to end.

The real discussion is about labour intensity, wages, automation, linkage between elements of the value chain, in all a much more complicated discussion than manufacturing versus services.

Deep breath.

OK so here's a real bug bear for me, the structure of the statistics is misleading. The standard industrial classification codes come from the 1930s in the US, and the 1940s in the UK. They hard wire a split between making and services which we inherit and continue to stumble over. There are significant parts of reported services which are done by manufacturing so called companies. There really needs to be a reconsideration of the structure of the statistics, beyond the missed opportunity of the Allsop review of a number of years ago.

Ah the exporting of services question ... but again lets note while Evan has given us the hard number for goods trade deficit, he has not given us anything contextual for services. Quoting a number of 2 billion in exports to Dubai is smoke and mirrors.

Is a service based economy sustainable?

Again Evan what are the numbers for what we have exported in services?

Now we are back to the City, our financial services strength ... Oh and tourism! A host nation. Hmmm, some taxes from the foreign nationals of high powered companies who are very good at structuring their tax exposure! And there goes another throw away of "running into billions of pounds". Love the fact that the estate agent is wearing his shoes while Evan has the silly blue shoes on ... Oh sorry looks like he's in socks!

The butler to the world's elite! Not sure we would all agree to that characterisation.

Potential landmine here, the selling of our universities. And he's just described them as businesses. Not sure my tv will survive the whole episode. Sorry but ignoring the role of universities in the innovation system, producing knowledge and graduates for UK companies, is mad. If we make universities factories for foreign graduates what happens to our research base?

Back to the City ... Here comes the collapse ... Interesting example of ICAP, but for Evan to say no risk is slightly misleading. Critique of the City? Burden on the economy ... Paul Wolley saying that it is too easy for the bankers to appropriate the profits, through complexity in financial instruments that is unnecessary and costly. Second charge, that the banks live on subsidies. Because of the public guarantee leading to lower costs of borrowing for the banks. Interesting part of the programme, and for once Davis is doing well at being even handed.

And finally the numbers on service exports 160 billion, well below our need for trade balance overall.

Into a call centre we go on a bland industrial estate in Sunderland. The issue here is relative wages to other jobs, not whether the task itself is different. And lots of the issues on services are coming out - high staff turn over, stress rather than physicality, and inequality in earnings (as shown by regional inequality).

So the wrapping up begins, and the important point of reinvention and evolution of the economy is well made. But the overall tone of manufacturing and services as being in competition with one another, that niche manufacturing is sustainable, that our knowledge will keep is ahead, all of these things soft soap the stresses in the economy and the significant challenges coming from emerging nations.

All in all great to have a programme discussing these big issues, but it is a programme that is out of date with industrial reality and overly optimistic that we will continue to invent and innovate our way to growth.

Apologies again if that was too staccato, will put a link into the iPlayer for the episode so you can read along.

Best

Finbarr