↗️ 5 Quick Questions for … economist Kevin James on ideas and economic growth

Does the American economy have enough 'innovativity?'

One explanation for the long-term downshift in US productivity growth is that technological progress requires evermore resources and researchers. And that's too bad because a complementary explanation: by the the early 1970s, we had harvested the big productivity gains from the Second Industrial Revolution — electrification, the internal combustion engine, among others — and the subsequent Information and Communications Technology Revolution had less productivity oomph than its predecessor.

Good ideas, old and new, are not enough, though. They must be entrepreneurially processed into new products and techniques. Economist Martin Weitzman explained in 1998 that “the ultimate limits to growth lie not so much in our ability to generate new ideas as in our ability to process an abundance of potentially new ideas into usable form.”

This development and commercialization process is a critical step for turning a great idea into something that boosts total factor productivity growth. TFP is that bit of economic growth that cannot be explained by inputs such as the number of hours worked or the amount of capital used. Presumably, it reflects advances in production technologies and processes. Gains in TFP have accounted “for well over half the growth in measured U.S. labor productivity (output per hour of work) over the past century,” according to the CBO.

Yet as economists Kevin R. James (LSE, Systemic Risk Centre), Akshay Kotak (LSE, Systemic Risk Centre), and Dimitrios P. Tsomocos (University of Oxford) observe in the new paper “Ideas, Idea Processing, and TFP Growth in the US: 1899 to 2019,” (which uses the penicillin example) much of the economic literature about economic growth “essentially ignores idea processing all together.” The researchers conclude this neglect is an important oversight. From the he paper’s summary:

Innovativity—an economy’s ability to produce the innovations that drive total factor productivity (TFP) growth—requires both ideas and the ability to process those ideas into new products and/or techniques. We model innovativity as a function of endogenous idea processing capability subject to an exogenous idea supply constraint and derive an empirical measure of innovativity that is independent of the TFP data itself. Using exogenous shocks and theoretical restrictions, we establish that: i) innovativity predicts the evolution of average TFP growth; ii) idea processing capability is the binding constraint on innovativity; and iii) average TFP growth declined after 1970 due to constraints on idea processing capability, not idea supply.

For more on this subject I reached out to Kevin James and asked him a few questions: