Innovation Crisis or Financial Crisis?

Kenneth Rogoff in Project Syndicate:

As one year of sluggish growth spills into the next, there is growing debate about what to expect over the coming decades. Was the global financial crisis a harsh but transitory setback to advanced-country growth, or did it expose a deeper long-term malaise?

Recently, a few writers, including internet entrepreneur Peter Thiel and political activist and former world chess champion Garry Kasparov, have espoused a fairly radical interpretation of the slowdown. In a forthcoming book, they argue that the collapse of advanced-country growth is not merely a result of the financial crisis; at its root, they argue, these countries’ weakness reflects secular stagnation in technology and innovation. As such, they are unlikely to see any sustained pickup in productivity growth without radical changes in innovation policy.

Economist Robert Gordon takes this idea even further. He argues that the period of rapid technological progress that followed the Industrial Revolution may prove to be a 250-year exception to the rule of stagnation in human history. Indeed, he suggests that today’s technological innovations pale in significance compared to earlier advances like electricity, running water, the internal combustion engine, and other breakthroughs that are now more than a century old.

I recently debated the technological stagnation thesis with Thiel and Kasparov at Oxford University, joined by encryption pioneer Mark Shuttleworth. Kasparov pointedly asked what products such as the iPhone 5 really add to our capabilities, and argued that most of the science underlying modern computing was settled by the seventies. Thiel maintained that efforts to combat the recession through loose monetary policy and hyper-aggressive fiscal stimulus treat the wrong disease, and therefore are potentially very harmful.

These are very interesting ideas, but the evidence still seems overwhelming that the drag on the global economy mainly reflects the aftermath of a deep systemic financial crisis, not a long-term secular innovation crisis.