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Why 95% of Traders Fail

Zen And The Decline Of Innovation

Politics / Social Issues Feb 23, 2013 - 07:24 PM GMT

By: Andrew_McKillop

Politics

BOEING DREAMLINER
The Dreamliner is grounded but Boeing CEO Jim McNerney says that redesign of its faulty lithium-ion batteries is moving ahead in a bid to satisfy regulators’ safety concerns and the jet can get back into the air "within weeks". The Boeing battery crisis is however just a part of Boeing's corporate troubles, and critics of Boeing attack its record on innovation - from both sides, for and against innovation.


The technological details on what Boeing engineers could or might do to reduce heat accumulation, vent the battery cells or make batteries resist fires will certainly have a heavy cost due to Boeing's innovation struggle reflecting an economy-wide, and even ideological crisis. This is the decline of innovation, the subject of heartwringing and posturing by politicians, the media, the economist fraternity and business for over 60 years in what today are called the "postindustrial" societies.

Even then, the keyword "decline" needs qualification. Boeing's troubles with li-ion batteries are lambasted by defenders of radical stepwise innovation, and attacked by defenders of innovation by "incrementalism". The first say that Boeing wasn't courageous enough, upstream, at the start of its design and engineering project to use much larger li-ion batteries than current Airbus planes. It made the decision, but then skimped and saved and squashed more radical battery designs. Boeing now finds itself with a panic-driven program to stuff insulation around the thousands of lithium-ion cells in each battery, add a new and experimental fume-venting mechanism, pack the cells in a more robust case made from a range of possible fire resiting materials, maybe of heat-resistant glass, test all this, keep costs under control, and persuade safety regulators and angy airline chiefs who made advance orders for the Dreamliner that all is well.

Incrementalists say Boeing went out on a limb, played with new ideas, and burned its fingers. Its innovation strategy should have been in much smaller and safer steps. Or not at all: incrementalists praise Boeing's idea of airplane windows which dim out automatically.

INDOOR PLUMBING AND CYBERNETICS
US economist Robert J. Gordon, writing in Wall Street Journal, 21 Dec 2012, underlined that economic growth in the US and other now-mature economies is taken as given; continued economic growth is an article of faith. This growth was built on innovation - but that was a certain kind of technical, scientific, industrial and business innovation. Concerning the inventions, Gordon says these, in many stark cases, were "one off", unique and one-time only. His studies on the USA's growth outlook and why he is negative on the outlook, include detailed research on why and how innovation worked in the past. He noted in his WSJ article that "Between 1891 and 2007, the nation achieved a robust 2% annual growth rate of output per person. Unfortunately, the evidence suggests to me that future economic growth will achieve at best half that historic rate".

As Gordon says, US economic growth wasn't based on "manna from Heaven". In the period of about 1875-1925 a massive number of one-off inventions, discoveries and innovations happened. He singles out, with no irony, the advent of indoor plumbing, saying: "the introduction of running water and indoor plumbing (was) the greatest event in the history of female liberation, as women were freed from carrying literally tons of water each year". But there is no way that indoor plumbing will be invented a second time. Nor the automobile, nor the telephone, computers and cybernetics.

By the 1970s, Gordon says, the impact of late 19thC inventions faded away and the computer revolution took over, allowing US economic growth to stay on its over-100-year average rate of 2% annual. Computers replaced human labor and contributed to productivity growth, but this climaxed with the marriage of computers and communication technology, producing the Internet. By around 2000, most computer-related inventions no longer produced fundamental changes but targeted miniaturization, as in hand-held devices like smartphones and tablets, basically the miniaturized combination of laptops and early cellphones. The industry was ready to offshore to China.

Arguments that innovation like fracking to extract shale oil and gas is a key innovation, are true, but the follow on argument that fracking will bolster or increase US economic growth is much less than certain. As Gordon says, energy costs for US industry and manufacturing can be reduced, but manufacturing counted for 30% of GDP in 1950 - and 11% of GDP today. The decline already happened, and the role of high energy prices in this decline was only one of many. Robotics and computer enhanced manufacturing - which extends back to the 1960s in Germany - face a general problem of global overcapacity in manufacturing. Innovative robots and workshop processes in workerless factories could for example one day produce Google's Driverless Car, making taxi drivers another threatened species: but would this enhance economic growth?

Indoor plumbing did much more for the US economy. Arguments that driverless cars will be high safety are likely true, but here again the decline already happened: fatal and serious car accident rates have fallen 10-fold in most mature economy countries since the 1970s.

HOLDING PATTERN
Innovation in mature economies such as America’s seems stuck in a holding pattern. Defendes of radical innovation blame the incrementalists. PayPal inventor Peter Thiel said in interview with Bloomberg Businessweek that: “Even back in the ’90s there were companies like Amazon that were willing to do big things. That has gone out of fashion now". Thiel claimed that only a tiny number of US companies and corporations are truly innovative today, including the Tesla Motors company of his friend and former business partner Elon Musk. In reality the financial story of Tesla Motors is of recurring promises of breakeven to be followed by profitability "within months", also accompanied by unimpressively low real innovation, using what is now highly conventional laptop type lithium-ion batteries, 4800 of them for 1 overpriced "supercar". For Thiel however, the fact that Musk often gets portrayed as a quixotic dreamer in the business press. “...reflects the insanity of our country, that anything non-incremental is seen as insane".

