Innovation Is the Key Determinant of Economic Growth and Social Welfare

In 1957 the economist Robert Solow published a calculation that surprised his profession. He asked how much of the growth in the output per worker of the United States between 1909 and 1949 could be explained by increases in capital, and found that it explained only about an eighth. The rest, which economists labelled the residual, was attributed to technical change, meaning better methods, machines and ideas. Solow won the Nobel Prize in 1987 in part for this work. Later economists, such as Paul Romer, whose models of endogenous growth appeared in 1990, built on it. The topic puts the conclusion in a sentence, that innovation is the key determinant of economic growth and social welfare.

The logic is simple. A country can grow by using more labour and capital, but these face diminishing returns. Beyond a point, adding workers or machines to the same methods yields less and less. Only new ideas can sustain growth indefinitely, because ideas, unlike physical goods, can be used by many people without being used up. The steam engine, electricity, the internal combustion engine and the computer each raised productivity across the whole economy. Joseph Schumpeter described the process as creative destruction, in which new products and methods destroy old industries and create new ones, driving the economy forward.

The evidence of history is overwhelming. For most of human history, income per person barely rose. After the industrial revolution of the late eighteenth century, the average income in Britain and then elsewhere began to rise steadily, and today average income in advanced economies is many times what it was two centuries ago. Population grew too, and yet living standards rose. The economist Joel Mokyr attributes this to a culture of innovation that spread in Europe. The contrast with periods of stagnation, when innovation was suppressed or ignored, supports the claim.

Welfare has risen with innovation as much as income. Life expectancy in India rose from about thirty two years in 1947 to nearly seventy by 2015, largely due to vaccines, antibiotics, sanitation and better farming. The Green Revolution, which brought high yielding wheat and rice in the 1960s, ended the dependence on food imports and the fear of famine. Smallpox was eradicated in 1980 through a vaccine and a surveillance strategy. Mobile phones have given farmers and fishermen access to prices and weather, and the economist Robert Jensen found that when mobile phones reached fishing villages in Kerala, the waste of fish fell and the price differences between markets narrowed.

The Green Revolution, which brought high yielding wheat and rice in the 1960s, ended the dependence on food imports and the fear of famine.

India has produced innovations of particular relevance to the poor. The Jaipur Foot, developed in 1968 by the doctor P. K. Sethi and the craftsman Ram Chandra Sharma, is a flexible artificial limb that costs a small fraction of Western prosthetics and has been fitted to hundreds of thousands of amputees. The Aravind Eye Hospital, founded in 1976 in Madurai, developed an assembly line approach to cataract surgery that offers free or cheap operations to the poor while remaining financially sustainable. Amul's cooperative model transformed dairying. The Unified Payments Interface, launched in 2016, lets anyone with a mobile phone transfer money instantly at near zero cost. These are frugal innovations, designed to do more with less, and they serve social welfare directly.

But the claim must be qualified. Innovation does not always increase welfare, nor does it do so equally. It can displace workers, as mechanisation did to handloom weavers, and the fear of technological unemployment has recurred in every era. It can concentrate wealth in the hands of those who own the new technology. Some innovations are harmful, such as the financial instruments that fed the crisis of 2008, the pesticides that poisoned ecosystems and the weapons of mass destruction. Innovation is a tool and not a guarantee of good.

Nor is it the only determinant. Daron Acemoglu and James Robinson argued in Why Nations Fail that institutions, such as secure property rights, an independent judiciary and open competition, decide whether societies can innovate and reap the benefits. A brilliant inventor in a country where officials seize property or protect incumbents will find it hard to bring his idea to market. Education, infrastructure, finance and openness to trade also matter. In this view innovation is a proximate cause of growth, and institutions are the deeper cause.

India's performance shows both promise and weakness. The country has a thriving software industry, a vibrant start up culture and world class research in space and pharmaceuticals. Yet its spending on research and development has stayed at about 0.7 per cent of national income, far below that of China, which spends more than two per cent, or Israel and South Korea, which spend above four. The number of patents and scientific publications per person is small. The education system rewards rote learning more than creative questioning. The Start up India initiative of 2016 sought to ease regulation and provide finance, but the underlying capacities of universities and laboratories need strengthening.

Policy should therefore be directed to the conditions for innovation. These include funding basic research, which the market does not provide because its benefits are widely shared, supporting universities, protecting intellectual property in a balanced way and encouraging competition. They also include ensuring that the gains are spread, through education that helps workers move to new jobs, and through public provision of health and basic services. Innovation that serves the poor, such as low cost diagnostics, drought tolerant seeds and solar lamps, should receive particular encouragement.

Even with the best policy, the nature of innovation resists planning. Breakthroughs often come from unexpected places and for unintended purposes, as when research into how bacteria defend against viruses led to the gene editing tools of the 2010s. The key determinant of growth is thus something that cannot be fully commanded, and a nation can only create the soil in which ideas grow. It remains uncertain how many good ideas are lost in places that lack that soil, and whether the person who would have found a cure for a disease is, at this moment, a child without a school.