The demand side of innovation: a new approach to higher productivity.

• Author: Kennedy, Joseph V.

Much of the current thinking about innovation is misplaced. America's fundamental problem is not a lack of innovation or new technology. Indeed, advances in information technology, nanotechnology, biology, and other disciplines are beginning to deliver a wave of new products and services.

But in order to increase productivity, these advances must be incorporated into markets: innovations seldom fit neatly into existing business models. Often an industry's processes have to be fundamentally reorganized around a new technology in order to get its full benefit. This is most likely to be true for those innovations that hold out the greatest hope for major productivity improvements.

Unfortunately, large parts of the American economy have been designed to resist the very type of reorganization necessary to achieve these advances. The solution to higher productivity in these markets is not more innovation but fewer restrictions on the market disruptions needed to take advantage of it.

It is not too much of a stretch to say that the continuation of America's international leadership depends upon higher productivity. This country has a number of significant strengths including its cultural vibrancy, political ideals, military power, and historic relationships with strong allies in every part of the globe. But each of these has been damaged over the past few years.

More importantly, each of these assets depends at least partially on economic strength. Without the confidence that comes from steady and rising incomes, American thinking tends to be inward and short-term. The attractiveness of the American model depends on its ability to deliver economic prosperity as well as political freedom.

Yet it is far from certain that the economy will naturally rebound anytime soon. Despite unprecedented fiscal stimulus, economic growth was relatively weak following the collapse of the financial sector. Because deficits of over 10 percent of GDP could not be sustained, government spending is now having a negative effect on growth even though the federal deficit for the last fiscal year was 4.1 percent of GDP. Instead of encouraging a surge of productive investment, unprecedented monetary easing has produced an economy that seems to panic at any hint of unwinding.

INNOVATE OR DIE

Greater productivity would significantly ease each of these problems. It is hardly surprising then that a great deal of research has gone into finding ways to encourage faster growth...