Innovation may seem like some capricious god that visits only if you are on Santa’s nice list, but it can be coaxed into visiting more often with the milk and cookies of research and development. It needs just the right kind of structure, though (Santa doesn’t like oatmeal raisin cookies, after all). Our current system rewards researchers for their grant-writing ability instead of their results. Proportionally to GDP, our spending on research has declined as well. This leaves us with less money less efficiently put to work. There are some bright spots. We have some extremely high-productivity firms showing us the way. The problem is a growing number of firms that have extremely low or even negative productivity growth. To change this, we need to fix some broken markets and create some new incentive structures.
You need not look very far to find firms with rapid growth in productivity. There are obvious names such as Amazon and Google, but there are others such as JP Morgan Chase that continue to plow profits into the business year after year. They are able to innovate because they create opportunities for innovation to flourish. Commercial spending money on research and development is sometimes more efficient because businesses have more information about their customers’ wants and needs. More of that requires more companies that are willing to look at a longer time horizon. Part of that can be corrected with the structure of executive pay, but it could be further aided with better federal investment practices.
Before we get into that, it’s worth noting that essentially all levels of government are running antiquated systems that are outdated from the moment they are up and running – and that’s if they are digitized at all. Data storage and organization practices for the government and, perhaps unsurprisingly, the entire healthcare industry, are abhorrent. We have information all over the place that we don’t know about and that causes errors. It can result in misinformed decisions. Simply digitizing information and organizing the vast arrays of data we have in a more coherent way would give the state and healthcare portions of our economies massive jumps in productivity. There are some companies working on this, but progress is slow. More focus needs to be placed on it. We are losing countless human hours on it that could be spent in better ways.
By the same token, the growth of ‘zombie’ firms has throttled our growth by keeping more people in jobs that don’t allow them to accomplish what they would be able to at a more productive firm. Long-term interest rates near zero and frequent government bailouts of low-productivity firms are a little bit like eating candy instead of a balanced meal. It may give us a short burst of energy, but the long-term health of our economy suffers.
How do we fix it, then? Simply throwing money at the problem does not solve it. It would be convenient if that was the case, but how that money is distributed is just as important, if not more so, than how much money is spent. One way current policies work is to funnel money through various institutions, such as the National Science Foundation, that are subsequently distributed via grants. Those grants have application processes, so scientists must write grant proposals detailing why they need the money and how they will use it. This takes them away from their research and grant proposal quality is not necessarily very correlated to the quality of their research. They are researchers, after all, not writers. The people that are rewarded, then, are the people that happen to be the best at writing or the ones researching something popular. Other problems can also arise. Science is a messy process and sometimes paradigms must be challenged to make way for new ones. The bureaucrats distributing funding are people, too, though, and people are prone to dismissing out-of-hand things that challenge their core worldview, even if it is their job to be impartial.
The fastest way to spark innovation is to pose well-defined problems and then create rewards for solving those problems. We just saw this in action with COVID vaccine research. An unprecedented sum of money was there for the taking, so unprecedented resources were thrown into the problem. Entire new systems were created. DARPA, the defense department’s advanced research arm, uses prizes for the best solutions to various problems to fantastic results.
We do not have to limit these mechanisms to research spending, either. Infrastructure costs have exploded and show no signs of slowing down. If, instead of paying a firm to build, say, high-speed rail, we laid out well-defined parameters for how many passengers should be able to travel on a long-range transit system with a minimum speed and whatever else we wanted to be included, we could guarantee a certain sum of money to be paid annually to the owner of said transit system (note: this has to be a hard sum, not a guaranteed profit, or bad incentives creep in). This is just one example. We could do this for countless other services and drive higher productivity with more connectedness.
The ‘free market’ is not some god to be worshipped, but a living, breathing system. It needs everything defined from who owns what to who can sue who if something goes wrong. With the right set of rules, it can be a powerful force for good. There is no reason that the government cannot create new markets for accomplishing goals such as greener energy, better education, or better healthcare. The key is defining the problem you want to solve. Anything else leaves up to chance what the markets will maximize.