Why Isn’t Innovation Driving Growth Anymore?

Average growth in Europe, Japan and the United States keeps slowing down when compared with previous decades: It is near zero in Europe and Japan, and 2% in the U.S. Inasmuch as, in those countries, innovation is still thriving, many new services are being offered, many start-ups are going public and raising funds, and scientific research is still leading to new discoveries. So why isn’t this inventiveness (being able to do more with less) producing any economic growth?

Sadly, of course, there is one purely economic reason: The growing weight of government in the economy, high taxation and a mountain of red tape to discourage entrepreneurs and stifle initiative. But let’s get back to innovation...

Innovation has drawbacks, one of which would be “creative destruction”, a term coined by the economist Joseph Schumpeter: At first, it renders obsolete products that were selling well, thus pushing some complacent companies toward bankruptcy and destroying jobs. This is how capitalism normally functions in a society under economic freedom. This is the only way to bring wealth to a country, a higher standard of living and full employment, notwithstanding any growing pains.

However, more and more, governments are trying to intervene in order to protect existing corporations. We’ve seen it with the banks in the 2008 crisis, and this goes on today with central banks keeping interest rates near zero in order to facilitate the re-financing of the banking system. The United States government has also helped General Motors and other large corporations. It can be seen as well with disruptive innovations having to fight the power of States or corporations, such as Uber, for instance, seeing its growth tampered in several countries because of the taxi industry’s lobby, or Airbnb, facing the wrath of many municipalities. This type of alliance between big business, corporations and government in order to maintain the status quo is what is meant by “crony capitalism” and, sadly, it’s happening more and more.

But there is worse: Governments think they can and should be the drivers of progress and they put an awful lot of money into it, to the point of totally going against the market fundamentals (unwarranted demand, subsidies, satisfying the call for tender instead of focusing on consumers’ needs). That would be the case of climate changes and the astronomical amounts engaged in wind and solar energy and the fight against greenhouse gases. Without digging deeply into the matter, we will note, however, that an international organisation has been created specifically in order to prove global warming, the Intergovernmental Panel on Climate Change, and that if it were to invalidate this warming trend it would lose all of its subsidies... this doesn’t bode well for scientific objectivity.

Governments intervene more and more with innovations, in the sense they want to be the ones to decide what the applications will be in society, which way they should go, by either regulating or handing out subsidies. The market, entrepreneurs and consumers, have less and less their say in the matter. Is it any wonder then that innovation is not enough to give the economy what it needs?