The End of Low Hanging Fruit?

Are all the good ideas gone? Really?

Low hanging fruit was the metaphor cum business cliche used to describe the easy and obvious opportunities that any organization should grab in order to bolster its margins before setting off after tougher objectives. As strategic advice it was a bit facile and, as is wont to happen, overused. But it did suggest at least one element of prioritization that probably offered some useful guidance.

Now, however, the ostensible disappearance of same is being touted as evidence of a loss of innovative vigor and economic opportunity. The problems with this argument are many, as the following article explains. First of all, it implies that there are a finite amount of easily attainable ideas or goals, a remarkable proposition in a world besotted by tablet computers and apps whose very existence was questionable within the lifetime of the average toddler. Second, it ignores the influence of incentives and opportunities on the minds and actions of the entrepreneurs who are inclined to seize them.

Most importantly - and most disturbing - however, this narrative is fed by the same 'guarantee me' mindset that has thwarted the economic recovery. Corporate executives, investors, lenders, even some entrepreneurs have somehow come to the conclusion that success should be a given. That there can be no downside in the great game of business - at least not for those in private sector. What happens to tax payers and their governments is evidently another matter, but that is a topic for a different day.

The implication is that without such guarantees, business people in the so-called developed world will sit on their cash rather than assume risk that by historical standards seems paltry. Most of the great industrialists faced ruin at one time or another, but that did not stop them. Their successors tremble at the thought of a missed hurdle rate. One might argue that the risks which brought about the financial crisis have tamed managements but the evidence suggests that those risks were actually inspired by the notion that a combination of other people's money and lax regulation meant no risk to the risk takers because others would - and did - suffer first. Until this aversion to personal commitment is overcome, it is not that low hanging fruit will not exist, but that they will rot on the vine. JL

Darren Acemoglu and James Robinson comment in 'Why Nations Fail':

The argument that innovation and technological progress have been slowing down has been making the rounds. It was recently articulated in Robert J. Gordon’s work and in Tyler Cowen’s influential short book, The Great Stagnation: How America Ate All the Low-hanging Food of Modern History, Got Sick, and Will (eventually) Feel Better. It jumped from obscure academic discussion to public debate when The Economist Magazine turned it into a memorable cover.

The idea is simple and has something to it: in the early 20th century there were many — what Tyler Cowen calls — “low hanging fruits” for the world economy to collect such as antibiotics, electricity-powered factories, radio, TV, planes and automobiles, and not least the great innovation featured on the cover of The Economist, indoor plumbing and sanitation. But these have all been exploited. As we run out of low hanging fruit, the argument goes, we are likely to run out of rapid technological progress and growth will slow down.

Two things are absent in this debate, however.

First, much evidence shows that what determines technological innovations isn’t some sort of “exogenous innovation capacity,” but incentives. This point was stated forcefully by the great economist Jacob Schmookler in his Invention and Economic Growth where he argued (p. 206): invention is largely an economic activity which, like other economic activities, is pursued for gain…

Schmookler illustrated these ideas vividly with the example of the horseshoe. He documented that there was a very high rate of innovation leading to improvements in the horseshoe throughout the late 19th and early 20th centuries because the increased demand for transport meant increased demand for better and cheaper horseshoes. It didn’t look like there was any sort of limit to the improvements or any evidence of an “exogenous innovation capacity” in this ancient technology, which had been around since 2nd century BC. Then suddenly, innovations came to an end, but this had nothing to do with running out of low hanging fruit. Instead, as Schmookler put it (p. 93), it was because the incentives to innovate in this technology disappeared because the steam traction engine and, later, internal combustion engine began to displace the horse…

Plenty of other examples illustrate how technology responds to incentives, and when incentives are there, great innovativeness follows. Amy Finkelstein’s research, “Static and Dynamic Effects of Health Policy: Evidence from the Vaccine Industry”, shows that when the government increases the demand for some vaccines, pharmaceutical companies respond by starting more clinical trials to come up with these vaccines. In a related paper, “Market Size in Innovation: Theory and Evidence from the Pharmaceutical Industry”, Daron and Joshua Linn show that expansions in the market size for different types of drugs driven by demographic changes lead to sizable changes in the discovery of new drugs.

Recent research by Walker Hanlon of UCLA, “The Necessity Is the Mother of Invention: Input Supplies and Directed Technical Change”, provides another telling example from the 19th century. After decades of focus on American cotton and no technological improvements in, among others, Indian cotton, Civil War-era disruption of U.S. cotton supplies to the British industry led to rapid improvements in textile processes using Indian cotton.

But, because where incentives for innovation will be strong is difficult to forecast, where the new innovations improving efficiency and consumer welfare will come from in the future is also difficult to predict. Who could’ve predicted a decade ago the ecosystem of innovations related to applications surrounding the iPhone and Android platforms? And yes of course, this doesn’t compare to indoor plumbing, but it illustrates both the rapid response of the economy to incentives and the difficulty of forecasting the areas where new innovations will revolutionize.

And this difficulty feeds into a potentially incorrect line of argument: we know the great innovations of the past and they were great, and we don’t know the ones of the future and thus they can’t be great (though it has to be said that the opposite incorrect argument has been voiced probably more often: we don’t know the great innovations of the future but we are sure they are great!).

All in all, the future is not ours to see of course, but it seems like the responsiveness of innovation to incentives so far suggests that so long as incentives continue so should innovation.

This brings us to the second important issue absent from the debate: the main argument of Why Nations Fail is that innovation stems from inclusive institutions. Hence the debate of whether innovation and technological progress will continue to rapidly improve our lives should center on whether inclusive institutions will spread or will retreat. The great innovations of the Roman Empire, for example, didn’t come to an end (and in fact fall into oblivion) because the Romans reached the limits of innovative capacity but because their institutions turned extractive and then collapsed. But institutions have been notable in their absence in this debate, and we would argue they are the key. (For a take on the future of innovation emphasizing institutions, see here).