What I would like to hear in the State of the Union

According to all indications, the President will use tonight’s State of the Union to hit on economic themes.  Look for exhortations to Congress to pass the payroll tax cut extension and other Obama Administration proposals.  With the head of the IMF now talking about a “1930′s moment” in Europe, there are clearly some short term economic issues to be addressed.  But on the long term issues, what I expect to hear tonight is an expanded variation of the following:

We need to increase our investments in basic research, education and infrastructure – and bring back manufacturing.

As I’ve noted before, that is all well and good.  But here is what I would like to hear next (using my wording from a number of reports and blog postings I’ve written over the past few years):

This is not the first time we have faced economic challenges.  In the 1980′s, the U.S. confronted a series of challenges to our economic competitiveness.  By working together, we overcame those challenges.  We can do the same today.

But we need to recognize that today’s challenges are different.  The nature of our economy has changed.  We are still an economic powerhouse.  We need to understand the new environment in which we find ourselves.

Back in the 1980′s, we faced global competition in goods and loss of domestic manufacturing firms; now it faces the fusion of manufacturing and services and the opening to international competition of services sectors once thought immune to such challenges. Then, the operating issues were quality and productivity; now they are customization, speed, and responsiveness to customer needs. Then, a key concern was creating a flexible and educated workforce; now, in addition, we must foster an educational enterprise that can provide the constantly changing skills required in a knowledge- and information-intensive economy. Then, the main financial challenge was reducing the cost of capital; today’s equivalent challenge is unlocking the value of underutilized knowledge assets and ensuring the efficiency and stability of the global financial system. Then, the policy problem was raising awareness of the importance of international trade; now it is crafting policy appropriate to an increasingly globalized and interconnected economy.

In the 1980s our focus was on individual firms and industries; now we must find ways of sustaining networks of firms and of adopting new business models. Finally, these problems and challenges, as well as myriad new ideas and technologies, are rapidly sweeping across the domestic and international economy. Their speed requires that U.S. industry, both manufacturing and services–as well as the suppliers of financial, scientific, and human capital–have the capabilities and resources necessary to prosper and grow in this new environment.

Basic research helped sustain America’s economy growth in the 20th Century.  But basic research is not enough.  It is one part of a the larger mix that fuels the economy.  We moving to a post-scientific economy where, to quote Dr. Christopher Hill, former Vice Provost for Research at George Mason University, “the creation of wealth and jobs based on innovation and new ideas will tend to draw less on the natural sciences and engineering and more on the organizational and social sciences, on the arts, on new business processes, and on meeting consumer needs based on niche production of specialized products and services in which interesting design and appeal to individual tastes matter more than low cost or radical new technologies.”

Education needs to move from the classroom to the living room.  Life-long learning should not be a slogan but an ingrained part of everyday life.   And as important as STEM is, our economic future is not solely in the hands of our scientists and engineers.  Our future prosperity rest on raising the skills and knowledge level of everyone.  Productivity no longer comes just from new machines, but from new ways of organizing work.  And as Professor Jamie Galbraith once said “American competitiveness depends at least as much on style, design, creativity and art – and especially on the liaison between technology and art.”

And let us be clear.  The manufacturing jobs of our father and grandfather are not coming back.  But we can create the manufacturing jobs for our children and grandchildren.  We cannot — we will not — compete on the basis of a race to the bottom where wages and living standards are lowered to keep jobs from moving elsewhere.  We can – and will — compete based on raising the knowledge content of our products — both goods and services.

We need to create new policies to confront our new challenges.  Government can play a major role in innovation and the development and diffusion of new products.  But, innovation policy needs to catch up to the innovation process.

In crafting a new policy, we must recognize three points:

  1) the innovation model has changed,

  2) it’s all about people and organizations, and

  3) technology plays multiple roles.

First, we all need to recognize that the innovation model has changed.  It is not the linear process of flowing from basic research to final product that sticks in everyone mind.  It is a network process. There are many points on the network where innovation can come from.  We have used a number of terms to try to describe parts of the new model: “open innovation,” “user-driven innovation,” and even “design thinking.”

It is also not solely about technology.  Technology remains an important component.  But, as noted earlier, social innovations, marketing, finance, design and business models are also key sources of innovation as well. 

Suffice it to say that innovation policy needs embraced this broader concept.

Second, innovation is about people and organizations.  Skills, not just education, are critical.  Likewise, both tacit and experiential knowledge, not just codified and science-based knowledge, are also important.  In order to put those skills and knowledge to proper use, organizational structure comes into play.  The old hierarchical systems of the industrial age are no longer adequate or appropriate.  New adaptive organizations which encourage innovation are needed.  What we use to be called “High Performance Work Organizations” are needed to effectively utilize worker skills and knowledge.

Finally, any innovation policy needs to understand that there are multiple roles for technology.  Technology can be a driver of innovation, a tool of innovation, and even sometimes not all that that relevant to innovation.  As a driver, the creation of new technology is a major source of innovation – the kind we normally think of when we use the word “innovation.” 

But technology is also a tool in the innovation process.  Technology as innovation tool works in two ways.  One is innovation as the absorption and utilization of technology.  For example, the iPod contained no new technology.  It utilized the technology in a new way.  The other is technology as an enabler.  This is especially true in the information technology (IT) area, where IT allows for a myriad of new applications and innovations.

Take the analogy of the railroad.  The marrying of the steam engine to a carriage on iron rails brought about far reaching changes in many difference areas.  The railroads spurred on development of a number of other industries, most notably the steel industry.  They changed opened up vast new markets and changed the retail and wholesale industries.  They even gave rise to new management practices and the shift from ownership capitalism to managerial capitalism.

And sometimes technology plays a very minor role in innovation, if at all.  Which was more important in creating the American suburbs: the automobile, Levittown or the 30 year mortgage?  One was technological; one was design; one was financial.  All were important.  As a nation we need to recognize and promote multiple forms of innovation.

So here are some policies I plan to put forward.  The new demand driven model innovation shows that government procurement and regulations can drive innovation. Government as a demanding customer can create the “thin opening wedge” — new products and services that have a specialized use. Once that specialized use is established, the product or service can be refined and adopted to a broader customer base. The demanding customer in fact becomes a co-creator. Smart regulations can serve the same function by creating demanding customers.

Here is another example of how we can expand our thinking on innovation.  We have a program to create and fund Engineering Research Centers (ERCs) in a number of areas. We should create one for design thinking.  We should expanding the ERC model to funding research on and demonstration of new business methods and organizational mechanisms as part of our “Catalyze Breakthroughs for National Priorities” element of the innovation strategy.  And we should fund more organizationally-focused challenges, such as the famous DARPA “Red Balloon” challenge.

These are but few of the types of new policies we will pursue — beyond the status quo and conventional thinking that government should confine itself to basic research, education and infrastructure.  That might be uncomfortable for some to hear.  But it is where we need to go if we are to restore long term economic prosperity in this highly competitive global economy.

That is would I would like to hear (or a variation there of).  If the President hits any of the major points, however, I will be happy.

 

Cross posted from the Intangible Economy.

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