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Does Innovation Lead to Prosperity for All?

Hanns Kuttner

Innovation surely leads to a higher standard of living. A standard of living is much harder to measure than something that gets measured as units of money. Any claim about the relationship between innovation and real income for average working families should be viewed with skepticism, with the degree of skepticism rising with the breadth of the claim. Innovation is a broad umbrella. It does not neatly or uniformly map into a narrow metric such as the real income of average working families.

Some examples of innovation show how capital can substitute for labor. Today’s examples look different. Big equipment that can take the place of multiple workers no longer looks like a typical example of capital substituting for labor. The declining price of computing power has made information technology a powerful force. New capabilities will bring more surprises. The impact of information technology will continue to reverberate throughout the economy. Much will take place regardless of whether leaders take steps that they think will accelerate its pace or slow it down. Bank tellers are under siege because ATMs and online interaction have taken the place of standing in a teller line to complete a financial transaction. The ranks of those employed by the postal service are thinner.

In other cases, innovation has surely increased employment. Change in the age structure of the population, with a growing share elderly, explains only part of the increase in health sector employment in the United States. Far more reflects how innovation has increased what the healthcare sector can do for people. Conditions now get treated that once had “watchful waiting” as their standard of care.

At different times and in different sectors innovation can be associated with increased or decreased employment, increased or decreased wages. Leaders who think about innovation in terms of narrow metrics such as employment and income may do as well or better trying to develop policies that will be assessed in terms of their influence on the weather a week or ten days out.

Economic accounting systems that generate such familiar statistics as GDP cannot easily count the influence of innovation in improving standards of living. But anyone who has used a smart phone or, more profoundly, looked at statistics showing declining cardiovascular disease death rates knows that standards of living are increasing. Thus G-20 leaders should embrace innovation and learn to smile when short-term values of some easily measured quantity such as income or wages gets cited as evidence “showing” the impact of innovation on the economy or citizens’ lives.

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2017 Annual Report

Hudson Institute

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