Changing Models when the Current Model is “Broken”

Gross Domestic Product Calculation Example

If there is one thing we can agree upon, it’s that there is little agreement about the nature of the current global economic crisis.  Everyone has their own view it seems.  Case in point is yesterday’s op ed in the Washington Post by columnist Robert Samuelson.  When looking to spur recovery, Samuelson points out, “we live in a world of broken models;” a statement perhaps everyone can agree with.

Based upon this statement, it would seem that a logical response would be to actually change the model when proposing solutions to our current economic problems.  Unfortunately, the rest of Samuelson’s piece is centered upon a model of the economy from the 1960s that has proven quite inadequate in explaining sustainable growth as well as job creation (along with numerous other flaws).

Samuelson goes on to summarizes that since consumption is down, government can’t increase spending, the private sector won’t invest and we can’t export, we are doomed to stagnation.  His “three possible solutions” are derived from the “broken model” itself.  It’s no wonder that he is left without a viable solution and claims that “there is no longer a large source of strong economic growth in the world to stimulate and support struggling economies.”

Samuelson explains GDP growth as derived from the following equation:

So, instead of using a “broken model,” let us do what is necessary and change the model with which we confront the current economic slump.  What will work is looking at the real long-term cause of growth and increased living standards: innovation and the related increases in productivity.  It is a test of human-ingenuity versus ever tightening constraints, and we must face the fact that the “new model” must be one where innovation is key driver of growth.  If and only if we as a nation face this fact, will we ever truly tap into the engines of growth and start moving forward rather than stagnating or slowing.  Today, we are moving beyond the time when short-run topical solutions (trying to use monetary and fiscal policy to direct markets when the markets themselves are what is broken) can conceal the real problem: slowing innovative productivity (See Figures 1 and 2 for an illustration of the recent trends in patenting by U.S. firms).

Though patent application rates were growing through the 1990s; since then they have declined.  Samuelson, with his focus on traditional macroeconomic management, ignores the fact that we are no longer innovating at an increasing rate.  Rather, the number of new utility patents filed by U.S. firms has stagnated. Samuelson states that “finding a path forward could be time-consuming, tortuous and, possibly, inconclusive.”  ITIF does not believe so, and the right model is not difficult to understand at all.

The “new” model is actually rather simple and comes with it, a simple solution: spurring innovation.  Increasing innovation will fundamentally change how we produce goods, relax current constraints, increase standards of living, and is the only sustainable source of growth.  As innovation economist Paul Romer rightly points out:  “The challenge now facing all of the industrialized countries is to invent new institutions that encourage a higher level of applied, commercially relevant research and development in the private sector.”

So, getting the model right at a theoretical level is not as hard as it seems.  So-called “New-Growth theory” has been around since Joseph Schumpeter in the 1940s and developed further in the early 1990s by Romer and since then by other prominent growth-economists.  Rather, where the real difficulty lies is in convincing those who use “broken models” to seriously reconsider how they look at the world.  Convincing policy makers to pay attention, and then attack the problem head-on by introducing a comprehensive innovation policy at the national level is exactly what is called for, and what could lead to the recovery we all seek.

Figure 1: Velocity of Innovation from 1981-2001

Figure 2: Velocity of Innovation from 2001-2011

Data Source for Figures 1 and 2: USPTO Patent count data available at http://www.uspto.gov/web/offices/ac/ido/oeip/taf/cbcby.pdf

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About the author

Justin Hicks joined ITIF in June of 2012 as Senior Economic Policy Analyst. Prior to joining the ITIF as Senior Economic Policy Analyst, Justin Hicks finished his Ph.D. in Economics at the University of California, Merced. His research focused on potential spillovers of cooperative R&D in the international setting as well as the impact of funding on R&D productivity in universities. In his current research, he looks to identify the effect of trade policy on the flow of ideas and home-country R&D productivity. His primary expertise lies in using applied microeconometrics to identify causal relationships using large data-sets. Prior to receiving his Ph.D., Justin achieved a M.A. in economics and a B.A. in Business economics from the University of California, Riverside.
  • 4Gbill

    Justin,
    I agree that the solution is innovation, especially radical innovation. But creating a solution requires knowing how to effectively and competitively create radical innovation and that requires a new model of innovation which is a new fourth generation of theory and practice. The current model of innovation is broken and is linear “push” model and process that begins with investments in R&D and falsely thinks that technology transfer will successfuly create commercialization. It will not and never has. Romer agreed that the linear model of innovation is false when he said  “If this (linear) model were correct, physicists would have developed the basic science of thermodynamics and used it to show that, in principle, heat could be converted into motion. Applied scientists would then have used the laws of thermodynamics to highlight the factors that determined the efficiency of this conversion process. Engineers and product designers would have used these results to develop practical devices like the steam engine. In fact, the sequence was precisely the reverse. The people facing practical problems in the marketplace developed the steam engine first. As they studied the efficiency of different engines, they uncovered basic principles. These eventually lead to the development of the basic science of thermodynamics.” The 4G model is nonlinear and is being used in part by companies such as Apple and Facebook and is the basis for lean startups. R&D is great but not in the linear (3G) model. We need to change the model for innovation to 4G.

