delanceyplace.com 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,
Princeton, Copyright 2009 by Princeton University
Press, pp. 43-45.