Is the sequence of financial bubbles dating back to Japan in the late 1980's, via Asia in the late 1990's, technology stocks at the turn of the decade followed in recent years by an accelerating series of bubbles in real estate, credit risk and commodities, all symptomatic of a deeper underlying economic malaise, rather than just incompetent monetary policy and an excess of global savings? The key fundamental drivers of sustainable prosperity are technical innovation and productivity growth, and their interaction over time. It was the utter failure of the Soviet system to sustain technical innovation and to boost stagnating productivity (notably in energy production) that presaged the sudden collapse of their system. Could we be facing a similar fate and simply running out of sustainable growth?
It may seem strange in our world of ever sleeker wireless gadgets and broadband connectivity to question the pace of technical innovation, but in fact R&D productivity has been slumping across many industrial sectors in the past couple of decades, and few recent developments are 'fundamental' in the sense that their loss would dramatically change our material living standards; our civilization could cope easily if we had to revert to the days of the telex/fax and fixed wire phone or a Walkman rather than an iPod, but not without antibiotics or the internal combustion engine. Technological progress has become evolutionary rather than revolutionary, despite the huge growth in scientific knowledge.
We seem to have run out of radical, paradigm shifting, creativity, and in the few areas such as GM food or stem cell research where breakthroughs seem possible, irrational, anti-scientific sentiment has stifled progress. In the pharmaceutical sector, the number of new chemical/biological entities approved by the FDA for sale more than halved over the last decade, despite record pharma industry investment, leading to slumping R&D productivity (see chart below); remarkably, about half of the failures reflect a failure to beat a placebo in late stage trials. Such 'blockbuster' drugs as have broken through have generally been lifestyle products of marginal medical value, and there has been minimal progress in key degenerative diseases from cancer to dementia. Agricultural chemicals show a very similar declining trend of slumping R&D productivity.
Silicon Valley and the IT industry are not immune to the trend, and veteran figures such as Richard Elkus (Tencor, Lam Research) and Judy Estrin (ex CTO Cisco) are now warning of an impending innovation crisis; our Internet age owes its existence to US government research investment at the height of the Cold War (notably at DARPA), and innovations spawned by a handful of giant private labs like IBM or Xerox as far back as the 1970's (there is typically a 20 year lead time for fundamental lab innovations to make it into mass market products; basic research pays off decades after investment, and neither politicians nor investors have the foresight to any longer make that commitment). 
This spending has collapsed as investment horizons have relentlessly shortened and the political impetus of Superpower rivalry has waned; just in August the famed Bell Labs, where the transistor and a host of other key innovations were invented, were closed by Alcatel-Lucent, as it pulled out of basic science, material physics, and semiconductor research. This is a potentially devastating trend. Silicon Valley got more Federal handouts over several decades than Detroit will ever get and a further key windfall from the influx of mathematical and scientific talent as the Soviet Union collapsed, whose role in creating companies from Google to Paypal has been critical. The payoff from these factors is now abating fast. So what's the core issue? It's a hugely complex area, but certainly the 'financialization' of our economies, particularly in the Anglo-Saxon world, has led both to shorter investment timeframes and distorted executive incentives, to the detriment of society at large. Additionally, the soaring pay gap between graduates entering industry and academia versus investment banking over the last 20 years has diverted intellectual talent from scientific research. In recent years banks have recruited thousands of top level engineers and physicists from across the world, who have been responsible for the frantic 'innovation' in exotic derivative instruments which has now blown up in our faces.
A reversal in these trends would certainly be helpful. However, ultimately I think we have a more profound problem. The rational Enlightenment values of the 16/17th centuries in Northern Europe were an intellectual revolution that gave rise to the scientific revolution of the 18/19th centuries and the industrial/technology revolution of the 19/20th centuries. Scientific method, the endless tinkering of trial and error experiment, of continuous improvement, has remained essentially unchanged in its principles throughout. The problem is that we have long harvested the low hanging intellectual fruit of this Enlightenment approach, and the economics of complexity mean that marginal returns from research are now in steady decline, very similar to the trend of diminishing marginal returns we are seeing across many economic activities such as energy exploration, for instance.
In a world of slowing technological progress and demographic decline, the sudden Soviet collapse may be a harbinger of things to come; interestingly, in a desperate attempt to promote faltering growth, the Soviet Union in its final years under Gorbachev boosted nominal wages and flooded the economy with money, igniting an inflationary spiral that quickly consumed them. There are no short-cuts to sustainable economic growth, and this crisis should be a wake-up call to that reality. The mindless consumption and leverage of recent years will have to give way to far greater investment in the future, from physical infrastructure to basic scientific research, if we hope to sustain our living standards in the long-term.
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