Planet Money - Two Indicators: The economics of innovation

Episode Date: June 14, 2023

Innovation is crucial for game-changing advancements in society, whether it's treatments for serious diseases, developments in AI technology, or rocket science.Today on the show, we're airing two episodes from our daily economics show The Indicator. First, a new paper suggests that breakthrough innovations are more likely at smaller, younger companies. We talk to an inventor who left a big pharmaceutical company to start afresh, leading to some incredible treatments for serious diseases.Then, it's off to Mars — or at least, on the way. Elon Musk's company SpaceX did a first test launch of a rocket meant to go all the way to the red planet. The rocket made it up off of the launch pad and lumbered briefly through the sky before self-destructing over the Gulf of Mexico. Suffice it to say, it's not quite ready. NPR science correspondent Geoff Brumfiel walks us through SpaceX's business plan as we try to figure out if this company has the funding and business acumen to reach its moonshot goal.These two Indicator episodes were originally produced by Corey Bridges & Brittany Cronin, engineered by Katherine Silva & James Willets, and fact-checked by Dylan Sloan & Sierra Juarez. Kate Concannon edits the show.The Planet Money version of this episode was produced by Willa Rubin, engineered by Robert Rodriguez, and edited by Keith Romer.Help support Planet Money and get bonus episodes by subscribing to Planet Money+ in Apple Podcasts or at plus.npr.org/planetmoney.Learn more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

This is Planet Money, from NPR. In the 1980s, Joshua Bojo was a chemist for the big pharmaceutical company Merck. Joshua's job was to try to draw out new compounds and figure out if they could be used for new medicines. I was making 25 to 50 compounds a year by hand, one at a time. We were told that it would take about 50,000 compounds before we should expect to get a drug. So you do the math, the average chemist would never make a drug in their entire career. You can imagine him in a lab hoping to find a treatment one day for, say, HIV or hepatitis C. And he thought that a computer could help him with his quest.

So he got one. Now, picture this. It's four decades ago. The computer is like the size of a fridge. He's ready to use it, but there's a problem because he can't even plug it into the wall in the lab because he needed a special electrical connection. The people in charge said,

we can't do that until we study the implications of this for all of Merck's labs around the world. And I just wanted a plug. And so it took literally three months to get this expensive computer sitting on a box at the end of the hallway plugged in. To Joshua, that weight was symbolic of everything that was wrong with a large company. Now, to be clear, this is not a story about Merck. This is a story about big organizations from pharmaceutical companies to car makers

because a new paper suggests that a lot of larger companies aren't allowing inventors like Joshua Boja to, you know, invent and that these old giants are holding the entire economy back. Hello and welcome to Planet Money. I'm Darian Woods. And I'm Adrian Ma. Today on the show, just let me make stuff. We're bringing you two recent episodes from our daily podcast, The Indicator, all about invention. First, we'll explore the ways in which bigger, more established companies might actually be holding inventors back

and limiting how much innovation is taking place in the American economy. After that, what happens when inventors do get to make stuff? We'll look at SpaceX, Elon Musk's giant space rocket company. They've got some big aspirations and have made some equally big investments in building new technology. But do their numbers really stack up? All that's after the break. Joshua Boja, the chemist who worked at Merck back in the 1980s and wanted to develop new drugs, fought for three months to plug in that giant computer. And later he

discovered another tool that could help him. And this involved bringing in his own early Apple desktop computer. I had to backpack it in in the morning and backpack it out because it was against the rules to have a non-approved electrical device plugged in overnight. I did that for an entire year. You would have got some pretty strong back muscles. It was a full backpack, you know, with the suspension on the back and everything. Joshua also saw that new chemical or biological innovations would sometimes fall between the cracks of this organizational structure at the company, one that was built around different scientific specialties. And he thought bringing the different specialties

closer together and organizing them around projects instead would actually help with this. But... I was running into active resistance from my peers who didn't like it that I was getting all these things, and the middle management sludge, which was really then slowing this innovation engine. I think anybody who's worked for a large organization knows exactly what you're talking about with middle management sludge. Yeah, I think this is a general feature. And it's sometimes active aggression, but often just passive aggression.

