Assume you have $1.4 million dollars that you want to give away. Your goal is to spur the development of new technology, but just not any innovation–something that you want people to invent. Which technology would you choose?
The people at the X Prize Foundation actually had to make that decision.
Funded by Wendy Schmidt, wife of Google former CEO Eric Schmidt, their goal was to “…inspire a new generation of oil cleanup technologies that enable a more rapid pace of cleanup…” The winner was Elastec, a small Illinois firm that figured out how to accelerate the speed of removing oil from water from the usual 1,000 gallons of oil per minute to 5,000. Here you can see the oil skimmer recovery equipment that they developed for the competition. According to NPR, the firm is already receiving orders from around the world.
Here (automotive energy conservation) and here (genome mapping) are other X Prize innovation challenges.
Our bottom line? We need to encourage the innovation that fuels economic growth. The question, though, is how much the incentives should come from government.
The Economic Lesson
Economists can use production possibilities graphs to illustrate economic growth. On production possibilities graphs, a bowed out curve is drawn which illustrates that country’s maximum production capability. Shifting that curve to the right displays the additional productive capability created by the invention.
An Economic Question: If you could fund an innovation contest, what type of invention would you target?
For years, female musicians said that they were being treated unfairly. The problem, they claimed, was audition bias. Many more men were selected for orchestras than women. The response was that the men were better. A Harvard and Princeton study found, though, that when an audition was gender blind, many more women were selected.
This takes us to Wal-Mart. Currently being heard by the Supreme Court, Wal-Mart v. Dukes involves a class-action suit in which Wal-Mart is accused of over-promoting men and underpaying women. However, before a trial court can decide whether discrimination occurred, the Supreme Court has to say whether a class-action suit can represent the 1.6 million women who have worked for Wal-Mart since 1998.
Commenting in Court, Justice Ruth Bader Ginsburg said that it was not “at all complicated…Most people prefer themselves. And so a decision-maker, all other things being equal, would prefer someone who looked like him.” The result? “Gender bias could ‘creep’ into the workplace.”
The Economic Lesson
For us, the key here is human capital. For an economy to grow and thrive optimally, the factors of production, land, labor, and capital, need to be appropriately allocated. When there is gender bias, women’s talents are underutilized and the entire economy suffers.
For an orchestra, we need the best musicians. Now, our court system needs to decide whether Wal-Mart promoted and paid its best people.
Instead of a garage or a laboratory, think of an office or a conference room. And, rather than a computer or an aircast, imagine a junk bond or a bank account. All of these products, at one time were invented.
In a recent Brookings article, Robert Litan discusses the products created by financial innovation. His purpose, which we will look at tomorrow, was to reply to Paul Volcker’s negative view of recent financial innovation. For now, let’s just identify a variety of relatively new financial products (inventions).
Grouping the new products into the financial function that they affected, Litan includes the following:
Payments: ATMs, credit card expansion, debit cards
Saving: money market funds, indexed mutual funds, hedge funds
Investment: ARMs, home equity lines of credit, collateralized debt obligations
Risk-Bearing: futures options, credit default swaps
The Economic Lesson
Imagine a convex line on a graph with goods as the Y-axis and services as the X-axis. Then, because someone invents something–maybe the computer–the line moves outward because that society is able to produce more. The “rounded outward” line is called a production possibilities frontier. It displays maximum productive capability. With innovation, productive potential typically increases.