State of Innovation

Patents and Innovation Economics

Inventing Wealth

Inventing is the way in which humans create wealth.  Despite this no major school of economics pays more than lip service to invention.  Economics is the study or how people produce goods and services to meet their needs.  If human beings did not invent, then studying economics would be the same as studying evolutionary biology.  Note this is true of history also.  If people did not invent, then the history of humans would be like the history of every other organism.  The only events of interest would be changes in our environment and our biology.  It is only because humans invent, that economics exists.  Below I will review the basics percepts of the major schools of economic thought and their relation to inventions.

Neoclassical economics focuses on the determination of prices, outputs, and income distributions in markets through supply and demand.[1] This school of economics concentrates on equilibrium in the market, which optimizes resources.  This occurs at the price where supply equals demand.  The policy focus of neoclassical economics is disruptions in market equilibriums.  Inventions are not a focus of neoclassical economics.  Inventions disrupt the equilibrium in markets.  They also do not generally fit into supply and demand curves.  What is the demand for an invention that has not been created?

Keynesian economics is in general agreement with neoclassical economics except they see a bigger role for government, particularly to stimulate demand.  Under neoclassical economics changes in supply and demand are equivalent (inversely proportional).  It does not matter if supply increases or demand decreases, the price of the good goes down.  Keynesians use this principle to argue that governments should stimulate demand when the economy is in a recession.  This will stimulate supply or production.  There is no place of invention in this school of economics either.

Marxists economic thought is based on the physical labour theory of value.  It denies the value of mental labor and capital.  As a result, there is no place for invention, which is mainly the product of mental labor.

Austrian economics differs from classical economics in its emphasis on the subject theory of value.  This school emphasizes a very limited role for the government.  Recently it has focused on the Federal Reserves’ adverse effect on the economy.  Austrian’s also do not see a significant role for invention in economics.

Monetarists focus on the effects of central banks on the economy.  They argue that fluctuations in the money supply are tied to business cycle.  According to this school of thought, central banks should focus price stability.  Inventions have no role under this theory.

While there has been economic research on the role of inventions in the economy, which we will examine later, no school of economic thought has integrated the role of inventions into their models of the economy.

[1] Neoclassical Economics, Wikipedia,, 10/31/10.


November 1, 2010 - Posted by dbhalling | -Economics, Innovation

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