Does Innovation lead to Prosperity for All?

By Evan Jensen

The modern industrialized economy is a fascinating experiment because never before in history have so many people been so productive. The scientific method, objective metrics of efficiency, mass production, information technology, flight, the list goes on of new capabilities and methods that have arisen fairly recently on the timescale of human civilization.

But today’s economy is so productive that it suffers from a surplus of workers, making it difficult for many people to earn a living. Which means we have to ask the question- does innovation lead to prosperity for everyone,[1] or does innovation cause centralization of wealth because of automation and offshoring?

Kinds of Innovation

Modern society is so productive in terms of new technologies and ideas that we tend to refer to them in bulk now as “innovation” rather than recite a long list of specific breakthroughs. But in many ways this misses out on the nuances of each development.

One type of innovation develops a new or enhanced capability. Increased capabilities can be huge developments, like the invention of flight. Or they can be improvements on the highest-end, best-possible design, like building a faster racecar. New capabilities garner a lot of attention because they are impressive, even if they are commercially useless when they are first created.

However, there is another, less-romanticized flavor of innovation, which is uncovering a new method of achieving the same capability for less cost. Improvements in efficiency and reductions in cost are often the cause of technological revolutions that change the world and increase prosperity for everyone.

New inventions and cost reductions are both innovation. However these two types of innovation actually have opposite economic and sociological effects.

 

Effects of New Inventions

New capabilities are often confused with “revolutionary” discoveries. Revolutionary inventions change the world at a stroke. But an invention that enables a previously impossible ability does not always lead to a revolution that changes the economy and the world.

The newly-invented ability to do something that was impossible undoubtedly grabs the attention and stirs the heart. But the invention of even a highly successful new capability does not necessarily increase prosperity. For example, in 1947 Chuck Yeager broke the sound barrier flying a ‘revolutionary’ experimental aircraft, the X-1. Supersonic plane technology was later incorporated into military aircraft and the now-decommissioned passenger aircraft, the Concorde. Unfortunately, supersonic passenger planes were the province of the wealthy. Eventually, due to the high costs of the Concorde and limited passenger interest, the supersonic passenger plane was retired in 2003.[2]

Consider a more modern example- commercial spaceflight. Wealthy “space tourists” can pay companies like Virgin Galactic to go to space, for $250,000 per ticket.[3] But this new capability will be a luxury for the recreation of the wealthy unless the price falls drastically. The invention of private spacecraft doesn’t necessarily lead to a revolution in personal space travel. We need more innovation to make it cheap.

Enhanced capabilities are sometimes similarly conflated with “evolutionary” improvements. Evolutionary improvements are incremental changes that accumulate over time and add up to slow, steady, and consistent progress. But, like new capabilities, developing enhanced capabilities does not directly lead to increased prosperity for everyone. More powerful, faster, more effective inventions tend to benefit those with the money to pay for them.

For example, racecar competitions spur a huge amount of research and development to develop faster, lighter, and better racecars. Although undoubtedly highly innovative, even a huge breakthrough in racecar technology does not necessarily lead to improved consumer cars. An exotic component, or carefully calibrated refinement might be a great advantage for a single racecar with a large budget, yet uneconomical to incorporate into every car. Certainly, some of the improvements from racecars can be adapted into consumer vehicles. But, in general, the kinds of high-end improvements that push the boundaries of what is possible for one machine don’t translate into more general prosperity.

New and enhanced capabilities do not directly lead to increased prosperity for everyone. Newly-developed capabilities will be expensive, either from inherent resource and labor cost, or because of high demand and limited supply. Useful new capabilities can be leveraged by people who have the capital to afford them, and are unavailable to those who don’t.

As a result, development of new, expensive capabilities causes centralization of wealth. People and corporations with plenty of capital can leverage those new capabilities to make more money if they choose. And when wealth is centralized, the wealthy then control the means of funding research and development. There is also a labor demographics component, because skilled labor like scientists or engineers is more expensive than unskilled labor. Monetizing R&D and shifting production either overseas or to automated processes then results in fewer total employees, with greater returns from fewer skilled workers and executives. Together, these factors potentially result in a vicious cycle that causes corporations and wealthy individuals to become wealthier while many of the poorer people are left without work.

