Abstract
For any scholar interested in understanding why the rate of innovation in the United States is declining, this book will prove valuable. It delivers a methodical explanation of four forces that have reduced America’s ability to innovate: 1) too much capital built up on the balance sheets of large companies, causing them to consolidate their product markets and avoid risky, disruptive innovation; 2) what the authors call “corporate managerialism,” which to anyone familiar with the heritage of Cornell’s ILR School will sound much like a (slightly) updated version of William Foote Whyte’s thesis set out in The Organization Man; 3) globalization, which the authors argue has focused companies on refreshing products rather than inventing new ones; and, 4) an overblown regulatory state that makes innovation disproportionately more difficult for young and small companies than for giant incumbents that enjoy government favoritism.
While these four forces are already widely appreciated, Erixon and Weigel develop each in great detail (the footnotes are an old-fashioned tour de force), and make the case for a negative synergy wherein each force effects the others in ways that instead of counterbalancing unwanted dampening of system-wide innovation, in fact, make matters worse. Thus, the reader is given a well-developed interactive perspective on why our nation’s innovation machine, as William Baumol once referred to the American economy, is becoming less productive. Much of the book’s argument in this regard was developed decades ago by Herbert Simon who described the managerial decision-making of secure incumbents as “satisficing.” Innovation seems to interest managers only insofar as they search for the upper bound on the corporation’s return on investment. Many large corporations seem to hunt down managers intent on optimizing resources by searching for disruptive innovations.
The book repeatedly engages a metaphor of graying capitalism, describing an economic system that is aging and becoming “dull and hidebound” (p. 16), where innovation is not sought and is actively resisted because of its potential to disturb the predictable, slow-growth path that is characteristic of “late-stage” market economies. In the United States, crony capitalism reigns—a variant on European industrial policy that the authors argue snuffed out innovation on the continent more than ten years before America felt the effects of its federal government trying mightily to replace market signals with its attempt to pick innovative winners and losers. Think Solera and Tesla. The argument goes on and on but to many dispassionate observers, Elon Musk’s greatest innovation rests in his ability to sell government on the idea that electric cars are more eco-friendly and that subsidies to his company will help reverse rising sea levels.
While The Innovation Illusion is elegantly written, the reader comes away with a sense of hopeless resignation. The forces for stagnation are simply too great. Old men cannot make themselves young again. The sense of foreboding, linked as it is to an argument about a maturing economy looking for another animating rationale (Could it be Bernie Sanders’s or Elizabeth Warren’s or Alexandria Ocasio-Cortez’s kind of socialism?), seems a little too familiar to anyone versed in historic economic thinking. Many of the most respected economists at the time of the Great Depression used the “tired out, mature economy” as an explanation—one that, like this book, does not lead to a convincing policy prescription to turn things around.
The two best chapters, “The Return of the Regulators” and “Killing Frontier Innovation,” jointly develop what the authors describe as the regulatory-permission economy that breeds precautionary management decision-making. Both chapters are useful in understanding the cultural tendencies introduced in the Progressive Era to rely on experts and to quantify and standardize every management decision. These joint impulses make schools of business and schools of government affairs largely indistinguishable. Both quash creative thinking, which, Erixon and Weigel appropriately point out, is critical to innovation and is not a synonym for technology.
In a field of particular interest to me, it is disturbing to see “benchmarks” and “best practices” being used to guide philanthropy, which was once thought to be the unfettered force that could support “wild and crazy” ideas, what the authors refer to in corporate life as the missing “culture of dissent and eccentricity” (p. 237). Foundations, even as they grow more numerous and wealthy, are less and less able to point to breakthrough ideas that enjoyed their funding.
In their dissection of the causes of falling innovation in the United States, Erixon and Weigel never mention the role that union work rules, which by nature abhor innovation, play in restricting management’s pursuit of productivity gains. Also unspoken is the role that our failing system of public schooling has in producing graduates no longer capable of synthetic thinking, a necessary component of the innovative process. Similarly, the authors seem blind to the effect class action lawsuits have had in inducing risk avoidance, and, hence, innovative experimentation with new consumer products. Indeed, the book seemingly worries that we are producing too much in the way of innovations aimed at improving the efficiency of households (consumers) and not businesses.
The book bemoans the loss of John Kenneth Galbraith’s vision, circa 1950 to 1970, of an economy governed by the elites of government, big companies (e.g., General Electric, AT&T, and General Motors), and national unions when it appeared there was sufficient money for corporate research and development. In fact, Galbraith, who was John Maynard Keynes’s best-known American popularizer, was in the thrall of central planning. Europe’s record of slow growth tells the tale of the EU’s industrial policy. The authors, however, do conclude that “managerialist versions of capitalism,” consistent with Galbraith’s theology, have produced companies that have driven out entrepreneurial risk taking so effectively that “often, only planning remains” (p. 85).
Just like most books on innovation, The Innovation Illusion is long on causation and short on remedy. Taxonomy overwhelms prescription. Indeed, its major suggestion is that we need to change political institutions. One cannot help but wonder if this book anticipated the Trump revolution, one that embraces the authors’ call to greatly reduce regulation of business. Of greater interest is the apparent rejuvenation of capitalism as evidenced in higher rates of GDP, tight labor markets, rising comparative returns for labor versus capital, low price inflation, and, an apparent reversal of a twenty-year decline in new business formation. If one believes, as I do, that entrepreneurs are the economy’s canaries—the agents of transforming innovation into new products and businesses—perhaps capitalism can fly again. Now, as the authors argue, the task is to get big companies to reform themselves or get out of the way.