The Covid crisis has highlighted the importance of innovation and, just as importantly, shown us that it’s thriving, argues Professor Joseph Stiglitz, the Nobel Prize winning economist and advocate for measures to improve global inequality and stop climate change, in a recent panel discussion. What follows are his thoughts on innovation that arose from this discussion.1
Innovation is very much alive and the current pandemic underscores this in a hugely tangible way. If Covid had arrived 20 or 40 years ago, we would not have been able to so swiftly identify and develop a means of testing, nor develop a vaccine – let alone multiple vaccines – at such a rapid speed. In this way, we have been protected by innovation. Global GDP would have plummeted far worse and for longer without these biology innovations.
One of the big insights that the pandemic shed light on is how important science is. If it hadn’t been for science, where would we be today? Science will deliver us from this pandemic and is the reason why we have such a high standard of living compared to 200 years ago, before the Industrial Revolution. The pandemic is impacting the direction of innovation. After all, robots don’t have to socially distance and are not susceptible to Covid. This has provided an enormous impetus for robotics and AI (artificial intelligence), the drive behind which was already huge before. This has serious implications for society because robots and AI are particularly good at replacing routine work. This disproportionately affects unskilled workers and feeds into one of the other crises we face – inequality, which feeds into the political [arena]. The pandemic will stimulate innovation that helps the more skilled and hurts the unskilled. We are already seeing this in the K-shaped economic recovery taking place in the US and many other advanced economies around the world.
Why is it so hard to see the effects of innovation, especially in terms of closing the big social disparities? This is exactly the same question asked at the beginning of the computer era, when Robert Solow, a great economist of the 20th century, said you see innovation everywhere except in GDP statistics. Back then it actually did come through in GDP a few years later. It took a long time for the innovation of computers to get translated more broadly into GDP growth, but it eventually did. Likewise, some of the innovation we are in the midst of today will show up later, but some is of a different nature and may not. Rather, it may show up in how well off people feel. For instance, social media makes people feel more connected, but [it] also makes some feel more anxious, potentially creates shorter attention spans and can be used to incite, like we saw in the January 6th insurrection in the US and with other hate crimes. These are negative aspects of innovation. Innovation is something new; it can be positive but it can also be negative. And when it is negative, the regulatory and legal frameworks must adapt to ensure that these innovations will actually serve the wellbeing of society.
China and innovation: Most economists see the world as positive sum, rather than a zero-sum game. If another country grows more, it can buy more of our goods, and we can all expand and grow together. But there are areas of concern. Obviously one wants a level playing field. Difficult issues arise because differences in economic systems imply greater difficulty in agreeing to common rules that work fairly for both systems. One area – AI – illustrates this point. Data is a huge input into AI and in Europe, you have a great respect for privacy compared to China. This gives China a huge competitive advantage in data. The pandemic and climate change remind us that we have to cooperate on a range of global issues. This will be the big challenge going forward. How do we devise an international rule of law that both allows us to uphold our values and provides a framework for cooperating in areas essential for doing so?
Climate change is another major issue we face today. But I feel confident that innovation will provide us with the means of combating climate change and allow us to achieve net carbon neutrality by 2050. The cost of renewables has plummeted to a degree that no one anticipated, and this will allow us to leave the fossil fuel-based economy behind, all because of innovation. By its very nature, we cannot anticipate what direction innovation will take or where it will show up and how it will help us in one way or another. But we can envisage a brighter future – from health to climate change.
Climate change is an existential issue for all of us and we must use every tool at our disposal in addressing it – including both monetary and fiscal. Central banks the world over are worried about stranded assets and climate risks. Regulatory bodies and central banks are moving very quickly to require disclosure of carbon risk. These are all critical to the transition away from fossil-fuel assets. We have already discovered more fossil fuels than we can possibly use if we achieve carbon neutrality by 2050 or even 2060. That means there will be a lot of stranded assets – assets priced positively today that will go to close to zero in the next 30 years. Bearing in mind the mortgage price readjustment crisis – we know that markets can sometimes adjust prices suddenly, rather than smoothly over time, leading to sudden price collapses. This could lead to a systemic crisis greater in magnitude than in 2008. So it is essential that institutions like the central banks review the systemic carbon risks. There is critical impetus for financial institutions and nonfinancial enterprises to move away from fossil fuels and this is a key accompaniment to the investments that the fiscal authorities must make and [the work that] governments must provide in pricing carbon and setting regulation.
[1] The full discussion between Professor Stiglitz and Christophe Donay, chief strategist at Pictet Wealth Management, can be found here.
