Innovation and Growth Despite the Fiscal Cliff

The burgeoning field of Innovation Economics1 is based on the idea that economic growth, employment gains and income growth are primarily driven by innovation. If you build an environment that encourages and enables innovation, you are also promoting economic growth. While the logic of Innovation Economics sounds simple and natural for our capitalist system, this election season and the fear of the fiscal cliff make it seem like we are a country that is short of common sense. Yet despite our current fears and uncertainty, innovators are working tirelessly to create the next product, the next company or the next process that is going to create a new industry or revolutionize an old industry and create tremendous new wealth. My belief is that while our messy democratic politics can lead to disturbing disruptions in our markets, the declines are temporary and are inevitably followed (like the rising sun follows the night) by a resumption of the markets long term upward march.

The reasoning of Innovation Economics has an intuitive appeal and evidence of its validity is apparent in a broad swath of history and in the world today. The Middle Ages are commonly known to have discouraged science and innovation, consequently growth was non-existent for hundreds of years. While a lot of factors coincided to enable the human race to emerge from the long dark night of the Middle Ages, a key to that emergence was technological innovation (especially the printing press) and the bitterly hard fought battle for freedom by scholars to pursue scientific inquiry independent of the church.2 Economic innovation, growth and rising incomes continued on an upward slope and set the stage for more economic growth with increasing innovation during the Renaissance, the Enlightenment and the Industrial Revolution.

Silicon Valley is probably today’s best known example of a geographic area having just the right mixture to generate explosive economic innovation that lifted up the world with economic growth. Empirical evidence shows clusters of innovation don’t happen by accident but are the result of specific attributes being brought together in one place in a “concerted effort of markets, institutions, policymakers”.3 The Council of Foreign Relations believes that the U.S. is largely successful in pursuing technology, demonstrating that technological innovation drives economic growth.4

The publication Scientific American is an advocate for the virtuous circle of science driving technology driving economic growth. They believe “technological innovation is responsible for half the U.S.’s economic growth since World War II. It has been the engine of our modern prosperity.”5 In a recent issue they examined the question: How does the United States stack up to the rest of the world in science, technology and innovation?

The U.S. ranked first in the number of published research papers – no surprise. The surprise is how how many more papers the US published, nearly 5 times as many as the second place country. On a scale of 1 to 100 the top three were; the U.S. finished first with a score of 100, Germany finished second with a score of 20.4 and China finished third with a score of 19.8. The U.S. issued the most patents of any country in the world followed by Germany at number two and China at number nine. In money spent on research in development; the U.S. ranked first and China ranked second. In the number of science and engineering doctoral degrees; the U.S. is ranked first, Germany second, United Kingdom third, Japan fourth and France fifth. China does not rank in the top 25.6

The United States’ leadership in science and technology is impressive and well measured by Scientific American. I believe it is equally clear and more impressive how the U.S. leads in entrepreneurial innovation and success at creating value from technological innovation. The great technology companies of the last few decades are almost all American. Think Intel, Cisco, Microsoft, Google, Apple and Amazon. The same environment that encourages these great engines of economic growth and wealth creation in new companies is also at work in older companies. Our domestic energy industry is a great example of that happening today. The technological innovation currently happening in the gas and oil drilling industry is opening up vast new reserves of oil and natural gas, driving down the cost of energy and likely moving the U.S. towards energy independence in the next 10 to 20 years.

Optimism is implied in the definition of investing. An American living in fear that the U.S. dollar will collapse and the United States will become a second rate country will not invest. That individual sees the world shifting like sand beneath their feet and their only rational “investment” is to buy gold, which is not an investment7 but rather an insurance policy, a depreciating store of value or a speculation.

I am an optimistic investor. I am wildly optimistic for the long term economic future of the great companies of the world which are by and large American companies. Why? Because the U.S. is an engine of economic innovation whose imperfect democratic and capitalist system will continue to grow and prosper in the years ahead.

Mark Swingle, CFP® is the principal of the independent financial planning firm Mark F Swingle Group located at 133 Prospect St. in Westfield. They are a part of Benefit Service Company which has been in Westfield since 1964.  Further information about the MFS Group can be found at www.westfieldfinancialplanning.com.

1. http://en.wikipedia.org/wiki/innovation_economics : Innovation Economics is largely based on Joseph Schumpeter’s book published in 1942 called Capitalism, Socialism and Democracy. Writing at the same time as John Maynard Keynes, he argued that “it was evolving institutions, entrepreneurs, and technological change that were at the heart of economic growth.”
2. http://en.wikipedia.org/wiki/Middle_Ages#Scholars.2C_intellectuals.2C_and_exploration
3. http://en.wikipedia.org/wiki/innovation_economics
4. Steil, B., Victor, D. G., Nelson, R. R. (2002). Technological Innovation and Economics Performance. A Council of Foreign Relations Book. Princeton University Press. 476 pgs.
5. Scientific American; October 2012, page 6, Mariette DiChristina, Editor
6. Scientific American; October 2012, State of The World’s Science, pages 36-52, multiple authors
7. http://www.investopedia.com/terms/i/investment.asp#axzz2BjxX91Ms : definition of investment

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by NFP Securities, Inc. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. Comments concerning the past performance are not intended to be forward looking and should not be viewed as an indication of future results.

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