What Are The Economics of Innovation?

by Dan Robles on 10/03/2008

Every time humans invent better ways of doing things, the economy gets a little bigger. This is a simple idea, really. It started with the making of tools then agriculture, followed by the scientific revolution and the invention of the printing press.

Eli Whitney’s musket demonstration led to the industrial revolution, the manufacturing economy, the Era of Information – up to, and including, the current knowledge economy.

Since the beginning, all of the people’s little tiny innovations have piled on top of each other and merged with other innovations to make big innovations – as a result, the economy grew faster and faster until today the global economy is worth 50 trillion dollars per year!

Where did all that money come from? Hey wait, how did money even enter this conversation? Money is simply another innovation – a scorecard really. Would you be surprised to learn that money does actually grow on trees?

Today new ideas are happening so fast that we lost track of what comes first; the innovation or the money?

As a result we live in a world where we say it takes money to make money; we must wipe out competitors who take our money no matter how much money it costs to keep them from taking our money, etc. Money is piled on top of money and parsed into exotic financial instruments and zipped across the globe.

This brings us back to that tiny flaw in market economics that I mentioned earlier:

Technological change must always precede economic growth. We are going about the process of Globalization as if economic growth can happen before the technological change happens.

This tiny reversal is at the heart of much that is unsustainable today – and it can be easily corrected.

The first thing to recognize is that the pieces of paper in your wallet do not represent Gold, Silver, or Oil. Some economists say that people are dumb for trading paper that means nothing. But people are not dumb – they are trading something called productivity. An hour of my time is worth an hour of yours and we naturally assign value to things based on information that we have about them. We trade an hour of American productivity for an hour of Japanese productivity, etc. It’s really simple.

Now here is the kicker – there is only one sustainable way to make more of these pieces of paper – it’s called innovation. Innovation increases productivity. Money and innovation are deeply and profoundly related.

In Fact, we can say that money and innovation are highly dependent on each other. If you want to make more money, you first need to make more innovation. It’s a system, without one, you can’t have the other – so why do anything else?

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