Soft peddling, maybe. Just, that idea sounds interesting. We'll have to study it. We'll have to study it. In the late 1980s, though, Joshua gets a call that offers a way out of this middle management sludge. A venture capitalist called me and said, you know, you can do this faster on the outside. And I was incredulous. I had never heard of a venture capitalist. I had no idea what they did. I said, but this is very expensive. And he said, oh, money's not a problem.

Joshua decided to leave Merck. He launched his own company, Vertex Pharmaceuticals, in 1989. Now, this situation is a huge dilemma in business and government. You've got larger, older organizations who often have the resources and experiences to do big things. Many of them perform their core business very well. Merck, for example, has saved countless lives by developing an HPV vaccine along with their many other vaccines and drugs. But established organizations tend to struggle when radically new ideas come along. So if you're an inventor, where do you want to be? Do you want to be with a dusty behemoth or at a scrappy startup?

Ufuk Akçigit is an economist at the University of Chicago who wanted to answer this question. The question is, how are we using our inventors in the U.S. economy? Ufuk tracked 760,000 inventors using their patent records, which he then matched with their employment data. He did that with the help of Census Bureau economist and co-author Nathan Goldschlag. inventors using their patent records, which he then matched with their employment data. He did that with the help of Census Bureau economist and co-author Nathan Goldschlag. And what Ufuk and Nathan found was that inventors earn more money when they go to bigger, older companies, like enough money to take an overseas family vacation every year. But these inventors tend to make fewer groundbreaking inventions.

Ufuk and Nathan looked at not just how many patents were filed, but also how important were their innovations. Like, how often was the patent cited by others, and how independent was this breakthrough? And by that measure of inventive output, innovation declined by up to 11% in those big companies. Now, how are those companies doing this? You know, paying more and not making as many groundbreaking inventions? Ufuk's read of the evidence is that the established companies are doing more in strategic hiring and strategic patent filing. That is, the companies are hiring promising inventors from startups and they're filing for patents,

but they're not necessarily doing much with that talent or that intellectual property. Ufuk believes that the companies are more likely to be defending their market share through hires and mergers and acquisitions rather than creating new markets with a great new product. As firms are gaining market power, rather than becoming more innovative, they are switching to more defensive strategies. Were you disappointed to find this? It is a little bit disappointing in the sense that we would like to make sure that the U.S. economy is using its resources in the most effective way. But of course, firms are just trying to maximize their profit and not necessarily the social welfare.

Ufuk also cites our old friend, middle management sludge. Normally, when an inventor is in a startup, typically all it takes is, you know, to convince three or four people in the company to implement a new technology or take a new direction. But when you're in a large organization, getting approval for a project or how resources are being allocated within the company, then bureaucracy definitely comes in. Ufuk thinks this could be part of the reason why Americans aren't getting more productive as fast as they used to. The U.S. economy has been investing more and more in innovative activities. If we are investing more in R&D, we should grow faster. But that's not happening. Indeed, the opposite is happening. We are receiving less in return. Now, of course, other reasons why the U.S. has slowing productivity growth might include regulation, low investment, and an aging population. But Ufuk and Nathan's

findings help us with part of this puzzle. Because when he looked at where inventors were going to work from the year 2000 to the year 2016, Ufuk found something that really worried him. We see a massive trend. The fraction of inventors that used to work for young, small businesses, it's declining drastically. Inventors and young, small companies are often trying to come up with a path-breaking discovery rather than defend old turf. And that's exactly how it worked for Joshua Boja, the chemist who started his own company, Vertex Pharmaceuticals. Now, to be fair, Joshua's old company Merck has continued to innovate too. But Joshua's new company, fueled by empowered and hungry scientists,

came up with some of the most exciting drug discoveries of our generation, including an HIV drug and a treatment that could add three decades to the lives of people with cystic fibrosis. Joshua is now retired from Vertex, but he says he still gets messages from people whose lives have been changed by his company. There is nothing more satisfying than getting a letter from a mother saying, I have two daughters who I did not expect to go to their high school graduation, and I expect now to go to their children's college graduation. Kind of makes you wonder how many great innovations we never saw because they got stuck in that middle manager sludge.