In sum, exotic and expensive technologies like faster racecars and space tourism do not make everyone more prosperous. However, a new capability or enhancement can also become the basis of a technological revolution if a later invention makes that new capability widely available.

 

Effects of Cost Reduction & Efficiency Improvements

Prosperity for everyone does not result from developing fantastic new capabilities. Prosperity for everyone results from cost reductions because more people can afford those inventions.

Achieving the same functionality cheaper is how technological revolutions happen. For example, Thomas Edison, despite popular belief to the contrary, did not in fact invent the light bulb. Incandescent light bulbs created by running electricity through an insulator had been around for decades. Many scientists and inventors contributed to electric lighting, beginning in 1802 with Humphrey Davy’s platinum incandescent light.[4] In 1841, Frederick de Moleyns obtained the first patent on an incandescent lamp using platinum in a vacuum chamber, but as with other platinum-based incandescent lights, platinum is too expensive to be commercially viable for light bulbs. In 1845 John W. Starr obtained a patent on using carbon filaments in an incandescent lamp.[5] Joseph Swan developed a carbonized paper filament in 1850, but the bulb he developed had too short a lifespan to be commercially viable. None of these light bulbs before Edison’s were widely distributed commercially.[6]

What Edison actually invented was a bamboo filament, after thousands of experiments with different filament materials. Edison’s new filament was overwhelmingly superior because it was cheap enough and would last long enough to make the light bulb commercially viable. He filed his patent “Improvement in Electric Lights” in 1878, and it was granted in 1880.[7] Before Edison, the light bulb was an exotic item; expensive, high-maintenance, and more a curiosity than a revolutionary product. Edison made the light bulb cheap.

Edison may not have invented the light bulb, but without question Edison democratized the light bulb. Edison made it possible for electric lighting to fill the homes of all Americans. Today we take artificial light for granted, but the quality of life improvement for families shifting from candles and lamp oil to abundant and cheap artificial lighting cannot be overstated.

The automobile revolution was also kicked off by reductions in cost and increased efficiency. Henry Ford did not invent the automobile; he invented the first commercially viable automobile. The first internal combustion engine vehicles were built in Europe in the 1800’s. In 1806 Swiss inventor François Isaac de Rivaz invented an early combustion engine using a mixture of hydrogen and oxygen gas.[8] In 1860 Étienne Lenoir invented the Lenoir gasoline engine. In 1883, Siegfried Marcus patented an ignition system in Germany. In 1885, Karl Benz patented the first gas-powered automobile, also in Germany, which he called the Motorwagen.

Henry Ford’s Model T first rolled off the assembly line in 1908. But the mass-produced Model T could be purchased at a price that middle-class Americans could afford. Henry Ford famously remarked that he would pay his workers enough that they would be able to afford the cars they built.

There are countless other examples of innovations that resulted in significant cost reductions, spurring technological revolutions in their wake. The invention of the Bessemer process slashed the cost of steel and caused a revolution across many industries. The Douglas DC-3 was the first commercially viable passenger airplane, establishing the airline industry that Americans could afford to fly on. Eli Whitney’s invention of the cotton gin greatly reduced the cost of processing cotton. Combine harvesters reduced the cost of food. Printed transistors reduced the cost of computers. Almost every major technological revolution is preceded by innovation that increases efficiency and reduces cost, causing an explosion of technology that puts some new invention in every household.

These technological revolutions have a democratizing effect by making technology and quality of life improvements widespread. Even households whose wealth is not directly affected benefit from access to a previously unaffordable technology.

 

Disruptive Technologies

Innovation also has the potential to disrupt entire industries. Unlike new or enhanced capabilities, significant improvements in efficiency are often highly disruptive to existing businesses. Established industries, companies, and even the social order are adapted to a particular set of limitations, partly imposed by available technology. Businesses make money by fulfilling needs (and wants) of consumers. As a result, businesses can be disrupted by a new technology that meets consumers’ needs more efficiently, or even completely eliminates a need.

