Perspectives Online

You Decide: Is innovation the key to prosperity?

I make about 80 presentations each year all around the state where I talk about the economy and forecasts for the future. Many of the questions I get from attendees are about jobs. Questions like, where will the new jobs be? And how can we ever hope to compete against countries where wages are so much lower?

These are important questions, and their urgency has increased with the recession and the growth of global competition. And as is frequently the case with economic issues, there are different answers to the questions.

One answer is pessimistic. Some think the outlook for U.S. workers is quite gloomy. They think manufacturing jobs will continue to be lost to foreign countries where worker salaries are much lower and where products can be made at a fraction of the cost. They also think better-paying service jobs – particularly professional positions – will increasingly follow the same pattern. Modern communication technologies (e-mail, faxing, instant video transmissions) will make it easier for engineering, legal, architectural and even some medical work to be done outside the U.S. and then quickly sent to domestic clients.

This pessimistic outlook sees increasing numbers of U.S. workers limited to lower-paying service jobs in retailing, health care and the restaurant industry.

But there is an alternative answer that is more upbeat about the future of the U.S. workplace for three reasons. First, it argues that foreign countries may not maintain their wage advantage with the U.S. Countries with sharply rising standards of living usually experience corresponding increases in wages and salaries. So while foreign workers may continue to be cheaper than their U.S. counterparts, the pay gap between the two may actually narrow, thereby making it less lucrative to move U.S. jobs to foreign lands.

Second, the optimistic viewpoint says there continue to be advantages for companies locating near their customers. Foreign production may be fine for standardized, mass-produced products and services, but customized products require feedback and interaction with buyers. So as the marketplace becomes more specialized and customized, the value of having a U.S. based location may increase.

But the third reason for being optimistic may be the most important – indeed, it may be the ace in the hole for the U.S. economy. In a word, the reason is innovation. Economies never stand still. There is an on-going process of some products and companies being destroyed while new companies and products are developed. The 20^th century economist Joseph Schumpeter coined the term “creative destructionism” to describe this transition.

If creative destructionism is inevitable – in other words, if a better mousetrap is always going to be made – then countries that are best able to create new things – to innovate – will be the ones that prosper over time.

And here’s the good news. By many standards, the U.S. has an economy that is most inviting to innovation. We have a flexible economy that allows businesses to shift resources and workers with little restriction. For the most part, failing companies are not propped up and protected by the government – although certainly some of the bailouts occurring in the past year went against this principle – and new companies aren’t barred from competing. We also have an open and flexible education system that facilitates worker retraining and the development of new areas of study.

However, innovation is messy. It requires the old and outdated to be closed to make way for the new and modern. Losses will occur as new profits are made. Innovation is also hard to predict. Because the concept deals with the future and the unknown, much trial and error goes into the development of a new product or idea before it is commercially viable. Hence, innovation best thrives in an unregulated, unrestricted economy with minimal rules and requirements.

Indeed, where would North Carolina’s economy be today without the innovations that allowed for the growth of technology, health care, food processing and other new firms that now employ the resources cut by the downsizing in our traditional tobacco, textile and furniture companies? While the shift hasn’t been painless, it has allowed for progress to be made in our state over the past three decades.

Where will the next innovations be made? It’s impossible for me – a mere economist – to say. But I do know they will occur, and both the U.S. and North Carolina are in great positions to foster them. Because – and you’ll have to decide if I’m correct – our future prosperity will be riding on the next “big things”! -- Mike Walden


Dr. Mike Walden is a William Neal Reynolds Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of N.C. State University’s College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. Other You Decide/columns are at http://www.cals.ncsu.edu/agcomm/writing/walden/decide.htm .


Related audio files are at http://www.ncsu.edu/waldenradio/