Classifying Innovations: type, breadth, impact, fertility.

Attention Conservation Notice: In the hope that people will stop talking past each other quite so much, discusses the different parts of the innovation elephant, and proposes  that a classification scheme be adopted, based on type, breadth, impact, and fertility.

Last year Tyler Cowen wrote a book called The Great Stagnation, which claimed that the flow of benefits from innovation is drying up. No matter how many scientist there are, or how many patents, or whatever things that others like to counter with, we're not seeing the same rate of return from these inputs as we did from innovations in the nineteenth and early twentieth century. The investment is great, but the rewards are few. The low-hanging fruit has been eaten. (Or: the law of diminishing marginal returns applies to the Solow Residual, too.)

A few months ago Robert Gordon published a paper with the same theme: no new inventions can compare in impact with that of indoor plumbing, the internal combustion engine, and electric motors. (Perhaps the last really world-changing inventions were the contraceptive pill, and high-response, high-yield dwarf grain varieties, a.k.a. the Green Revolution.)

There has been some econoblogospheric debate on the topic of innovation, with  Isabella Kaminska at FT Alphaville being one of the more important nodes in the debate graph.

A couple of days ago Daron Acemoğlu and James Robinson joined the debate with a post on their blog for their marvellous book, Why Nations Fail. Here's an extract, which itself is only supporting material for their theme, but illustrates what I want to say:-

First, much evidence shows that what determines technological innovations isn’t some sort of “exogenous innovation capacity,” but incentives. This point was stated forcefully by the great economist Jacob Schmookler in his Invention and Economic Growth where he argued (p. 206): 

invention is largely an economic activity which, like other economic activities, is pursued for gain…

Schmookler illustrated these ideas vividly with the example of the horseshoe. He documented that there was a very high rate of innovation leading to improvements in the horseshoe throughout the late 19th and early 20th centuries because the increased demand for transport meant increased demand for better and cheaper horseshoes. It didn’t look like there was any sort of limit to the improvements or any evidence of an “exogenous innovation capacity” in this ancient technology, which had been around since 2nd century BC.

Acemoğlu and Robinson reiterate the excellent points that the things that matter most for innovation are institutions and incentives. True, every word of it, but missing the point of what Cowen, Gordon et al. are going on about.

It's clear from the example in passage quoted above, and a from few other passages in their piece that Acemoglu and Robinson are talking about innovations in the broad sense. Cowen, Gordon et al. on the other hand, seem to be pining for more of the kinds of innovation that change the structure of the economy, and sometimes the nature of work itself, by generating a slew of follow-on, derivative innovations. Cowen:-

I think in terms of general purpose technologies and platform-like breakthroughs.  Once you get them, innovation runs wild, otherwise it is tough sledding, with incentives still accounting for some of the variation within a particular place on the innovation curve.

In short, Acemoğlu and Robinson talk about the supply of innovations, without considering their effects either in terms of changes to production processes or in terms of benefits to households, while Cowen and Gordon are talking about their social and economic effects. To be fair to Acemoglu and Robinson, no-one so far in the debate has been very clear about what they are talking about, or proposed much at all in the way of a taxonomy of innovations. So here's a first stab at one,  based on effects.

Looking along one dimension, the effects of innovations could be divided into three categories. An innovation creates something new; it does or creates something better; or it substitutes inputs or eliminates an industry from the money economy.  

"Something" here means a new category of product, or a new industry,  not just another product in an existing category.  So "television" is a type I innovation, whereas "LCD television" is a type II innovation, and within that industry, 3D TV is a minor (perhaps negligible) type II innovation, and things such as Sony's "X-Reality Pro" are really insignificant type II innovations. The spread of schooling and resulting widespread literacy eliminated "letter-writer" as a specialist industry, and so it could be considered a type III innovation, at least in part. 

In the real world things don't divide neatly into categories, of course. Some innovations can be hard to classify into one of the three types, because they have multiple effects.  The spread of literacy had many other effects besides putting scribes out of work. Among them, it increased the demand for printed books and greatly increased social mobility. But the categorisation into new/better/gone still tells us something useful, I think.