Change from disruptive technologies can be painful. Increased efficiency means less work needs to be done to accomplish the same tasks. With less work, companies downsize, competition rises, wages drop, and the economy suffers. For example, before the invention of the refrigerator in 1915, consumers would pay “icemen” to deliver ice to their houses, to be stored in insulated ice boxes. When the refrigerator was invented, the icemen lost their jobs.[9] The business model of the icemen depended on the consumer’s need to have ice delivered, which the refrigerator eliminated. For icemen, the invention of the refrigerator was a disaster because their task became so much more efficient. Refrigeration became so available that specialized workers to deliver ice were no longer useful. Consumers’ money shifted to refrigerator manufacturers instead of income for the icemen.

Increased efficiency has the potential to allow everyone’s needs to be met more cheaply and easily, with less expenditure of labor. But as a direct result of reducing the total necessary amount of work, jobs evaporate. Jobs are not merely temporarily lost like in hard economic times; those jobs are permanently obviated, forcing the displaced workers to change occupations. The employees forced to change occupations experience the worst downside of an invention that increases efficiency. The disruptive technology benefits the general public through cheaper technology, at the expense of the employees the invention replaces. In the case of the invention of the refrigerator, the disruption was so severe that eventually the refrigerator completely destroyed the market for ice boxes and ice delivery.

Whether innovation leads to prosperity requires a balancing of the benefits to (almost) everyone against the drawbacks to the workers whose jobs disappear. Employees are also consumers, so even icemen personally benefit from affordable refrigeration, even as their jobs are rendered unnecessary by it. Once the displaced employees find other jobs, they still benefit from refrigeration. Subsequent generations also benefit from innovation, well after the short-term, painful changes that must be made in its wake. In the long run, even though the icemen were forced to change jobs due to the invention of the refrigerator, the net result was positive. Most would agree, with the benefit of hindsight, that we are better off using refrigerators than paying people to deliver ice to ice boxes.

Sometimes companies, especially powerful companies, take it upon themselves to fight a disruptive technology to preserve their existing business model. Sometimes they even succeed at suppressing a disruptive technology. Oil companies successfully quashed the EV1 electric car in the 1990’s. But usually they fail. For example, print newspapers’ Biltmore Agreement failed to stop the proliferation of radio news. Competition drives the development and adoption of more efficient methods. Existing businesses must either take advantage of increases in efficiency, or be forced out by their competition. Once the genie is out of the bottle, it may be impossible to ‘uninvent’ the disruptive technology, even if it hurts existing businesses.

Another example of a disruptive technology is 3D printing, which could change everything about how products of all kinds are manufactured. Since the industrial revolution, only people with capital can manufacture goods. Factories are expensive facilities, and only wealthy individuals, companies, or venture capitalists can pay to build and operate a factory. The exclusivity of this opportunity then enables a factory owner to make a lot of money by mass producing inexpensive goods to be sold around the world. Work in factories, once a plentiful source of jobs in the United States, has increasingly been outsourced to foreign countries where labor is cheaper, centralizing wealth in factory owners while many Americans struggle to find work.

3D printing has the potential to disrupt the factory paradigm and make manufacturing cheap. So cheap, in fact, that anyone could use a 3D printer to manufacture a product in their own home, without paying for factories, workers, capitalists, banks, long-distance transportation, warehouses, retailers, and so on. So much of the world’s economy and infrastructure is built around manufacturing and distributing products that 3D printing has the potential to be extremely disruptive, and could put a huge number of jobs and businesses in jeopardy.

Strangely, increased efficiency actually seems bad for the economy. If you are using economic metrics like the GDP, this makes perfect sense because production and consumption drive GDP. If people are more efficient by working less and consuming less, then GDP falls. It seems economic growth is not actually an objective metric of our concept of “prosperity.”

