Google is proof that yes, it does create innovation. How many products and tools came out of people dicking around?
What new product has Google launched recently that it didn't cancel? Google's main money makers are all still products from 15-20 years ago.
Given all this it's proof that no, paying people to dick around doesn't generate more creativity once you peaked.
At the same time at their scale the measures of success are different. If a solution doesn't reach a huge audience it's quickly lost between the big products, while it might be profitable.
Back in the days an Orkut which served primarily Brazilian audience was okay, but compared to scale of Gmail, YouTube and Search (and the aimed reach of Google+) it was a distraction, not helping the core brand.