nnovation has been the driver of the extraordinary progress from which humankind has benefited for a couple of centuries, but it faces a largely hidden threat: Innovation is becoming harder and more expensive.
It’s instructive here to take the long view. For most of recorded human history, improvements in human welfare from generation to generation have been limited. Take, for example, GDP per capita as a measure of economic prosperity. For most of human history, roughly until the early 1800s, the measure barely moved to $1,200. But since that time, it has grown by more than 14 times (Exhibit 1).1 Human health has followed a similar trajectory—low for centuries and only significantly improving in recent generations. In 1900, for example, the average life expectancy of a newborn was 32 years. By 2021, this had more than doubled to 71 years.2
These and many other improvements in our lives have been driven by a set of scientific discoveries and products engineered based on those breakthroughs. These innovations have enabled economies to grow and people’s lives to improve. The steam engine helped power the Industrial Revolution. Vaccines that prevent diseases such as smallpox, measles, and polio continue to save millions of lives each year; infant mortality is estimated to have decreased 40 percent in the past 50 years because of vaccines.3 The invention of the integrated circuit for computing and lasers for communication through fiber-optic cables helped create the global internet.
But the rate of progress enabled by innovation now faces an under-recognized threat: Innovation is getting more difficult and more expensive.
Even as science advances, R&D productivity is on the wane
By many metrics, and in many fields, each dollar spent on R&D has been buying less innovation over time. In other words, R&D productivity has been declining.
Take the semiconductor industry. With integrated circuits embedded in products that support nearly every part of our lives, this sector has advanced in accordance with “Moore’s Law”—the remarkable observation put forward by Intel cofounder Gordon Moore that the number of transistors on an integrated circuit will double about every two years.4 This is roughly equivalent to an exponential growth rate of 35 percent annually in transistors per dollar.
But this level of performance increase has been bought at the cost of increasing expenditures in R&D. Nicholas Bloom, an economics professor at Stanford University, and his research collaborators published a paper in 2020 that examined the real R&D expenditures of semiconductor companies and equipment manufacturers and estimated that their annual research effort rose by a factor of 18 between 1971 and 2014.5 In other words, maintaining the performance growth rate in Moore’s Law required 18 times more inflation-adjusted R&D spending in 2014 than it did in 1971 (Exhibit 2).
It’s not just semiconductors. The biopharmaceutical industry has produced innovative products used to prevent and treat many diseases, enabling millions of people to live longer and healthier lives. But the challenge of declining R&D productivity in that industry led Jack Scannell, a multidisciplinary life sciences analyst, researcher, and entrepreneur, to coin the term “Eroom’s Law” (that is, the reverse of Moore’s Law) to describe the fact that drug discovery has become slower and more expensive over time.6 He and his research collaborators found that the number of new drugs approved per billion US dollars spent on R&D halved roughly every nine years between 1950 and 2011, falling around 80-fold in inflation-adjusted terms (although the decline appears to have stabilized somewhat in the past decade) (Exhibit 3).
Declining R&D productivity has been reported in other fields, such as agriculture, where higher yields for multiple crop types require increasing levels of R&D spend. Using company-level data across all sectors in the United States, Bloom and his team found that R&D productivity declined in general, with output measures including revenue, market capitalization, employment, and revenue per employee. (This was not the case for all companies: While most experienced a decrease in R&D productivity, 22 percent of organizations increased research productivity.)7
AI has the potential to bend the curves of R&D productivity, not only unlocking more economic growth but also boosting the chances of solving some of the most important human challenges, from preventing and curing diseases to reducing the level of carbon emissions.
