Innovation Economics: The Economic Doctrine for the 21st Century



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While the U.S. economy has been transformed by the forces of technology, globalization, and entrepreneurship, the doctrines guiding economic policymakers have not kept pace and continue to be informed by 20th century conceptualizations, models and theories. Without an economic theory and doctrine that matches the new realities, it will be harder for policymakers to take the steps that will most effectively foster growth.

Fortunately within the last decade a new theory and narrative of economic growth grounded in innovation has emerged. Known by a range of terms – “ institutional economics,” “new growth economics,” “evolutionary economics,” “neo-Schumpertarian economics,” or just plain “innovation economics”: – collectively, this new economics reformulates the traditional economic growth model so that knowledge, technology, entrepreneurship, and innovation and are now positioned at the center, rather than seen as forces that operate independently.

But up to now, innovation economics, and innovation policy, has not fully been appreciated by policymakers, in large part because the dominant economic policy models advocated by most economic advisors and implicitly held by most policymakers largely ignore innovation and technology-led growth, in favor of macroeconomic issues, such as tax cuts on individuals, budget surpluses, or social spending, which at the end of the day pale in significance to innovation in driving economic growth.

In contrast, “innovation economics” recognizes the reality that a global, knowledge-based economy requires a new approach to national economic policy based less on capital accumulation, budget surpluses, or social spending and more on smart support for the building blocks of private sector growth and innovation.

Rather than focus on ensuring that prices accurately reflect costs to drive what conventional economists call allocative efficiency, innovation economists argue that the lion’s share of economic growth is determined by productivity and innovation.

Rather than focus principally on markets assumed to be in equilibrium and individuals assumed to be acting rationally in response to price signals along supply and demand curves, innovation economics recognizes that innovation and productivity growth take place in the context of institutions. In this sense it is based on the notion that it is only through actions taken by workers, companies, entrepreneurs, research institutions, and governments that an economy’s productive and innovative power is enhanced. As a result, when examining how the economy creates wealth, innovation economics is focused on a different set of questions:

  • Are entrepreneurs taking risks to start new ventures?
  • Are companies investing in technological breakthroughs and is government supporting the technology base (e.g., funding research and the training of scientists and engineers)?
  • Are regional clusters of firms and supporting institutions fostering innovation?
  • Are research institutions transferring knowledge to companies?
  • Are our trade policies working to ensure a level playing field for American companies?
  • Are workers getting skilled and are companies organizing production in ways that utilize those skills?
  • Are policymakers avoiding erecting protections for companies against more innovative competitors?
  • And perhaps most importantly, are policies supporting the ubiquitous adoption of advanced information technologies and the broader digital transformation of society and the economy?

This site is devoted to helping policymakers better understand the doctrine of innovation economics and its implications for a host of economic policy challenges both broadly cutting across issues (e.g., tax policy, regulatory policy, spending and investment policy, and trade policy) and specifically to particular substantive areas (e.g., energy policy, retirement security, housing, anti-trust, and competitiveness policy). We believe that such a project is critical if nations are to reshape their economic policies to effectively spur widely shared growth in the 21st century. Indeed, it is critical to the long term welfare of nations’ citizens.

Over 70 years ago, as policymakers were in the grasp of outmoded economic doctrines that hindered them from effectively responding to the Great Depression, John Maynard Keynes famously stated, "Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist." These words are as true today as when Keynes wrote them, and our challenge today is to open up the dialogue over economic policy to include a new doctrine of innovation economics.