It has become a common theme in politics and business alike to emphasize the critical role innovation will play in economic growth. Businesses are told to innovate or die, that only through increasingly rapid innovation will they be able to survive and thrive. Governments, like in Finland, publicly declare that innovation is critical in returning their respective countries to the path of economic growth – which, in turn, they expect will solve most of their problems.
On the level of individual companies, there is something there. But on a system-level, like for a country let alone globally, it makes little sense – because much of innovation today reduces GDP instead of increasing it.
Let’s take a step back. Some, viewed as heretics by many, have pointed out that economic growth is slowing and will eventually come to an end and that there’s little innovation per se can do to prevent that; the end of growth comes from fundamentals. Other folks have posited that the rate of innovation itself is slowing down – recently, The Economist took on some of these claims on innovation slowing down and, while raising a number of valid points, dismissed the concerns in an atypically unconvincing manner.
To get some fundamentals straight; as long as economic growth remains coupled to resource and energy usage, infinite growth is a mathematical impossibility on a finite planet. Few people deny that, but to counter it some say economic growth has decoupled from resource usage. It hasn’t. There has been some modest relative decoupling – the global energy intensity is 33% lower than it was 40 years ago – but that’s nowhere near enough. To continue economic growth in a finite world, we would need absolute decoupling – and that simply has not happened anywhere on a system-wide level, nor are there any signs of it being realistic in time frames that matter. On the contrary, factors like the decreasing EROEI (Energy Returns Over Energy Invested) of the most important energy sources can cause even the modest relative decoupling to reverse itself.
With that, let’s get back to to point that on a macro-level, innovation often has a negative impact on the economy as a whole. How is that?
Take demateralization for one, a huge innovation domain over the past decade. As the books, music and movie businesses become increasingly digital, the effect this dematerialization shift has on the economy as a whole is negative. Cutting out the middlemen like bookstores enables lower prices and better efficiency – and running the industry with fewer people and less money.
There are many more GDP-reducing innovations that everyone is – with or without understanding what their full impact is – rooting for; take working remotely for example. There is nary a person who thinks it’s a bad idea to have knowledge workers work from home or closer to their home rather than jump in their cars and waste untold hours of time and money commuting to the CBD. Remote satellite offices, spread in the suburbia, for example, would be a win-win for both employees and employers – employees would save time and money from the skipped commute, employers would get more productive people, save on expensive CBD office costs etc. But overall, the impact to the economy as a whole, could easily be negative as people would need fewer cars, there’d be less need to build roads, less office rent paid, even fewer public transport tickets etc. More telecom services required, yes, but by not nearly enough to offset all the cost savings.
In short, innovation will not be the salvation that brings unending economic growth. Nothing will.
This naturally doesn’t mean innovation is bad; innovation is about so much more than stimulating economic growth. It just means it’s important for different reasons than for what people often think. Like adapting to ongoing changes and saving the planet. We desperately need innovation in helping businesses and communities become more resilient and hopefully even antifragile. We need innovative solutions to help us reduce carbon emissions at a rapid pace; we need innovations to maintain social stability in an era of decline. And so on, ad infinitum.
Importantly, though, the innovation we now need is not all technological innovation. Technology plays a role, but what we really need is innovation that must identify, accept and integrate lessons from history and natural systems, include social aspects and dial back on the pure fragility-inducing efficiency-mantra. It is not like the most visible innovation today that focuses on some new technology, often for the sake of neomania.
Let’s innovate on things that really matter.
References & resources
- The Economist: Has the ideas machine broken down?
- Nassim Nicholas Taleb: Antifragile: Things That Gain from Disorder
- Tim Jackson: Prosperity without Growth: Economics for a Finite Planet
- Richard Heinberg: The End of Growth: Adapting to Our New Economic Reality
- Chris Martenson: The Crash Course: The Unsustainable Future Of Our Economy, Energy, And Environment
- Mats Larsson: The Limits of Business Development and Economic Growth: Why Business Will Need to Invest Less in the Future