Who is responsible for this downturn in innovation? The first target is always Nanny Government, typified in the current Dreamliner crisis by some Boeing defenders accusing the US FAA airplane safety agency of "wildly overreacting" to li-ion battery fires by grounding the Dreamliner. Nanny society and government are "risk off" or risk averse, so they panic at the slightest explosion in an airliner!

This argument continues, saying that excessive regulation makes public markets unable to reward risk and innovation. Any public company, which in theory should be able to draw capital to pay for R&D more easily than a private company, has too much exposure to the State's "nannyism" and the need to be State-friendly. Also, when it tries to get around this by floating a new private company through business start ups and the IPO process, investors will see this as a proof it has little confidence that its innovative products or processes are going to work. The IPO is a flop, and the innovation stops dead.

Bringing a new, focused, innovative product company to market through the IPO process should theoretically give these small and bright companies more access to capital to finance their own R&D but this is not the real world case. Finance professor S. Bernstein at the Stanford Graduate School of Business has studied the history through 20 years or more, of the patent application descriptions of new companies following their IPO. He found that only in the first 5 years after an IPO, there is an average decline of 40% in their follow-on or further new patent claims, in other words their rate and quality of innovation drops very fast. One reason is simple: a company’s best inventors tend to cash in their chips and head to either smaller and newer companies with more upside, or get recruited by "giants of industry" - but also, at least as important, because innovation managers become heavily inclined to pursuing incremental projects that will not spook investors. They started radical but soon became incremental, then corporatist.

This concerns mostly small, and some midsize companies. When we move to the "industrial giants" in a postindustrial economy and society, their main concern is two-part only: staying mindful about bottom-line profits, and mindful about their State-approved image as "a great company". As we know, this second concern can easily overwhelm the first, especially during economic recession and crisis. In this range and scope of "real world" goals and priorities, innovation counts for little or nothing.

THE SOUND OF ONE HAND CLAPPING
'What is the sound of one hand clapping?' is a celebrated Zen kondo or interogative statement to test the enlightenment of Zen students through dialogue using nonrational, paradoxical language. With mondos which are Zen statements aimed at focusing students on the real world stripped of anything other than direct personal experience, the fundamental aim is defined by renowned Zen Buddhist masters like D. T. Suzuki as "disabling and exhausting the analytic mind", to enable enlightenment and insight.

With this, innnovation becomes the Zen middle way - neither total nor subsidiary, neither radical or incremental. For the economy however, despite Silicon Valley Zen masters claiming that Zen and high-tech business innovation draw on the same sources, innovation faces "corporate hubris", more simply the fear of failure and the pursuit of arrogance. Add in the costs and risks of innovation, and the reason innovation is declining becomes even clearer.

Joseph Schumpeter is often called "the 20th century's second most important economist", alongside Keynes but he was never given the iconic elite-friendly image, and rewards that went to Keynes. Above all Schumpeter is either praised or criticized for identifying corporate hubris, inertia, monopoly and cartel building, refusal to innovate and bureaucratic me-tooism as "the death of capitalism".

In 'Capitalism, Socialism and Democracy', published in 1950 he wrote: "The perfectly bureaucratized giant industrial unit not only ousts the small or medium sized firm and “expropriates” its owners, but in the end it also ousts the entrepreneur and expropriates the bourgeoisie as a class". We can call this "the middle classes", who Schumpeter said were doomed to lose not only their income but also what is infinitely more important, the function, role and status of the middle class in society. He went on to say that the real "pacemakers of socialism" are neither the intellectuals nor political agitators - but the Vanderbilts, Carnegies and Rockefellers. Updating this, we can add the present crop of tycoons such as George Soros, Bill Gates, and Warren Buffett.

Why innovation declined was simple for Schumpeter: when it concerns the economy, the role of entrepreneurial innovation soon becomes much more important than scientific and technological invention or product innovation, and business innovation is always the first victim of corporate empire building. Technological and product innovation, as Robert J. Gordon would likely agree, faces its own separate problem of decline because the stock of inventions has grown so fast and the limits of science have been pushed so wide. Neither automobiles nor indoor plumbing will ever come again as a new invention, a second time. Only further improvements, usually aimed at economizing water, metal and materials or energy, or improving safety and design features for bored consumers will occur. Driverless cars may be "a nice idea" but the role of cars is to transport human beings.

Schumpeter was more interested in the process of making new ideas work than in the generation of the ideas themselves. The rate of new patents being granted in a country was not his prime interest, and it can be argued that at least some, even many of the large bureaucratic-type corporate entities which Schumpeter said strangle business innovation may have an impressive track record for filing patent claims. What they do with their patents is the acid test.

Studies designed to test if Schumpeter was right often back up one of his observations: large companies that were built on the back of one or a few major innovations - like Microsoft or Apple - tend to stay in that sector of activity. They concentrate on their earliest, most business-successful innovations and get into trouble when or if they try diversifying, with other innovative product ideas they however paid for and patented, but did not have the "business model" to make it work. An upcoming example could concern Google's attempt at breaking away from its large remote IT server business model and into "hardware products and things", like laptops or driverless cars. A negative trend also supporting that argument is the decline or disappearance of the individual independant inventor. Even filing a patent claim is an expensive and time-consuming process suited to bureaucratic and large organizations.

The circle turns, and we find why innovation is the other missing hand for the silent handclap of corporate-state crony capitalism. This is the triumph of the unoriginal and uninventive. For business innovation it richly fulfils the Schumpeterian prediction of decline and poverty.

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2013 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.

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