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The New Bazaar

The economics of innovation

Within economics, there's a semi-famous quote from the economist Paul Krugman: “Productivity isn't everything, but in the long run, it's almost everything.”

Krugman’s point is that ultimately, how much productivity climbs each year—roughly speaking, how much more efficient an economy’s workers become at producing goods and services—is also what determines how much our living standards also rise from year to year. And so in the long run, there really is almost nothing that matters more. 

Unfortunately, since about the early 1970s productivity has climbed much more slowly than in the earlier postwar decades. We have been stuck in a period that economists have labeled The Great Stagnation. And a big reason why is that the pace of innovation—the kind of scientific and technological innovation that leads to fast productivity growth—has also been slow. 

But now, there’s now a lot of people—including Cardiff!—who are optimistic that maybe the Great Stagnation is ending. That we’ll get back to the faster productivity growth of the past. Among other reasons why:

  1. The economy in the last few years has become more dynamic. There’s been a boom in the number of startups that entrepreneurs launch every month. 
  2. There has been quite a bit of experimentation in the workplace for how to get things done, most obviously the rise of remote work. 
  3. Incredible new technologies like mRNA vaccines have emerged. These also include things like GPT-4 and other language learning models, suggesting that artificial intelligence could soon have a noticeable effect on the economy. 
  4. And finally, an intellectual shift, partly brought on by higher inflation, has compelled many people (including policymakers) all across the ideological spectrum to really emphasize the importance of expanding the economy’s capacity for growth, and to figure how best to do that. 

Which policies and institutional designs can best lead to new technologies and innovations? How do we reform public institutions like the National Institutes of Health, with its $47 billion budget, to fund the kind of science research and development that leads to transformative new technologies? What have we learned about the way science is actually done now?

In other words, how do we get right the economics of innovation? 

That effort is where today’s two guests come in. Heidi Williams is an economist and the director of science policy at the Institute for Progress, a think tank. Caleb Watney is the co-founder and co-CEO of the Institute for Progress. 

They discussed with Cardiff not only the Great Stagnation, but also recent industrial policies passed by the US government, like the Chips and Science Act (which is aimed at developing a domestic semiconductor industry) and the Inflation Reduction Act (which will spend money to develop new clean technologies, among other things). 

And they discussed new ideas for how the country’s existing scientific institutions—its commercial labs, universities, and public bodies—should approach the process of scientific discovery.

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