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Aug. 14, 2020, 9:27 a.m. EDT

Innovation is too important to be left to investors alone

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CAMBRIDGE, Mass. ( Project Syndicate )—Innovation is the engine that drives contemporary economies. Living standards are determined by productivity growth, which in turn depends on the introduction and dissemination of new technologies that allow an ever-wider variety of goods and services to be produced with fewer and fewer of our planet’s resources.

Policy makers and the public at large understand the importance of innovation. What is less well appreciated is the degree to which the innovation agenda has been captured by narrow groups of investors and firms whose values and interests don’t necessarily reflect society’s needs.

In today’s advanced economies, private firms undertake the bulk of research and development. The business sector’s  share  of total R & D spending ranges from 60% in Singapore to 78% in South Korea, with the United States closer to the higher end, at 72%. But it is the public sector that provides the essential social, legal, and educational infrastructure that sustains private R & D.

Also by Dani Rodrik: We need to create more good jobs. The old easy answers won’t work any more.

Innovation in the private sector depends crucially on government funding of basic science and research labs. It relies on scientific talent trained in universities supported by public funds. The state provides innovators with monopoly rights through the patent system, and ensures the private appropriation of returns to R & D through labor and contract law. Not least, private R & D is heavily subsidized by the state through tax credits and other policies.

As a society, we should care not just about how much innovation takes place, but also about the types of new technologies that are developed. We ought to ensure we are investing in technologies that are safe, environmentally sound, empower rather than simply replace human labor, and are consistent with democratic values and human rights.

The direction of technological change is not fixed or determined from outside the social and economic system. Instead, it is  shaped  by incentives, values, and the distribution of power.

Despite the state’s heavy involvement in supporting innovation, governments typically pay remarkably little attention to the direction technological change takes in private hands. But private firms’ priorities often lead them to underinvest in technologies that have significant long-run returns, such as those that reduce climate change, or to pay inadequate attention to the human-rights or privacy implications of digital innovations.

Pharmaceutical companies, for example, seek returns in high-price medicines for rare diseases affecting advanced economies, instead of vaccines for tropical diseases affecting millions in poor countries.

Also read: Gilead is protecting its drug patent instead of protecting COVID-19 patients

Moreover, firms tend to over-invest in automation in order to increase the return to capital and managers, at the expense of employees. As the economists Daron Acemoglu and Pascual Restrepo have  noted , this may result in “so-so technologies” which produce few overall productivity benefits, while leaving workers worse off.

The common fixation with automation can lead the smartest investors astray.

In 2016, Elon Musk announced that Tesla’s /zigman2/quotes/203558040/composite TSLA +3.50% Model 3 would be built in a new, fully automated car factory, which would operate at speeds exceeding what is feasible for humans. Two years later, the plans had foundered, and severe bottlenecks at the new factory made clear actual production would fall far short of the company’s targets. Musk was forced to set up a  new assembly line —full of human workers—on the factory grounds.

“Humans are underrated,” he  conceded  on Twitter.

Innovators’ priorities are naturally shaped by their own cultural and social milieu. In a recent paper, Harvard Business School professor Josh Lerner and Ramana Nanda have  quantified  how distant their values and priorities may be from those of ordinary people.

In the U.S., venture capital (VC) plays a disproportionate role in financing innovation by startups. The VC industry is highly concentrated, with the top 5% of investors accounting for 50% of the capital raised.

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