The Great Innovation Deceleration

The rise of the West is often traced back to the Black Death of the mid-1300s, which killed over 40% of Europe’s population. For example, some historians think that the resulting labor scarcity increased the bargaining power of peasants in the West, which led to the end of serfdom and to higher standards of living but failed to bring about institutional change in the East.

Many parallels between COVID-19 and the Black Death have been drawn, but most of them are unhelpful. In a medieval economy, fewer people meant more land per person and a higher income for the average citizen. The opposite is true in today’s knowledge-based economy, since ideas are non-rivalrous and, unlike land, can be used by everyone simultaneously.

In modern economies, the larger, more diverse, and interconnected a population is, the more ideas and wealth it is capable of generating. Large, interconnected societies allow more people to participate in innovation, which adds to collective knowledge and gives others in the society better tools and instruments to make further discoveries. In a world where wealth is derived from ideas rather than land and objects, our greatest resource is our social networks, which act as “collective brains.”

While COVID-19 has been much less deadly than the bubonic plague that hit medieval Europe, it will imperil the interconnectedness of populations and thus the critical knowledge flows that facilitate innovation both locally and globally. Indeed, the pandemic has already reduced knowledge transmission within our collective brains as governments have introduced restrictions on immigration, global value chains are being dismantled, travel has plummeted, and knowledge workers are isolated in home offices.

First, new ideas often emerge through sporadic meetings and interactions. That is why our knowledge industries are so highly clustered in places like New York, London, and Silicon Valley. From Renaissance Florence, to Victorian Birmingham, to early 20th-century Detroit, to contemporary Seattle, cities have been key facilitators of knowledge transmission and catalysts for innovation. However, the kinds of random interactions that foster innovation are less likely to happen at a time when social distancing has become the new normal. And while it is true that the web, together with technologies like Zoom and Slack, helps to explain the growing geographical distance between co-applicants on patents even before the pandemic, collaborators have to meet somewhere to build a relationship and generate an idea in the first place. Studies show that many new ideas and projects are launched by people meeting at conferences, and collaboration suffers when important conferences are canceled.

Despite the miracles of digital technology, nobody lives in cyberspace, and our virtual interactions mirror our networks in the physical world.

Second, immigration has been a prime driver of innovation and the spread of ideas throughout history. The United States benefited enormously from the influx of Jewish émigrés during World War II who boosted innovation wherever they settled. And they weren’t the exception but the norm. According to a recent study published by the National Bureau of Economic Research, immigration has been a key force behind American innovation for the past 130 years. While the loss of skilled people raises concerns over brain drain for the sending countries, emigrants often create badly needed connections to global sources of knowledge. What’s more, some return home with new knowledge and skills, further driving innovation. The Indian diaspora, for example, has been critical to the development of a thriving IT cluster in Bangalore. Immigration, it turns out, can be beneficial for the sending and receiving countries alike.

Yet if history offers any guidance, the fear of disease spreading is likely to lead to a lasting clampdown on immigration. In the 1880s, for instance, Chinese immigrants were accused of bringing smallpox and the plague to the U.S., paving the way for the 1882 Chinese Exclusion Act. This time around, President Donald Trump has issued a presidential proclamation aimed at restricting the entry of students and researchers from China, and has suspended H-1B visas, which is what Tesla CEO Elon Musk used to begin working in America. If such immigration restrictions continue and persist, the consequences for global innovation, knowledge diffusion, and skill development would be dismal.

Third, much technology transfer today happens through global value chains (GVCs). It was the rise of GVCs that allowed China to gain unprecedented access to Western technology and lift millions of people out of poverty. To be sure, the Chinese have also been stealing American and European intellectual property, but that is how much of technological progress has occurred throughout history. Global powers, including Great Britain, Imperial Germany, and the U.S., stole industrial secrets, patents, and copyrights when they were lagging behind, but that helped rather than hindered technological progress. In the words of economic historian Charles Kindleberger, “In each case, stealing technology was an interlude on the way to positive innovation.”

However, for the most part, technology diffusion was slow. The West invented new technologies at a faster pace than lagging economies could copy them. The period after the British Industrial Revolution, which is known as the Great Divergence, saw the West pull ahead of the rest of the world in terms of growth in per capita income. Things only changed in the 1990s, when information and communications technology made it possible for Western companies to offshore production to low-cost destinations like China, allowing them to effectively combine modern production technology with cheap labor. A company like Apple suddenly faced compelling incentives to help Chinese companies improve iPhone production. And so, for the first time in history, Western companies began to improve technology in foreign lands at a massive scale, causing global inequality to plummet while spurring innovation — what Graduate Institute Geneva economics professor Richard Baldwin has called the Great Convergence.

The dismantling of GVCs could mark the end of convergence. The decoupling from China that Trump has advocated — an idea that has gained bipartisan congressional support — now seems set to happen. Steadily worsening U.S.-China relations, which have been exacerbated by the pandemic, could lead to a significant slowdown in global knowledge flows, leading to a deceleration in global innovation. Worse still, it raises the prospects of a cold war turning hot: An internal Chinese government think tank report, which leaked in May, even warns Chinese leaders of the growing risk of conflict as U.S.-China relations continue to deteriorate.

Could escalating U.S.-China tensions spur military competition in ways that also boost global innovation? As Matthew Yglesias wrote for Vox, “Wartime pressures have often driven innovations — World War II gave us jet airplanes, radar, synthetic rubber, and fabrics — that later unleash peacetime prosperity.” However, this view is misguided. Studies show that U.S. productivity actually declined with America’s entry into World War II, and as productive resources were drawn into the war machine, innovation faltered. Indeed, some of the best and the brightest scientists in the world ended up working for the Manhattan Project in the race to develop the bomb ahead of Nazi Germany. What World War II did was prompt a massive shift from productive to destructive innovation. Military competition between China and the United States would do the same.

Mitigating the Risks to Innovation

What can be done to reduce the risk of a global innovation deceleration? First and foremost, governments must realize that knowledge diffusion isn’t a zero-sum game. As noted, modern knowledge economies are very different from the preindustrial economies that were hit by the bubonic plague. Regrettably, history tells us that greater competition for resources — which follows from lasting recessions — induces zero-sum thinking, which overlooks the dynamic benefits of innovation over the long run. Governments around the world must resist tit for tat when it comes to the dismantling of global value chains and restrictions on immigration, which would make us all poorer.

Finally, governments must enact policies that enable a return to the kind of in-person interactions that drive innovation. The only way to accomplish that before a vaccine arrives is by establishing comprehensive testing regimes that allow people who have been infected with the coronavirus to be promptly identified and isolated. Until those are in place, people won’t feel safe meeting and socializing again, and innovation won’t go back to normal.