Is innovation faltering to create growth?

Economic growth, a major discussion topic is further "christened" by the recent Nobel Prizes to Nordhaus & Romer. At least Romer brought us closest to explaining through a model that endogenous growth stems from inventions and innovation where positive spillover effects are the prime driver of growth and it is lack of competition that creates growth through monopolies, eventually.

Is this hypothesis changing? There is some evidence from the stock of innovations and the new stock we have added in the last decade.

If spillover effects cause economic growth, there will be no incentive for the inventor to create new stock of inventions. In fact marginal product of invention would be reduced to zero and no rent will also be available to the inventor.

Take the best example of the last twenty five years, the internet itself, which created $5 Trillion of new economic growth. The spillover effect of this invention has taken us this far, which provided fodder for such a stratospheric total factor productivity growth that it created five of the top ten firms whose value today tops $4 Trillion.

But surely this has led to monopoly of the highest order, in each of their fields these top five are one single firm driving change.

The question now is whether the stock of new inventions are changing positively or are we relying on spillover effects to take us through one more decade?

Evidence seems to suggest that we are not creating new stock of human capital that will replace the old stock sufficiently. Take the top five firms in this domain and the answer will be clear as the investments needed to create new stock is diminishing if one goes by their balance sheet numbers.

Most of the inventions of the earlier times came freely to this world, from telescope to steam engine, there were no patents involved. The pace of growth that stemmed from these inventions touched a wide range of people and it reached all the distant shores of civilization. The same is true for our most prized invention, the internet, it is virtually non-patented and free for one and all thus allowing further innovation to happen.

But is this changing now with disguised patenting, where spillover effects could be limited to act? Why would Google have to pay billions of dollars to Apple to have their Chrome installed in Apple handsets to remain the default search engine in Safari on iOS ; does this mean that the costs are going to rise for our next generations to be able to use the internet? If every application is going to be priced it would continue to raise the cost of information and in turn the cost of commerce.

Does this mean we are entering the next phase in internet where the information highway is going to have tolls that would limit access to the privileged? Will this not mean that innovation price tags are rising in costs and instead of collaboration we are entering the phase of competition?

This could provide the perfect ground for innovations to hit the bumpers and the road blocks simply come from competition rather than collaboration.

The entire premise of growth is hinged on the current internet commerce that is proliferated by a free information highway. If the information highway is put to competition and rent seeking, we will turn our innovation pyramid upside down.

If innovative firms start to engage in rent seeking, they would lose the very edge that they have carefully nurtured to reach the sharp edges of knowledge that they hone through development of human capital.

The language of business and the language of innovation is not at cross-purpose, they unify eventually for the supreme purpose of human progress; economic growth is just a residual denouement.