  • http://twitter.com/TheEconomist79 Justin Hicks

    Dr. Miller,

    I appreciate your comments, and would be interested in how you incentivize, maintain appropriability and tractability of new ideas in your proposed innovation management style.

    Also, how does it relate to policy makers?  What are the public policy triggers that can be pulled to spur a movement towards a completely different system of property rights regarding information?

    Given the very “sticky” nature of public policy, patent policy and institutional design, I am interested in how we move towards your model?

    I’d be interested in a digital copy of your book if you are able/willing to share.

  • 4Gbill

    You have asked very good questions that I can answer, but not adequately in this format. The current linear “push” innovation model is broken and even the part that includes open innovation with IP licensing of patents is inadequate. Public policy does need a justified reason to change and part of that reason is to support and protect innovation by removing barriers and  filling some regulatory gaps in trade policy such as the uncompensated hidden externalities of “free trade” that have been hidden “subsidies” provided in the USA that greatly assisted the development of intellectual property for innovations. These subsidies have been unfairly given away by current policy and need to be partially returned to the public in the form of some new compensation and the new regulations would significantly strengthen IP protection and thereby incentivize innovation especially the type  that creates jobs in the USA  without harming globalization and trade. It’s an extension to current WTO thinking that still supports fair trade among all nations except nations that innovate are better compensated. The 4G model of innovation is far more effective and competitive with a new framework that is more complex, more collaborative, faster, cheaper and productive than the current 3G linear model of innovation even when 3G is enhanced with basic open innovation (things like “connect and develop”, express licensing, brokers like InnoCentive and NineSigma…) and therefore 4G innovation is more difficult to effectively manage without understanding what you have identified as incentives, appropriability and tractability. But let me do a quick introductory answer. Markets are “won” with new dominant designs (DD) that have several parts in 4G that are missing in 3G. Targeting a new DD is required but 4G teams are required to do all parts of what Geoffrey Moored calls the “whole product”.  4G refers to these teams as “galaxies”. In the universe of global innovation, galaxies compete.  Innovation is a big team sport that entrepreneurship typically overlooks.  Teams include government, industry and academia. Teams are aligned with the 4G framework. The Chinese government has discussed with me an interesting way to practice 4G and incentivize the teams by doing 4G experiments as a competition among teams in a market with customers where the winning team and its candidate for a dominant design is awarded a new Chinese government specified standard. This lets the market pick “winners and losers” rather than the government but the government grants support of the new winner with regulated standards. The 4G process permits new more efficient IP protection inside a team in spite of higher degrees of collaboration and speed.  First to file works well in 4G, but IP (patents, trademarks, brands, trade secrets) has to be carefully managed with new 4G methods in the new framework. The learning curve is very much in play. Intangible capital needs to be measured and protected, not just the current IP elements. 4G DD’s are based on platforms that typically are proprietary but “open” like Microsoft/Intel and Apple both do very well for the PC and the iFamily respectively. Teams in 4G have partners that span different regions and the partners are aligned with an architecture that evolves. The concept of regional clusters in 3G is too restrictive. Regions can both compete and cooperate by having team members who are supplying different parts of a candidate for a new dominant design.  4G operates somewhat like the WWII Manhattan project that had several teams competing for different dominant designs (Little Boy and Fat Man) with regions not competing within each team.  DOE Innovation Hubs are part of 4G. The DOE Sunshot Program practices parts of 4G because it has well defined goals across the value chain to lower the cost of installed solar. 4G is a solution or innovation “pull” model.  Understanding markets and how to serve new or markets transformed with new DD’s which include new business models is proprietary IP.  Translational research at NIH practices parts of 4G because it does 4G research on clinical practice, not just 3G research in basic science. What’s missing are the 4G parts that include workforce education and support of innovation teams working on real projects innovation in innovation extension centers , the 4G experiments, new regulation that better support those experiments, the 4G contests to create new dominant designs with teams, and the public policy to support innovation including granting regulations with standards for new DD’s. You know government has a history of regulating commerce with standards including the intersection for vehicular and pedestrian traffic which has a DD with regulation that includes red, yellow, green signaling. Without that DD regulation, the free market would really crash.

  • http://twitter.com/TheEconomist79 Justin Hicks

    So, do you think that 
    http://www.xprize.org/ is a model that fits your definition of “4G”?

  • 4Gbill

    Justin,
    Xprize is 3G, not 4G because although it is a competition that is focused on solving parts of major problems with new capabilities that show breakthrough technology, Xprise doesn’t do the 4G process with iterative experiments in a market with real potential customers including consumers who have a large problem plus there is no required open platform targeted on creating a new dominant design like Microsoft/Intel and Apple iFamily have platforms that are open to other companies to produce a “whole product” and value chain, market or industry “ecosystem” governed by an architecture. Most of the twelve 4G principles and practices are not followed in Xprise. Mostly, Xprize is an exercise in entrepreneurship that supports a single company and its suppliers and is still largely technology “push” with a linear model in a field of dreams.