Ultimately whether innovation leads to prosperity boils down to wondering what “prosperity” actually means. Is economic growth synonymous with prosperity? Is a financially secure and happy person prosperous? Or is it national economic, diplomatic, and military strength that makes a nation prosperous? Different definitions of prosperity can have different answers as to the effects of innovation.

 

Conclusion

It is an oversimplification to say that “innovation” in general either leads to prosperity for everyone or centralization of wealth. “Innovation” includes developments that have both effects. Some inventions unlock new and enhanced capabilities that will remain difficult, expensive, and exclusive to the wealthy. Other inventions significantly improve the efficiency or reduce the cost of a technology, making that technology available to more people.

I think that prosperity means financial security and happiness for as many people in the general public as possible. Under this definition, I argue that innovation increases prosperity for everyone because inventions that reduce costs increase quality of life for everyone.

Inventions of new or enhanced capabilities can lead to refinements that make them widely available, but do not by themselves lead to increased prosperity. Expensive and exotic new technologies, although impressive, are highly exclusive. Therefore they centralize wealth by giving increased financial opportunities to people and institutions that have large quantities of capital. So the question of whether innovation as a whole leads to prosperity for everyone turns on whether the prosperity-spreading effects of increased efficiency are greater than the prosperity-centralizing effects of exclusive technologies.

The centralization of wealth caused by innovation is the result of technologies that are only available to the wealthy, such as factories. Suppose that some future innovation makes manufacturing available to the middle class, such as 3D printing democratizing manufacturing the way Edison’s light bulb democratized electric lighting. Innovation that makes technology cheaper, and thus available to more people, therefore makes everyone more prosperous instead of centralizing wealth.

I think history shows a trend of increasing prosperity for everyone because of strong incentives to increase efficiency for market advantage. New technologies might languish as exclusive to the wealthy for a time. But inventors will be highly motivated to deliver those luxury technologies to everyone, and make a lot of money in the process. When a more efficient method is invented, competition will drive its adoption. The resulting drop in prices increases everyone’s quality of life. An invention that makes an industry more efficient can disrupt that industry, forcing painful change onto disrupted employees while consumers benefit. But the pain of adapting to change is temporary, and in the long run everyone is better off from increased efficiency due to innovation.

As a society we should adapt and move forward to obtain the greater rewards of more advanced technology instead of trying to resist progress just to preserve what we have now. We just have to realize that we do not want to be employed as icemen in an economy that already has refrigerators.

In short, innovation makes everyone more prosperous in the long run. Change to take advantage of innovation can be painful and difficult, but the result is better for everyone.

[1] See also, Joseph Allen, Does Innovation Lead to Prosperity for All?, http://www.ipwatchdog.com/2014/07/28/does-innovation-lead-to-prosperity-for-all/id=50560/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+Ipwatchdog+%28IPWatchdog.com%29

[2] Richard Westcott, Could Concorde ever fly again? No, says British Airways, Oct. 24, 2013, http://www.bbc.com/news/business-24629451

[3] Mike Wall, Ticket Price for Private Spaceflight on Virgin Galactic’s SpaceShipTwo Going Up, Apr. 30, 2013, http://www.space.com/20886-virgin-galactic-spaceshiptwo-ticket-prices.html

[4] John H. Lienhard, Electric Lights Before Edison, University of Houston, http://www.uh.edu/engines/epi1330.htm

[5] John Wellington Starr, http://home.frognet.net/~ejcov/starr.html

[6] However, Swan did develop a cotton thread filament in 1880, and these bulbs had limited commercial success. Swan’s light bulbs were actually the first electric lights ever used in houses and public buildings.

[7] Thomas Edison’s Patent Application for the Light Bulb, http://www.ourdocuments.gov/doc.php?flash=true&doc=46

[8] Len Larson, Dreams to Automobiles, 2008, ISBN 9781469101040, available at books.google.com

[9] Jonathan Rees, Ice Boxes vs Refrigerators, The Historical Society, Dec. 12, 2013, http://histsociety.blogspot.com/2013/12/iceboxes-vs-refrigerators.html

Opinions expressed in this article are those of the author and do not necessarily represent the views of Stein IP.

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