… a core term used in Economic Analysis and Atlas102


Merriam-Webster defines innovation as the act or process of introducing new ideas, devices, or methods.

The Economist describes innovation as a vital contributor to growth and goes on to say:

“The big challenge for firms and governments is to make it happen more often. Although nobody is entirely sure why innovation takes place, new theories of endogenous growth try to model the innovation process, rather than just assume it happens for unexplained, exogenous reasons. The role of incentives seems to be particularly important. Although some innovations are the result of scientists and others engaged in the noble pursuit of know­ledge, most, especially their commercial applications, are the result of entrepreneurs seeking profit. Joseph Schumpeter, a leading practitioner of Austrian Economics, described this as a process of ‘creative destruction’ [see Creative Destruction]. A firm innovates successfully and is rewarded with unusually high profits, which in turn encourages rivals to come up with a superior innovation.

“To encourage innovation, innovators must be allowed to make a decent profit, otherwise they will not incur the risk and expense of trying to come up with useful innovations. Most countries have patents [see Patents] and other laws protecting intellectual property, which allow innovators to enjoy a (usually temporary) monopoly [see Monopoly] over their innovation. Economists disagree over how long that protection should last, given the inefficiencies that result from any monopoly.

“For most of the second half of the 20th century, governments played a crucial role in funding and directing pure research and early-stage development. In the 1980s, however, legal changes in the United States started to reduce this role. One change aimed to move technological development out of the country’s state-financed national laboratories. Another allowed universities, not-for-profit research institutes and small businesses doing research under government contract to keep the technologies they had developed and to apply for patents in their own names. This appears to have contributed to a surge in innovation in the United States, as government researchers and university professors teamed up with outside firms, or started their own. Hoping for similar results, many other countries have followed suit.

“Is innovation all it is cracked up to be, or is it just change for change’s sake? A few years ago, Robert Solow, a Nobel prize-winning economist, observed that ‘you can see the computer age everywhere these days except in the productivity statistics’. Although new computer technology clearly had affected people and firms in visible and obvious ways, the slowdown in productivity growth that had afflicted the American economy since the 1970s did not appear to have been reversed. Believers in the new economy argued that the ‘Solow Paradox’ no longer holds true; in the late 1990s, the computer revolution started to deliver the productivity growth long promised. Even so, this shows that innovation can take a long time to deliver the goods.”

Atlas topic, subject, and course

Monopoly and Price Discrimination (core topic) in Economic Analysis and Atlas102 Economic Analysis.


The Economist, Innovation, Economics A-Z, at, accessed 7 May 2016.

Page created by: Ian Clark, last modified 7 May 2016.