Innovation Shortfall Thesis Gains Another Fan

I still find many people who instinctively recoil when I talk about the innovation short fall as a prime cause of today’s economic problems. But see this  interview with hedge-fund billionaire Peter Theil (hat tip to Arnold Kling)

My orthogonal take is that the whole thing happened because there was not enough technological innovation. It was not really the fault of the borrowers or the lenders; the problem was that everybody had tremendous expectations that the country was going to be a much wealthier place in 2010 than it was in 1995, and in fact there’s been a lot less progress. The future is fundamentally about technology in an advanced country — it’s about technological progress. So a credit crisis happens when the technological progress is not as good as people expected. That’s not the standard account of the last decades, but that’s the way I would outline it.
People were expecting house prices to go up 8 percent a year. That would be quite possible in a society where the GDP was growing tremendously and where there were tremendous gains in efficiency and technological innovation. But we’re not having that much innovation and, because of that, the housing bubble was unrealistic. It’s also possible that the housing bubble was very deeply linked to the tech bubble. The tech bubble was about extrapolating technological gains; it turned out that the gains didn’t materialize as quickly, or at all, and then people went back to housing and back to credit to get the 8 percent returns. But housing and credit still depend on an underlying society that is progressing, and that sort of progress was not actually happening. So, if the tech bubble was fake, then the housing bubble would almost certainly have to be fake. The real root of the problem is always technology.

Compare that to my 2009 cover story in BusinessWeek, Innovation Interrupted:

While Wall Street’s mistakes may have triggered the financial crisis, the innovation shortfall helps explain why the collapse has been so broad.

See also my recent policy pieces for the Progressive Policy Institute, which link the innovation shortfall to the persistent job weakness (for example, here)

Added: I see that Tyler Cowen is about to come out with a minibook on the innovation shortfall, entitled The Great Stagnation. I didn’t know the book was coming–but the fact that Tyler dedicates the book to me won’t stop me from writing a positive review.


  1. Bill Messer says:

    Could a major contributing factor to the innovation shortfall be that too many PhD’s in math and physics have been working on Wall Street and not enough in R&D? I remember Richard Nixon saying back when he was president that the US economy was so strong it would take a genius to wreck it. Ironically, the aforementioned PhDs have provided that genius, by omission (ie, by not doing what math/science PhDs have traditionally done) as well as commission.

  2. The innovation shortfall thesis is a canard. To give your argument its due, there is a sense of technology optimism in the US, having gone through a PC boom in the 80s, an internet bubble in the 90s, and the rise of mobile at the end of this last decade. However, if one is going to buy an overpriced house, one has to have more than a “sense”: you have to be able to point at money coming in, which at least happened with the stocks in the ’90s, ie the wealth effect, if not their revenues. I don’t think any of the people in the housing bubble had innovation on their mind, rather it was a mix of the narratives Thiel attributes to the Left and the Right. Bankers had a bunch of money to invest because of the savings glut but had no idea where to put it, so they funneled it into housing, spurred by dumb govt incentives. The public was glad to cash in on the bubble to flip houses or take out HELOCs and then overindulge in LCDs/SUVs. Of course, one can make a facile claim that innovation could have bailed them all out- someone might invent a new, cheap biofuel and make us all richer but nobody is going to make big decisions by simply assuming that- but to suggest that the innovation shortfall was a primary reason is to let people off the hook for any control or rational decision-making process about their lives. I suggest that is the primary reason you and others put forth this innovation shortfall excuse, as a way to blame the fates rather than our own decisions.

  3. Here is how I’ve been thinking about our suppressed technological innovation. Innovation tends to spring from the mathematically competent. It is fundamental to a great many disciplines, but for several decades, there has been reported a notable shortage of math teachers in the U.S.

    There have been many career options for the mathematically competent that paid truly dramatically better than teaching, particularly K-12 teaching. I propose that students have been taught so poorly in the critical discipline of mathematics that it may have permanently reduced the ability of the population to innovate, to teach and inspire youth, and to even manage personal affairs.

    Meanwhile, the frenzy of resentment toward public servants and decent pay or benefits for them, often vehemently against teachers, pretty much guarantees that those talented in the math and science disciplines would never choose to teach, unless at the university level where there are some significant efforts to achieve competitive salaries (too late to make a difference for many students).

    • Nonsense on all counts. Almost all math, basically anything beyond 2 + 2, is a waste of time for 99.99% of the populace. People don’t add their grocery bills these days, they have computerized cash registers to do it for them. Your smartphone and every cellphone has a calculator built in. Most numerical work is done by software nowadays, which only requires a bunch of computer-literate people to learn the simple rules needed to manipulate the GUI, with a few numerically adept people writing the underlying code. As for innovators specifically, one doesn’t create the next Edison, as if that were every possible, by teaching a bunch of Tony Sopranos math. The type of person who’s going to innovate gravitates to that by themselves. As for a claimed teacher shortage, the ranks of teachers are about to be decimated by online learning, so we’ve got way more than we need now. 🙂

  4. i don’t see the two as linked quite so closely as thiel makes out.

    greed and wall street innovating in gaming regulations and markets caused the housing bubble/financial crisis.

    the lack of real growth is because of tyler’s low hanging fruit argument.

    both relate to unreasonable expectations of growth in the short term (one from doing nothing, one from real technology) but the lack of growth in technology would not keep house prices up.

    technology should mean house prices go down. cities are cheaper than sprawl. modern building methods are cheaper than building out of stone. automation and mass production mean housing should become a cheap commodity, eventually. agriculture technology means less land use per capita. fast transport technology means people can live wherever they want.


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