Innovation and education need to drive the economy

After the current trade war subsides, we will return to a more rational basis where nations and regions trade based upon comparative advantage.  Everyone will produce what they produce best, and we all win by trading. There will be some manufacturing realignment with higher-value strategic manufacturing returning to the U.S. and some manufacturing moving from China to other Asian and, hopefully, Central American nations. 

The United States will thrive based upon two compelling and durable strengths: economic freedom and innovation. The freedom of labor and capital to migrate toward opportunity makes markets work by allowing the economy to automatically respond to human needs and wants.  Furthermore, prospects of freedom and opportunity attract risk takers from around the world to the U.S., and they contribute greatly to American innovation.

Joseph Schumpeter first introduced innovation economics nearly 80 years ago in his book “Capitalism, Socialism and Democracy,” which is on par with Marx’s “Das Kapital” and Smith’s “The Wealth of Nations.” Schumpeter described the concept of “creative destruction,” whereby entrepreneurial innovation promotes long-term economic growth even as it destroys wealth imbedded in old institutions whose high profits and executive compensation are more based on protecting the status quo and dominating markets through non-competitive means such as “special” relationships with governments. 

Schumpeter’s thesis focused more on the innovation end-game when new technologies and business approaches become commercialized through entrepreneurship.  But the innovation process starts with basic scientific research. The lead time from basic research discoveries to early commercialization often takes decades.  Just over half of basic research occurs at universities, and about half is funded by the federal government.  The developmental research stage takes basic research to commercialization and is more likely to involve individual inventors and be funded by business due to shorter-term payoffs. The commercialization stage is where capital meets invention and ideas enter the market as new products and services. 

One of our greatest national economic challenges will be ensuring our innovation culture becomes far more widespread. Research by Bell, Chetty et al., in the Quarterly Journal of Economics (2019) indicates inventors are more likely to have been exposed to innovation by their parents. Given America’s recent history, it’s no surprise whites, Asians, males and higher income households are more likely to produce innovators, especially in industries and regions more prone to invention like Austin, Texas, and Silicon Valley. 

Relevant innovation metrics are difficult to come by. For instance, while WalletHub ranks Colorado 10th for a supportive small business environment, that does not tell us how many startups are truly innovative versus simply fulfilling needs created by rapid growth in Colorado. For innovation, WalletHub ranks the state fifth by considering our workforce and the innovation environment.

Other metrics include patents, research funding and venture capital. The state ranks 15th in patents issued per capita from 1977 to 2004.  In the last decade, Colorado is on par with surrounding states, with a 30% increase in funding from the National Institutes of Health. In 2018, Colorado realized the 10th highest amount of venture capital per capita being invested in area businesses. These rankings, which are encouraging, could be higher if there were measures for technology transfer from the military into the private sector, new product development in outdoor recreation, resource conservation and sustainability, or measures of innovation within existing businesses throughout the state.

Unfortunately, there are other indicators that raise questions about innovation in Colorado. If we are to economically thrive in the future, the state, like the nation, must institutionalize innovation into the fabric of our emerging 21st century culture.  We cannot rely on exposure at the household level nor merit-based immigration.  Institutionalizing innovation requires quality educational programs, including strong research universities.  Here our results are mixed depending upon the source.  In terms of pre-K through high school educational achievement and quality outcomes, Colorado ranks somewhere between 14th and 23rd.  Best College Reviews’ ranking of research universities places CU Boulder 24th in the nation and Colorado School of Mines 50th.  Yet other rankings from College Consensus place no Colorado university or college in the top 80 nationally. 

These rankings indicate Colorado readily attracts the human and financial capital to compete effectively in a world of innovation and economic freedom, but we are starting from behind many of the top research areas in the nation and still have a long way to go. Fundamentally, Colorado must question our education models and challenge leaders, policy makers and residents to support dramatic improvement in the future. It’s hard to be too good when it comes to innovation and education.