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Summary of the book The Economics of Innovation for the course Market Dynamics and Corporate innovation at UU.
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The economics of innovation. Anintroduction.
Chapter 1
Introduction to the book.
Chapter 2
History of economics of innovation.
Adam Smith and John Rae: Smith believes invention followed the division of labour. Rae on the other
believed invention was the main drive behind the wealth of nations (creation of wealth).
John Stuart Mill: Invention is central to wealth creation. He was one the first to write the paradox of
invention: that invention doesn’t per se make life better for all, but rather for only a few.
Karl Marx: Absolute centrality of invention within economic development. He means that a company
in a competitive market cannot survive without innovation.
John Ruskin: Ruskin saw many other channels for the use of invention other than what we would
now call innovation.
Henry George: Reasoned that every labour saving invention caused an increase in rent (property
prices), so that inventions and innovation are not per se good for the normal working people.
Alfred Marshall: Puts the consumer as the innovator through his/her behaviour.
Thorstein Veblen: First to say ‘invention is the mother of necessity’, instead of other way around. It
suggests a demand could emerge for inventions for which there was no original need to the
consumer.
Joseph Schumpeter: Introduced concept of creative destruction. One of the most important for
economics of innovation. And he insisted that creative destruction is a more important force for
competition than price competition.
Lewis Mumford: Says the most important innovations have been social (clock) not technological
(steam engine).
John Kenneth Galbraith: The innovators and marketers create demand, which is to be satisfied by
invention.
E.F. Schumacher: Technological progress provides us with tools which can have both good and bad
effects.
Chris Freeman: Says innovation is not just a field of economics but is multidisciplinary.
Kenneth Arrow: Firms in competitive environments will underinvest in invention because it is risky.
And for basic goods even more because firms are scared of others freeriding on them.
Robert Solow: Growth of productivity is caused mainly by technical change rather than increased use
of capital.
, Nathan Rosenberg: Innovation cannot be demand-pull or technology-push alone, both must work
together before innovation takes place.
Richard Nelson: Created evolutionary economics. Innovation requires employees to do things
differently than how they were done in the past.
Paul David: The way towards equilibrium is influenced by its past course.
Eric von Hippel: Consumer is increasingly important for innovation and increasingly able to innovate
by themselves.
Paul Geroski: Into a new market the fast-second entrant is often more successful than a fast first.
5 Themes:
1. Innovation and Wealth Creation: Smith, Rae, Mill, Solow, Rosenberg and Schumpeter.
2. Innovation and Competitiveness: Marx, Schumpeter, Veblen, Geroski.
3. Innovation and sustainability: Ruskin, Schumacher.
4. Innovating, Unexpected Side Effects and Paradoxical Non-Effects: George, Veblen, Mumford,
Ruskin (side effects), Mill, George, Galbraith, Solow, David (no effect where one was
expected).
5. Through which channels does innovation work? Marshall, von Hippel, Veblen and Mumford
(firms are not the only innovators in the economy).
Chapter 3
Basic concepts in innovation
The simplest model is that of linear innovation. Research and creativity lead to an invention, this
invention leads to product design and development, the invention becomes an innovation when its
first put to commercial use.
Creativity is the process, invention is the result of it.
Technological change vs. innovation: innovation is wider than technological change. Technological is
a subset of innovation.
Pure process innovation only changes the way a product is made without changing the product
itself. Pure product innovation creates a new or improved product without changing the production
process (except for material inputs). Most innovations embody some of each.
Most firms will only spend on research and creativity if there is some economic return on the
investment. For this the innovation has to be of commercial value and the firm must get some sort
of head start using the invention for economic advantage. The main way to protect inventions is
patents. This makes the invention public but ensures no one copies it. Informal methods are
ensuring process/product complexity, confidential agreements and strategies for secrecy.
Consumers, 2 extremes:
- Consumer of habit who likes to the familiar and doesn’t change. Will be resistant to
innovation.
- Active consumer or Marshall consumer is always seeking variety and change.
- In the middle of these is the average consumer.
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