The cellphone (a type I innovation, spawning several new industries) enabled many other industries to work at a faster tempo, so it has type II aspects. It has also caused the virtual elimination of pay phones, and it seems likely to eventually eliminate traditional landline phones, so it has some type III-ness, too. The iPhone, a type II improvement over preëxisting smartphones, has enabled the creation of new industries besides affecting the structure of the mobile phone industry, and changing its economic importance.

Considering innovations like these points us toward three other dimensions of innovation: breadth, the number of industries affected by the innovation; impact: how much effect the innovation has on methods of production or how great the benefits to households are; and fertility: how many industries or products and services arise that depend on the innovation.

Type, breadth, impact, fertility. Let's look at some examples from above.

Schmookler's horseshoes are clearly of type II: each was an improvement on the preceding one, in terms of the services provided to horse users. The scope or breadth of effect of these innovations was on the fair to middling fraction of industries and households that employed horses on a daily basis in the late nineteenth and early twentieth centuries.  In terms of impact on productivity, on changes to economic importance of the industries concerned, and on benefits to households, the impact of each new kind of horseshoe was more or less unnoticeable. Fewer horses lamed, incremental increases in load size, slightly cheaper tickets and fewer delays due to horse trouble. All nice for farm workers, travellers, and transport firms, but not the stuff of letters to mother.  In terms of fertility, each new horseshoe may have inspired its successors, but that's the best that can be said. There was no impact on manufacturing or services other than transport.

In the end, a type I invention provided overwhelmingly greater benefits than even the best horseshoe, even in its scope of impact, as Acemoğlu and Robinson admit:

Then suddenly, innovations came to an end, but this had nothing to do with running out of low hanging fruit. Instead, as Schmookler put it (p. 93), it was because the incentives to innovate in this technology disappeared because

the steam traction engine and, later, internal combustion engine began to displace the horse… 

So despite A and R's claim that "[i]t didn't look like there was any sort of limit to the improvements" to be made to the horseshoe, in the end they ceased to matter. 

More importantly for our purposes, the structure of production in those years would not have differed noticeably if none of those improvements had been made, so they didn't matter to start with, either. So: type II, breadth minor, impact almost nil, fertility almost nil. 

The steam traction engine, on the other hand, had great impact in agriculture, transport, and  construction, which at the time were three large industries in terms of employment, and three important suppliers of services to households. It reduced employment in agriculture, and increased the size of the agricultural  contracting industry, and it transformed and increased the importance of maintenance engineering (blacksmithing, as it used to be). The traction engine was also quite fertile, causing the spread of new kinds of  earthmoving equipment such as the bulldozer and the steam excavator, and inspiring various machines used in forestry such as 'portable' sawmills, besides stimulating the development of new, larger combine harvesters and ploughs.

The classification for the traction engine is therefore: type I, breadth moderate, impact major, and fertility moderate.

The steam traction engine was itself a type I child of a much more fruitful type II innovation: Watt's improvements to the steam engine. This was a type II innovation which had enormous breadth and strength of impact, and was moreover  fertile. (Once Watt's patents for his invention had expired, the number of different applications for steam engines took off, and the resulting innovations swept through nearly all of the major industries of the time, the main exceptions being retail trade and domestic service.) 

The external condenser steam engine is classified as type II despite its fertility. One of its more visible effects was to enable the creation of the railway industry (type I). But that's all it did: enable. The actual innovation of rail was a separate process with the steam engine as one of its major parts.

(It has been asserted that if rail had not been invented, economic progress would not have been greatly delayed or stunted. People and goods would have been moved via canals and rivers instead, with no great loss of benefits. Nevertheless, the rail industry did become a significant part of the structure of production.)

The proposed classification scheme enables convenient definition of what we are talking about, when we talk about innovation.  Cowen and Gordon are focused on highly fertile, wide breadth, high impact type I and type II innovations: transformational innovations, we could call them, which are the tiny minority. Acemoğlu and Robinson, by contrast, have a broader view, taking in the whole range of innovations from the most common and trivial up to the transformational.

Anyway, there it is: type, breadth, impact, and fertility. Enjoy!