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 / Spring 2014 / Issue 74(originally published by Booz & Company)


The Rise and Fall of Western Innovation

Curiously, Phelps loses interest in his market-cap-to-output ratio when he evaluates the purported decline of innovation in the United States. Relative to U.S. economic output, the total value of shares listed on U.S. stock markets was more than twice as high at the end of 2012 as it was in 1988, according to the World Bank. This should, by Phelps’s logic, mean that the U.S. economy has become more innovative over time. Instead, Phelps points to the slower U.S. productivity growth of recent decades as evidence of a lack of innovation.

But has there been a decline in innovation in the United States? By Phelps’s own reckoning, competition spawns innovation, and I find plenty of evidence of increased competition in the United States since the 1970s. Global competition has forced U.S. manufacturers to shape up or give up. Deregulation has created competition in a dozen industries, such as natural gas production and telecommunications. And far fewer companies today enjoy the commanding market shares that General Motors, U.S. Steel, and your local newspaper boasted 40 years ago.

It is undeniable that the U.S. economy is not delivering the steadily improving wages and living standards the nation’s residents expect. But Mass Flourishing fails to deliver convincing evidence that a lack of innovation is the culprit. 

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