Aerodemesis. So I've talked about how at some larger legacy companies, there are all these barriers to innovation. So what happens when those barriers get taken away and inventors do get enough resources? After the break, we'll look at SpaceX and the very expensive business of going to the moon, and even Mars, and whether that business really adds up. We have never seen anything like the revolution in AI technology happening right now. Or have we?

The 1920s, the 1940s, the 1960s, the 1980s. The robots are coming. The robots are coming. One economist says, yeah, things are changing, but maybe not as fast as you think. People keep saying, but this one feels different. But they've said that every time. A conversation you didn't hear in our series on AI in our recent bonus episode. And listen to that episode for an exclusive discount code for the NPR shop. As a thank you to our Planet Money Plus supporters. We are back. It's Planet Money. I'm Darian Woods, and I'm joined by NPR science

correspondent Jeff Brumfield. Welcome to the show. Hi, Darian. So good to have you. You're here to talk about Elon Musk's giant rocket. That's right. As I'm sure you saw this spring, Elon's company, SpaceX, launched the biggest rocket the world has ever seen. It's called Starship. It's enormous, taller than the Statue of Liberty. And from the moment those engines fired, it was excitement. It was so powerful, it blasted a giant hole in the bottom of its concrete launch pad. It sort of lumbered into the air and then started spinning out of control. They had to punch the old self-destruct button there,

and the whole thing blew up over the Gulf of Mexico. All right, so mixed results, but people were kind of celebrating a bit as well. Yeah, yeah. I mean, SpaceX treated this thing like a big success, and it was actually, even though this giant, super expensive rocket exploded. You know, just getting something like this off the pad, getting it this far into its flight on the first try is really impressive, into its flight on the first try is really impressive. But they still have a long way to go. Right. Now, SpaceX is not a brand new company.

It's been around since 2002. The technology that it's developed is geared towards launching things into space, things like weather and communications satellites. Falcon 9 is in startup. LD is go for launch. Yeah, it's got these rockets where the bottom part of the rocket can land vertically and be reused really easily. And that's made its launch costs far cheaper than most other space companies. I spoke to this analyst named Chris Quilty. He's the president of a company called Quilty Space. He says SpaceX is getting a lot of business. SpaceX, when it comes to the launch industry, is sitting high on the hog. They're in such a good position competitively.

So I understand that SpaceX has big contracts to launch supplies to the International Space Station and even astronauts too. And so you'd think with these big deals that SpaceX would be making a lot of money. You'd think so. I mean, it really is dominating a lot of different parts of the business of launching things into space. But here's the thing, Darian, the space launch business isn't all that big. Right. I mean, I read that the entire global revenue from satellite launches is only about $6 billion. And that's revenue. That's not even profit. That's the pie that all the big space companies split up. SpaceX is a private company, so we don't really know the

financials. But from what Quilty can tell, it probably isn't making money. Starship just this year alone is costing $2 billion, according to Elon. So it sounds like a ton of money going into research and development and expenses to pay for this new rocket. Yeah. And I mean, we should maybe take a minute to explain why it's so expensive. So Starship is a radically different design from the rocket SpaceX currently uses. Those ones are as lightweight as possible because every pound you need to launch into space costs money. But Starship isn't like that. It's made of stainless steel. Steel is cheap. It's strong. It can withstand reentry into the atmosphere better than things like aluminum. But it's heavy. And that brings us to the second feature of Starship. It is enormous.

