Innovation Economics - Theory

Theory

Innovation economists believe that what primarily drives economic growth in today’s knowledge-based economy is not capital accumulation, as claimed by neoclassicalism asserts, but innovative capacity spurred by appropriable knowledge and technological externalities. Economics growth in innovation economics is the end-product of knowledge (tacit vs. codified); regimes and policies allowing for entrepreneurship and innovation (i.e., R&D expenditures, permits, licenses); technological spillovers and externalities between collaborative firms; and systems of innovation that create innovative environments (i.e., clusters, agglomerations, metropolitan areas).

In 1970, economist Milton Friedman said in the New York Times that a business’s sole purpose is to generate profits for their shareholders and companies that pursued other missions would be less competitive, resulting in fewer benefits to owners, employees, and society. Yet data over the past several decades shows that while profits matter, good firms supply far more, particularly in bringing innovation to the market. This fosters economic growth, employment gains, and other society-wide benefits. Business school professor David Ahlstrom asserts: “the main goal of business is to develop new and innovative goods and services that generate economic growth while delivering benefits to society.”

In contrast to neoclassical economics, innovation economics offer differing perspectives on main focus, reasons for economic growth, and the assumptions of context between economic actors:

Economic thought Focus Growth Context
Neoclassical Market price signals in using scarce resources Productive factor accumulation (capital, labor) Individuals and firms behaving in vacuum
Innovation Innovative capacity to create more effective processes, products, business models Knowledge/technology (R&D, patents) Institutions of research, government, society

Despite the differences in economic thought, both perspectives are based on the same core premise: the foundation of all economic growth is the optimization of the utilization of factors and the measure of success is how well the factor utilization is optimized. Whatever the factors, it nonetheless leads to the same situation of special endowments, varying relative prices, and production processes. So while, the two differ in theoretical concepts, innovation economics can find fertile ground in mainstream economics, rather than remain in diametric contention.

Read more about this topic:  Innovation Economics

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