The world is in the market for some clean-energy breakthroughs. But can the market deliver?



It is less likely to happen than you think without government support, suggests Daron Acemoglu, the Charles P. Kindleberger Professor of Applied Economics at MIT. In contrast to received wisdom, his mathematical modeling on the subject suggests private-sector innovation is inefficient: Many firms chase the same short-term payoffs, inhibiting long-term technological and economic progress. The economy would grow better, and become greener, if technology firms pursued a greater diversity of innovations.



"Why is it that we have not developed new technologies until now?" asks Acemoglu during an interview in his office. "It's not a surprise that we're going to run out of oil, and 20 years ago we knew the environmental implications of fossil fuels. But we didn't do anything because the market doesn't provide enough incentives for diversity of research."



As Acemoglu states in a research note he published online this summer, the constant financial pressure on corporations means that "too much research will be devoted to currently successful product and technology lines," rather than potentially transformative, if risky, projects. Moreover, Acemoglu observes in the work, "A Note on Diversity and Technological Progress," our patent system rewards incremental improvements on existing devices. Should someone patent a far-reaching advance, "somebody else will have invented even a better version of this technology by the time it can be marketed." Automakers, he notes, long favored small steps, not leaps.



Acemoglu's model looks at the financial incentives facing private-sector researchers who could work on either technologies that are already in use or on future innovations. To maximize profits, scientists will tend to work on existing devices, creating a large quality gap between those technologies and their languishing potential replacements. This analysis illuminates a paradox: What seems logical for technology companies, one by one, may not be best for the entire economy. Conversely, Acemoglu writes, policy-makers trying to help the environment by fostering a variety of clean innovations could also produce better economic results.



The issue matters because the government's increasing drive to create clean energy, Acemoglu thinks, should fit the contours of innovation. He believes a carbon tax, for instance, could help the environment but fail to spur significant innovation, since the market might respond with modest carbon-reducing technologies, not transformative changes. In another 2009 paper, "The Environment and Directed Technical Change," Acemoglu and three Harvard co-authors (including economist Philippe Aghion) assert that subsidies for research on clean technologies as well as temporary taxes on profits related to fossil fuels such as coal (which accounts for nearly half the electricity generated in the United States) would better prod corporations to research clean technologies.



Other economists find this analysis fruitful. "One might think innovation is a random arrival process of ideas," says Benjamin Jones PhD ’03, an associate professor at Northwestern's Kellogg School of Management who studies the structure of scientific research. "While that may be important, Daron has shown how innovation is also disciplined by economic conditions."



Some colleagues, while agreeing that corporate research usually involves small-scale advances, are less likely than Acemoglu to regard such incrementalism as a problem. "If you look at transformative technologies, those are the product of many incremental steps, which end in something larger," says David Levine PhD '81, an economics professor at Washington University in St. Louis who has written about innovation. For this reason, thinks Levine, the government does not need an assertive innovation policy.



Diversity at the university



Acemoglu, by contrast, thinks the government should not only more actively encourage technological change, but can expect to find a broad range of research ideas specifically in universities, which have markedly different incentive structures than the market. In academia, Acemoglu suggests in his note, the "diversity of researchers" and "their non-profit seeking or 'nerdy' behavior, may be socially beneficial." Granted, university researchers may also look to capitalize financially on their innovations, and, Acemoglu acknowledges, academics can exhibit their own "herding" habits. Still, he says, "There is also an automatic control against that, which is that there is a reward for originality." Acemoglu regards projects such as the National Institutes of Health's EUREKA program (which funds innovative research) as promising ways of enhancing this diversity; as he notes, breakthroughs such as the Internet have their origins in government-sponsored academic research which later become commercialized.



Indeed, Acemoglu even suggests research diversity can stem from the sociological diversity of researchers. "I think it's very much related," he says. "If you have a different perspective, you might have a different solution to a problem." That may not apply to closely circumscribed fields like particle physics, Acemoglu adds, "but if you're looking at a social problem, it's a major thing." Our multi-faceted climate problem, he thinks, fits this category.



Studying innovation has diversified Acemoglu's own research portfolio; in 2005 he won the John Bates Clark Medal, the American Economic Association's award for the best American economist under the age of 40, largely for work relating forms of government to economic growth. But innovation has become an important area of research for him: "My ideal would be to team up with climate scientists and bring these ideas about the diversity of technology into their climate models."



Those models contain assumptions about economic growth. But will that growth be clean? Understanding the dynamics of innovation could let climate analysts forecast the environmental consequences of government policies. This is work in progress, notes Acemoglu, but surely there will be a growing market for it.

