Larry Summers Blogs (!) About Innovation

by Noam Scheiber | September 21, 2009

Last month I wrote a piece noting (a la Paul Krugman) that it was tough to see where growth would come from absent some technological breakthrough that attracted a wave of business investment. I went on to argue (not a la Krugman) that the imperative for such a breakthrough was so strong we might want to consider something as crude as industrial policy to expedite the process.

At the time, I conceded that the White House appeared to be thinking along similar lines, if not quite as ambitiously as I'd prefer. Now, in a blog post (blog post!) that just went up on the White House site, National Economic Council director Larry Summers fleshes out the White House view on this question: 

An important aspect of any economic expansion is the role innovation plays as an engine of economic growth.  In this regard, the most important economist of the twenty-first century might actually turn out to be not Smith or Keynes, but Joseph Schumpeter. 

One of Schumpeter’s most important contributions was the emphasis he placed on the tremendous power of innovation and entrepreneurial initiative to drive growth through a process he famously characterized as "creative destruction."  His work captured not only an economic truth, but also the particular source of America’s strength and dynamism.

One of the ways to view the trajectory of economic history is through the key technologies that have reverberated across the economy.  In the nineteenth century, these included the transcontinental railroad, the telegraph, and the steam engine, among others.  In the twentieth, the most powerful innovations included the automobile, the jet plane, and, over the last generation, information technology.

While we can't know exactly where the next great area of American innovation will be, we already see a number of prominent sectors where American entrepreneurs are already unleashing explosive, innovative energy:

In information technology, where tremendous potential remains for a range of applications to increase for years to come;

In life-science technologies, where developments made at the National Institutes of Health and in research facilities around the country will have profound implications not just for human health, but also for the environment, agriculture, and a range of other areas that require technological creativity; and,

In energy, where the combination of environmental and geopolitical imperatives have created the context for an enormously productive period in developing energy technologies as well.

Looking across the breadth of the U.S. economy, the prospects for transformational innovation to occur are enormous.  But to ensure that the entrepreneurial spirit that Schumpeter recognized in the early twentieth century will continue to drive the American economy in the twenty-first century requires a role for government as well: to create an environment that is conducive to generating those developments [emphasis added].

Summers says the stimulus allocated about $100 billion in support of innovation--which seems to be a slightly broader concept than the industrial policy approach I advocated. (I counted less than $20 billion in direct spending on R&D.) But it's clearly the right idea and it's encouraging to see the White House thinking along these lines.

P.S. Summers points readers to a recent NEC white paper laying out the broader innovation strategy, which is probably worth a read.

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