In his article for the July/August issue of the Washington Monthly, Barry Lynn correctly notes that the slow pace of technological progress in many fields could help explain many of the ills of today’s economy. That’s an absolutely key point. Faster, broader innovation could help create more jobs at higher pay, and help the United States escape the slow-growth trap.
But having identified the right field of battle, Lynn points his rhetorical guns at the wrong target. What’s worse, they are loaded with the wrong policy ammunition.
Lynn argues that technological stagnation is due to “a concentration of economic control that enables a few corporate bosses to manipulate technological advance entirely outside of any open and competitive marketplace.” Looking back to Franklin Delano Roosevelt and the New Deal, Lynn’s solution seems to be “stepped up antitrust enforcement with the forced licensing of key patents held by monopolistic enterprises.”
In the current day, Lynn’s prime examples of innovation-sapping monopolies are drawn from the tech industry. He spends some time on Monsanto and Pfizer, but he primarily focuses on tech companies such as Microsoft, Intel, Oracle and Google. Drawing the analogy with the 1911 antitrust case against Standard Oil, he notes that “it’s not hard to identify which corporations could be renamed Standard Operating System, Standard Semiconductor, Standard Enterprise Software, Standard Storage, and Standard Search.”
Unfortunately for Lynn’s analysis, the tech sector is the one part of the economy where innovation is proceeding at a breakneck pace. In particular, the introduction of the iPhone by Apple in 2007, followed by the release of the Android mobile operating system by Google, rapidly transformed the way that people in the U.S. and around the world do business and live their lives.
The new generation of smartphones spawned an entire new industry of app developers—makers of lightweight software specifically designed to run on mobile devices. According to the Progressive Policy Institute’s latest calculations, the “app economy” has generated more than 750,000 jobs in the United States, and many more in the rest of the world. It’s really hard to see how tech innovation could have proceeded any faster than it did in the tech sphere over the past five years.
The term ”mobile apps” does not appear in Lynn’s story. What’s more, Lynn does not mention Apple, Facebook and Amazon, major competitors of Google. Nor does he mention the rise of cloud computing, which has undercut the business model of companies such as Oracle and Microsoft. Nor does he mention the rise of new global competitors such as Samsung, which both supplies key components and makes its own smartphones.
Lynn tries to make the case that big companies are blocking innovation by buying up small companies. However, exactly the opposite seems to be true: In a time when capital markets are still quite volatile, venture capitalists can’t justify their investments in startups solely on the hopes of going public. Nevertheless, venture funding continues to flow to startups because of the possibility of being acquired. Indeed, more than 1,000 Internet-specific venture capital investments were made in the past year, according to second quarter 2013 statistics.
In fact, what’s typical today is intense competition on platforms or ecosystems anchored by large companies, who have an interest in stimulating innovation rather than suppressing it.
Truthfully, if Lynn was concerned about technological stagnation, he would have been better off to turn his focus to the biosciences, where the government and private industry have spent hundreds of billions on research and development over the past 15 years. While scientific breakthroughs such as human genome sequencing have been plentiful, turning those scientific gains into commercial innovations has been far slower. Indeed, the FDA has still not approved any human gene therapy for sale.
In fact, we can see that neither small biotech firms nor large pharma companies have prospered over this period. Over the past 15 years, there have been no super-successful startups in biotech comparable to Google or Facebook. At the same time, adjusted for inflation, the stock price of pharma companies today is no higher than it was in 1998.
The question: Why are biosciences suffering from this disconnect between research advances and commercial innovation? Some of the common explanations fit right into Lynn’s thesis, including the possibility that accumulated pools of patents are blocking innovation. Some have also suggested that the business models of large pharma companies make it difficult for them to innovate.
Alternatively, it may be that innovation in the biosciences is being hampered by high levels of regulation. The FDA has stepped up its oversight over the past decade, requiring more extensive and lengthy testing of new products, making innovation more expensive and the hurdles higher.
We don’t know the answers, but there’s a larger lesson here. It’s easy and popular to take aim at the companies that are innovative and successful, as Lynn does. But the real gains come from trying to unblock the obstacles to growth in areas where innovation is lagging.