11/20/09 - innovation

In today's excerpt - historically 85% of the increase in per capita GDP (gross domestic product or wealth) in the U.S. economy has come from innovation—the invention of new products and services or the invention of better ways to make existing products and services. It follows that any durable and sustainable program to create jobs in an economy would focus foremost on innovation:

"Since the 1950s, economists have understood that innovation is critical to economic growth. Our lives are more comfortable and longer than those of our great-grandparents on many dimensions. To cite just three improvements: antibiotics cure once-fatal infections, long-distance communications cost far less, and the burden of household chores is greatly reduced. At the heart of these changes has been the progress of technology and business.

"Economists have documented the strong connection between technological progress and economic prosperity, both across nations and over time. This insight grew out of studies done by the pioneering student of technological change, Morris Abramowitz. He realized that there are ultimately only two ways of increasing the output of the economy: (1) increasing the number of inputs that go into the productive process (e.g. by having workers stay employed until the age of sixty-seven instead of retiring at sixty-two) or (2) developing new ways to get more output from the same inputs. Abramowitz measured the growth in the output of the American economy between 1870 and 1950—the amount of material goods and services produced—and then computed the increase in inputs (especially labor and financial capital) over the same time period. To be sure, this was an imprecise exercise: he needed to make assumptions about the growth in the economic impact of these input measures. After undertaking this analysis, he discovered that growth of inputs between 1870 and 1950 could account only for about 15 percent of the actual growth in the output of the economy. The remaining 85 percent could not be explained through the growth of inputs. Instead, the increased economic activity stemmed from innovations in getting more stuff from the same inputs.

"Other economists in the late 1950s and 1960s undertook similar exercises. These studies differed in methodologies, economic sectors, and time periods, but the results were similar. Most notably, Robert Solow, who later won a Nobel Prize for this work, identified an almost identical 'residual' of about 85 percent. The results so striking because most economists for the previous 200 years had been building models in which economic growth was treated as if it was primarily a matter of adding more inputs: if you just had more people and dollars, more output would invariably result.

"Instead, these studies suggested, the crucial driver of growth was changes in the ways inputs were used. The magnitude of this unexplained growth, and the fact that it was exposed by researchers using widely divergent methodologies, persuaded most economists that innovation was a major force in the growth of output.

"In the decades since the 1950s,  economists and policymakers have documented the relationship between innovation—whether new scientific discoveries or incremental changes in the way that factories and service businesses work—and increases in economic prosperity. Not just identifying an unexplained 'residual,' studies have documented the positive effects of technological progress in areas such as information technology. Thus, an essential question for the economic future of a country is not only what it produces, but how it goes about producing it.

"This relationship between innovation and growth has been recognized by many governments. From the European Union—which has targeted increasing research spending as a key goal in the next few years—to emerging economies such as China, leaders have embraced the notion that innovation is critical to growth."


Josh Lerner


Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed—and What to Do about IT


Princeton University Press


Copyright 2009 by Princeton University Press


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