Carl Schramm

In the face of a stagnating economic activity many economists are trying to explain why the medicine they have been administering these last six years isn’t working. Not capable of accepting theoretical defeat they offer new explanations. The “new” normal is in the process of being explained by nuance con gusto.

We are being told that technology has permitted big corporations to replace manufacturing jobs with either cheap foreign labor (thanks to the global logistics revolution) or the substitution of capital for labor using robotic technology. But, an even grander reason is on offer by Robert Gordon who says that innovation itself is slowing. He argues, much like many before him in similar moments when the mysteries of economic life produced a slowdown that in their minds shouldn’t be, that everything is different because people are living differently, or should be. The predictions of the Club of Rome comes to mind as do visions of President Carter in a sweater telling us the world was exhausting its energy supply. Now, according to Gordon, as a result of relentless waves of innovation all of humankind’s wants and needs are pretty much satisfied.

His model begs us to think of innovation in a demand-pull framework. In fact, innovation happens because more innovators think up more great new ideas and they bring them to the market for judgment. When it comes to innovation we live in a supply-push world.

Gordon’s point might be better taken if he said that innovation was slowing because there were fewer people innovating. As it is, he is only putting a false explanation on an epiphenomenon of a slow-growth recovery continuously teetering on recession. Innovation might appear to be slowing because in the last five years about 30 percent fewer firms are being created to develop new innovations. In the face of greater regulatory uncertainty and the immanent threat of higher taxes to fund government expansions such as Obamacare, the number of new firms committed to bring innovation to market has declined.

What explains why it is that fewer people are coming forward to start businesses to develop and exploit new innovations? The beginning of an answer lies in Jonathan Hughes’ The Vital Few where he makes the case that the economy hangs on a small number of visionary entrepreneurs who bring forth big new ideas. Perhaps fewer such people are showing up. Think about this question using President Obama’s recent explanation of “structural” problems in the economy.

Carl Schramm

Carl J. Schramm is University Professor at Syracuse University. He is the Arthur & Carlyse Ciocca visiting professor at U.C. Davis, a visiting scientist at MIT, a fellow at the Institute of Business Innovation at UC Berkeley and a director at the Berkeley Research Group.