The economics of innovation

There are many different kinds of technical innovations, but one of the most important distinctions is between incremental improvements to an existing range of products and processes and the revolutionary transformations brought about by entirely new technologies and production systems. Such deep-going transformations justify the expression ‘change of paradigm’ because they affect almost all branches of the economy to some extent. Examples of such paradigm changes are the introduction of electric power a century ago and the present revolution based on microelectronics. Each gave rise to a range of new products and changed the production system in many other industries. This paper makes some comparisons between these two technical revolutions and the social and economic changes which they engendered. On the basis of Schumpeter's theory of long cycles in economic development, it argues that a critical factor in each of these transformations was the adaptation of the institutional and educational framework in the leading industrial countries, to take advantage of the enormous productivity potential of the new technology. Today, as was also the case a century ago, there is some danger of Britain failing to make the necessary institutional changes in time to avoid further erosion of her position in world trade and economic performance.