Friday, June 5, 2009

Are We Rewarding Innovation?

I came across this article in Forbes and I thought it was extremely well written and insightful. With the economy the way it is we as a nation have a greater need than ever for innovation. However, there are many factors stifling innovation in our nation.

While we know that many innovations are accidents, I'm not sure if they are necessarily random. The Internet, for example, came out of a sustained R&D effort over a long period of time. Various pieces of the puzzle fell into place in the mid-1990s, giving us a great discontinuity--an innovation of the scale unknown in decades--upon which markets, industries, jobs and the development strategies of entire nations such as India, could be created.

We need a few more Internets.

Easy to say, extraordinarily hard to do. Especially within a system that has created a fundamental problem compensating speculators way above creators. Besides that, we have systemic challenges of risk-aversion rampant at the moment, with venture capitalists behaving like bankers, and Wall Street's obsession with quarterly results that discourages long term R&D.

In my studies at the University of Tennessee Center for Executive Education during the last week, we have discussed the short term results oriented mindset at length. I hinted around this very topic on my lean is a growth strategy post. Innovation is an accelerated growth strategy, and the fact that short term thinking is holding investment in innovation back in a time of great need is troubling.

"A willingness to take intelligent risks and try something new is critical to both innovation and entrepreneurship. But the last decade has seen an increasing focus on short-term returns through risk taking without questioning or transparency to even understand the real level of risk. As a result, we replaced the foundation for real economic growth with the illusion of prosperity," writes Judy Estrin, a long-time entrepreneur and author of Closing the Innovation Gap.

Not only is funding for specific projects few and far between, but there is a lack in compensation for innovators relative to their peers.

There's good reason for the brain drain that has gone on from technology into finance. We have set up a system that does not compensate creators adequately and, instead, compensates speculators with outlandish amounts of money.

Perhaps the tough times in the economy will bring some balance back to the system with regard to compensation, but the short sighted challenge doesn't seem to be going away anytime soon.

Seeing as Atlas Shrugged is probably my favorite book of all time, this article really got me interested as it put a new twist on Ayn Rand's views of wealth redistribution.

Much has been written recently about Ayn Rand's classic, Atlas Shrugged. In Rand's book, the captains of industry went on strike when the government decided to practice wealth redistribution on an unacceptable scale. In our modern society, the problem we are facing is substantially more complex. It is no longer a government versus private sector issue. There's a terrible triangle of competing interests: the creators (those who add value) versus the speculators versus the government.

This passage reminded me of a topic discussed in the Meeting of the Minds video I posted a while back. Dr. El-Erian, CEO and co-CIO of PIMCO spoke in the clip about the extreme importance of maintaining trust between private industry and the government. The trust that private entities will play by the rules set forth, and the trust that the government will maintain those rules and uphold private industry's right to prosper. Obviously our current economic state illustrates that this trust has been breached, and this does not bode well for innovators who rely on that trust more than most.

Capitalism 2.0 must fundamentally be rooted in justice--justice for the entrepreneurs--or else we may see the value creators go on strike, leaving the speculators with nothing to speculate on, and the government with no wealth to redistribute.

I would argue that the power to change this dynamic lies within the hands of the American people. As we become more educated in personal finance the need for speculators inherently decreases. Choose index funds, invest for the long haul, take personal responsibility for your finances. As for the innovators, they have always risen to the challenge before in this country and I feel they will continue to do so. However, it might be about time we take a look at what exactly we are incentivizing as a nation.

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