Then there’s the more purely financial innovation. There are good things here too — fractional reserve banking, factoring, common-stock limited-liability companies, tradable fungible bonds, stock-market index funds, that sort of thing. But on this front I think the low-hanging fruit was plucked decades if not centuries ago, and that we’ve long since entered a world of diminishing returns when it comes to the positive developments. Meanwhile, the negative developments, from portfolio insurance to CDO-squareds, have been arriving at an ever-accelerating pace.
When intermediation related operations go north of 1/3 of your economy something is out of whack. In Knowledge and the Wealth of Nations David Warsh points out that economists have had great difficulties in explaining economic growth and rising productivity from the beginning of the profession with Adam Smith. Innovation is an exogenous parameter outside of their models. Societies such as the Syracuse of Archimedes or Song China may have had the engines of technological innovation ready to go, that critical bridge between science and engineering, but the cultural matrix was not going to facilitate any mass revolution catalyzed by gains from productivity due to technology. Utopia in the pre-modern age was egalitarian primary production, not mass affluence and endless horizons of innovation and increased material wealth. Double-entry bookkeeping, the printing press and a shift toward rule of law and representative government may have allowed for technologically driven economic lift-off which reshaped our perceptions of the possible, and generated a virtuous feedback loop. It seems though today that the legal, financial and institutional scaffolding around the engine of technological innovation is possibly growing so thickly that we are in jeopardy of reverting back to the state of pre-modern economic stasis.
Addendum: Also, it seems to me that most contemporary financial “innovation” is actually just trying to extract more juice out of the orange; gains of efficiency, as opposed to ground-breaking game changers (such as double-entry bookkeeping or the joint-stock corporation). At some point when there’s no juice to be extracted you’re going to just end up redistributing the juice to the benefit of the “innovators,” if you know what I mean….