It has these huge engines called Raptors. And the first stage uses 33 of them. Now, why do all this? The point is reusability. The steel, the big engines, all of this is designed to make Starship cheap and tough and capable of flying again and again, kind of like an airplane flies over and over and over. capable of flying again and again, kind of like an airplane flies over and over and over. And so this is all kind of in service of traveling to Mars? Like Elon Musk wants to get civilization to build a city in Mars, right? Yeah, exactly. I mean, to be frank, civilization is feeling a little fragile these days.

Elon estimates that it's going to take around a million tons of supplies to get the city started. And SpaceX's current rockets can't move a million tons to Mars, but Starship can. Starship is capable of doing that. It's capable of getting a million tons to the surface of Mars and creating a self-sustaining city. Okay, so it's good to have a dream. Interplanetary life goals. Yeah. And Elon has built this company, SpaceX.

It is winning loads of contracts. Right. I mean, it would actually almost certainly be making money if it weren't for the fact that it was trying to build this giant rocket to Mars. Okay, so is there any economic case for Starship, that big rocket? Yeah, I mean, Elon thinks so. So leaving the dreams of Mars settlement aside, he thinks a big, tough rocket like this could make it very cheap to launch other stuff into space. And that could allow humans to start all kinds of businesses that feel like they're completely impossible right now.

like they're completely impossible right now. You know, maybe recreational space stations or space factories that might make things in zero-g or even like going off and mining asteroids. And, you know, if all that stuff happens, all that commerce would be getting rides on Starship, which would make SpaceX a lot of money. So it's a big vision from a business perspective too. But I should say it also comes across as quite a gamble.

I mean, I spoke to another analyst, Carissa Christensen. She's CEO of a company called Bryce Tech. She says the problem is, right now, no one in the satellite business really needs a Starship. Payloads today are designed for vehicles that are available today, and Starship is much bigger. So there's not an immediate, obvious commercial fit for Starship in terms of commercial launches. So it sounds like she's saying we don't know if anyone will actually buy flights on Starship. Exactly. Now, there is one other sort of economic case for Starship. SpaceX is also building a satellite internet service called Starlink. And Starlink needs thousands of satellites in orbit to work.

Now, because Starship is so huge, it could allow them to radically expand the Starlink network. And that could generate a lot of cash. But that's all in the future. For now, Chris Quilty says SpaceX is going to struggle to be profitable. Until Starship is flying and the development costs are down and it's generating revenue instead of consuming cash, and until they start getting new Starlink satellites on orbit, I think it'll be a challenge for them. Okay. So it sounds like the profits for SpaceX really depend on whether they can kind of get over this research and development hump for Starship. Do we know whether they have the cash to be able to pull this off? The short answer is no. And that's because we really don't know how many tries it'll take to get Starship to fly. The company does have some extra help.

NASA has awarded it around $4 billion in contracts so that SpaceX can develop Starship into a lunar landing vehicle. A literal moonshot. Yeah, a literal moonshot. And Chris Quilty told me, you know, that that is the sort of thing that investors seem to love about Elon, these big visions, and they're willing to pay up for it. The sense I get from when I talk to investors is there is still a belief that, you know, SpaceX is going to change the world. And that may be the company's sort of final ace up the sleeve. It's just this faith that SpaceX really can change the world. In a recent sort of round of fundraising, the valuation that was sort of bandied

about for SpaceX was close to $140 billion. Now, do you remember the total revenue from launch is only around $6 billion annually? I mean, it really shows that investors are ready to believe that Starship will work and that it'll pay off. I mean, I guess the question is, how many rockets are they willing to see blow up? These episodes were originally produced by Corey Bridges and Brittany Cronin. They were engineered by Catherine Silver and James Willits. Fact-checking by Dylan Sloan and Sierra Juarez. Viet Le is the Indicator's senior producer, and Kate Kincannon edits the show. Jess Jang is our acting executive producer. I'm Jerrion Woods. This is NPR. Thanks for listening.

And a special thanks to our funder, the Alfred P. Sloan Foundation, for helping to support this podcast.