Fauxnovation
I couldn’t quite decide how to connect this to my post about innovations in crayons, so I decided to just split them into two.
This is a more negative take on the innovation that the market forces. Krugman on financial creativity:
At this point, there is no reason to take it on faith that cleverness in the financial industry is a net social good. Unless you can provide some clear evidence of productive innovations since regulation began to unravel — and ATMs don’t count — the balance of the evidence suggests that smart people have been devising ingenious ways to concentrate risk and direct capital to the wrong uses.
So innovation and creativity certainly drive the markets, as everyone is into growth and if you can’t find new things to sell folks it’s hard to grow. But I often wonder whether in the end it’s really “good” (though I guess that’s not really a fair question, since I like living in a prosperous country … and do work for companies that rely on just this sort of “creativity”). Is this sort of innovation really the best engine for growth? I mean I know there are other models (service pops to mind first), but this seems to be the dominant business strategy. I guess R&D-based companies would be another type, but so many of those get sucked in by this sort of fauxnovation (again, see: five blades).
Hi, I'm 
isn’t this a problem only when innovation is confined to a specific market (in your example, finance) and ends up not translating to other related areas (laws & regulations, consumer markets, banking, etc. in your example)?
seems to me that innovations fail when they operate only according a single evaluative criteria of their own field.
successful innovations (those that secure enduring positive outcomes) are capable of keeping multiple orders of worth in place at once. i.e. they are able to see a challenge simultaneously as financial, and legal, and behavioral, and regulatory, and …
I’m totally with you on this one but I think that there is a level of subjectivity here.
Looking at consumer goods innovations, some people (myself included) will always be happy to hear about (and purchase) stuff that comes under fauxnovation such as Crayon, LEGO, and Jelly Beans but feel ‘cheated’ when we see another blade on a razor sold for 30% premium.
And what about fashion? isn’t it the mother of all fauxnovation? yet we all participate in this.
I think that like most things, there’s good innovation and bad innovation, useful innovation and stupid innovation, genuine innovation and greedy innovation…
@Ana – Yes, I totally agree. I think that’s a good distinction. When I think of innovation that’s precisely what I think of: Disparate ideas that end up combined, often accidently.
@Asi – Good point, didn’t think about fashion, that’s a crazy one. This is a half-baked theory at best for me. Thanks for the comment Asi.
You’re broadening “innovation” beyond what Krugman is discussing. Financial innovation refers to things like packaging up mortgages and selling them in chunks, which theoretically distributes (and therefore manages) risks, where in reality it just hid the risk and caused scary entanglements that no one understood.
I think a more apt analogy to something we understand would be a sudden overwhelming desire to leverage social media to generate oodles of magical followers that somehow… magically, of course… result in higher revenue for a company.
Oh wait…
As Krugman has said before, since the 1970′s the real wages of the median American hasn’t really changed. Instead, the rich have gotten really, really rich. That accelerated post-2000.
The theory is that financial innovation hasn’t made it easier for productive ideas to get funded… just for bankers to make more money off the things they fund.
The counter-argument is that it’s a much more liquid credit market these days. It’s easier to tap the value of your house by getting a mortgage. It’s easier to get a credit card. It’s easier for companies to meet payroll without cashflow problems. And so on.
Not sure who is right.