This year’s Nobel Prize was awarded to Joel Mokyr, Philippe Aghion and Peter Howitt, for their work on the relationship between technological innovation and economic growth. The press release credits them with having “having explained innovation-driven economic growth”, which I think overstates the case – there is much that is not yet understood about the relationship between innovation and economic growth. But the importance of their contributions is not in doubt – and it’s particularly welcome that both Mokyr and Aghion have laid out their arguments in fascinating and accessible books. What makes the award particularly timely is that we are now in a period where economic growth has notably slowed, despite apparently continuing technological progress. As the press release states, “perhaps most importantly, the laureates have taught us that sustained growth cannot be taken for granted”.
Mokyr’s work focuses on the cultural, institutional and intellectual background to the Industrial Revolution in England, taking that to be focused on the period 1760 to 1830 (the period sometimes referred to as the “First Industrial Revolution”). His is a notably idealist reading – for example, very much downplaying more materialist factors such as the wide availability of fossil fuels in Britain, but emphasising the interaction between the growth and diffusion of scientific knowledge and the development of craft skills.
What lessons should we take from the economics Nobel in addressing the UK’s current growth problem? A recent article by Daniel Susskind in the FT takes this question head-on: “What Nobel economics prize winners teach us about growth“. The piece criticises the widespread consensus view amongst growth oriented think-tanks that the top priority for restoring economic growth in the UK is to to build more houses and more infrastructure: “Yet the lesson from the Nobel-Prize winning work of Mokyr, Aghion and Howitt is that serious growth comes from a very different place – discovering new ideas, unleashing innovation and whipping up technological progress”.
I very much agree with this position. We know from econometric studies (e.g. Accounting for the slowdown in UK innovation and productivity by Goodridge & Haskel) that the UK’s growth problem is fundamentally a problem of slowing total factor productivity growth, and economists tell us that total factor productivity growth arises from innovation (broadly defined). We also know that the sectors where the slow-down has been most pronounced are the most technology intensive sectors, like pharmaceuticals, telecommunications and computer software (see e.g. Diagnosing the UK Productivity Slowdown: Which Sectors Matter and Why? by Coyle & Mei).
This isn’t to say that infrastructure isn’t an important supporting factor – better transport links between and within our underperforming Northern and Midland cities would unlock agglomeration benefits, and the country would get more value from the outstanding innovation ecosystem of Cambridge if that small city could grow more and could be better connected to the rest of the country.
But if the primary problem is that our innovation system isn’t working well enough, what can we learn from Mokyr’s work? Since his methods are fundamentally historical, we should understand two things. The first is that the innovation system that in Mokyr’s view drove the first Industrial Revolution was a product of a particular time and place. The second is that the innovation system we have now has changed a great deal from that time – and crucially, it could change again.
One particular feature of today’s system is the centrality of universities in the research system, with government policy and rhetoric heavily emphasising the importance of new companies spinning out and scaling up based on new ideas from university research. Universities are central to the UK’s innovation system now – but this hasn’t always been the case, and is in fact a relatively recent development, a development of the last couple of decades.
In the 1st Industrial Revolution (that Mokyr was primarily concerned with) English universities [1] played no part. The great pioneer of modern chemistry, Joseph Priestley, described them as “pools of stagnant water”. While Oxford & Cambridge focused on preparing the dim younger sons of the gentry for the priesthood, the big advances in science & technology were being made by independent scientists & industrialists in the Midlands and the North, who built their own networks & institutions.
Modern research universities only emerged in UK at end of 19th century, copying the German model, and prompted by fears that in the “second Industrial Revolution” the UK was at risk of falling behind Germany economically. The 1870 Royal Commission on Scientific Instruction and the Advancement of Science, chaired by the Duke of Devonshire, was crucial in directing state funding to the new universities that were emerging in the industrial cities, like Manchester and Leeds, and leading to what was essentially a refounding of Oxford and Cambridge as institutions with more science focus [2].
Important new science emerged from these universities in the early 20th century – nuclear physics from Manchester & Cambridge, x-ray crystallography from Leeds. But arguably, just as important as a driver of the second industrial revolution was the development of the industrial R&D laboratory – itself an important institutional innovation. In Sheffield, stainless steel was invented in the Brown Firth laboratory, while GEC’s Hirst Laboratory served the new electricity industry.
Meanwhile the government set up its own R&D laboratories. Some were focused on serving industry, like the National Physical Lab (1900). Others were devoted to military research, like Porton Down (1916) and the Admiralty Research Lab (1921).
This was the basis on which the post WW2 UK innovation system was built. Military R&D was hugely expanded driven by the technology races of the Cold War. Major conglomerates like ICI and GEC ran big corporate laboratories, while smaller firms were served by government sponsored collaborative industry research associations (e.g. the Rubber and Plastics Research Association, the Shirley Institute for the textile industry). Universities played their part in this system – they did basic research (some of this use-inspired, driven by interactions with industry), trained scientists, and connected with international networks.
This system dramatically changed in the 1980s & 90s. The government, as a matter of policy, withdrew from applied research (e.g. running down the civil nuclear program pretty much to zero), & the end of the Cold War meant big cuts to military R&D. In the private sector, there was a significant fall in business R&D intensity. Major R&D intensive firms like ICI and GEC were broken up, & the move to “shareholder value” led to wider reductions in industry R&D.
The decline in total government support for R&D was arrested in 2000s, but a rise in funding for research councils was counterbalanced by continuing falls in govt department research. The effect was a further rise in the fraction of UK government R&D funding directed through research councils and carried out in universities. So the current situation, where UK public sector research is dominated by universities, with the expectation that this is exploited through VC backed spin-out companies, is actually a very recent phenomenon, of the last 20 years.
It’s great that this year’s Economics Nobel has drawn attention to the importance of innovation for economic growth. Innovation happens through individuals working in particular institutional arrangements, and Mokyr’s work draws attention to the institutions at play in the first Industrial Revolution, in the late 18th & early 19th centuries. But the institutions of innovation change through time – & if economic growth disappoints, as it does now, that suggests we need to reexamine our institutions for innovation, and the wider political economy they are shaped by. Declining rates of innovation aren’t inevitable.
[1] There is a case that Scottish universities – especially Glasgow – did play more of a role. James Watt’s time as an instrument maker, & his friendship with James Black & exposure to his researches on the nature of heat, at Glasgow University, probably was influential.
[2] The Duke of Devonshire also played an important personal role here through his own philanthropy, whose memory is preserved, for example, in the name of the Cavendish Laboratory in Cambridge.