Following a lecture from Tim Harford on innovation and longshots, the importance of innovation on economic growth, and the incentives behind technological advancement, are considered.

Following the Second World War a number of economists compared the growth of output in the United States with the growth of capital and labour over the same period. At the time, it seemed obvious that to increase output, the volume of input factors simply needed to increase as well. However, their findings suggested that, rather astonishingly, only 15% of economic growth had been due to input increases; the remarkable 85% residual was attributed to innovation.

Innovation is a critical contributor to economic change, and it was Schumpeter who argued that it is at the core of economic growth; through the development of new products and processes, scarce resources can be more efficiently processed. Just look at the edge that Henry Ford’s exploitation of production line technology gave him over his competitors. Although temporary monopolies will be established, perhaps through patents, rival firms will inevitably compete away the initially abnormal profit. The monopolies can be considered necessary, or even good, as the initial profit levels provide an incentive and a reward for innovators, and through advances in technology society will benefit.

While innovation has always been a challenge, today’s innovators are faced with a problem that has growing significance: specialisation. Unlike da Vinci, a 15th Century jack of all trades who very successfully dabbled in painting, anatomy and engineering, the modern innovator must become an expert in a very niche field before he can advance it. The obvious scientific leaps have disappeared, and a technological advance is likely to be relatively small, especially when considering the vast number of scientists working on similar problems, suggesting the chance of failure is also high. As our scientific knowledge expands, the cost of innovation and the time taken to develop a technology dramatically increases. Look at the latest US produced stealth fighter which cost $1.4billion and took 20 years to develop; compare that with the five years it took Supermarine to develop the Sptifire, at a cost of $1m.

There are obviously market incentives and direct government funding, but in his lecture, Tim Harford outlined one of the more interesting ways to encourage innovation is the prize fund. Prizes are an historically successful way of achieving progress, by effectively converting the process of innovation into a commodity. During the early 18th Century, the Royal Observatory at Greenwich was concerned with discovering a method that would allow British ships to accurately calculate their longitude while at sea. It was known that the development of a sufficiently accurate clock would solve the issue, however the problems in developing such a clock confounded the intellect of Newton himself. A prize equivalent to £5,000,000 today was offered to whoever could solve the admiralty’s problem, and, in 1737, John Harrison produced the required clock. The fact that a self-taught clockmaker was able to solve a problem that bamboozled the finest minds illustrates why a prize fund works so well.

The prize fund allows a firm, NGO, government etc. to access a huge pool of talent and the return on expenditure is generally very favourable, as the prize funder will receive sufficient entries so the cumulative value of research offered most probably exceeds the prize value. Furthermore, the value of the prize is finite, so the funder only has to pay when there has been achievement.

As a society, we are risk averse and don’t like change which inevitably provides a difficult environment for the ‘Heroes of Innovation’ to thrive in. Although in some sectors innovation is evident, others exhibit less progress: designed in 1964, the Boeing 747remains the long-haul aircraft of choice 47 years later; China, the world’s most rapidly growing economy, is still heavily reliant upon coal for its power, a technology that has been used for almost 200 years. For growth to be maximised, innovations should ideally be occurring rapidly in all sectors of the economy, but barriers such as oligopolies in the energy industry arguably prevent this from happening. Ultimately, trial and error is the only way to solve complex problems and we should therefore learn to encourage failure while encouraging scientists and entrepreneurs to innovate and imagine. Returning to Schumpeter, his theory of creative destruction is rather nicely mirrored in the words of Thomas Edison: ‘every wrong attempt discarded is another step forward’.