Innovation creates value, and offers more efficient ways for doing things

Innovation and its Economic Impact

Innovation generates value and provides new ways to do stuff. Economists therefore assume that creativity can only be calculated by efficiency and production. The calculation of a total productivity factor of the concept, which captures the contribution of creativity in itself. Example for the calculation of innovation is the online retail innovation that has increased economic growth to 3% over the past year, compared to 0,8% for other firms, and enhanced productivity performance in the entire industry. According to JP Morgan, "Amazon.com Inc. lifts efficiency almost entirely in the retail market. The average internet retailer generates $1.3 million in sales per employee, compared to the average brick-and-mortar retailer's $279,000." (Greg 5).

Question 2 answer

Innovation is important to both society and businesses. To society, innovation has improved people’s standards of living and people’s mortality rates its stagnation brings dissatisfaction to the middle class in society. Through research and development (R&D), the field of medicine has produced a cure for most diseases that affected human life. The author says, ‘In the past century, vaccines, antibiotics and clean water vanquished humanity's biggest killers… most of those diseases now have therapies.’" (Greg 3).

To businesses, innovation has led to a more efficient way of trading. Online retail trade is faster and provides a higher gross product than normal businesses. Amazon.com Inc. is an example of high productivity. Regulations for the commercialization of ideas in the business sector have made the world safer and raised the bar for future innovation. Businesses are now less likely to pollute, leaving people to enjoy cleaner air e.g. production of zero-emission cars.

Question 3 answer

According to the author, innovation slump is the key reason for middle-class dissatisfaction, yet the low-hanging fruit in science, medicine, and technology has been harvested. (Greg 2). New advances in innovation are now hindered by the fact that they are costlier and more complex. "Frontier" companies are often patented and now use the most efficient processes and technology, making it difficult for their competitors to catch up. This doesn't hinder productivity. The risk is that once a firm becomes dominant, no competitor can match its network and innovation is less necessary to retain customers. (Greg 5). The competitors will, therefore, have no place in the industry and will leave, reducing the number of innovations an economy could have had.

Secondly, the society has grown less tolerant of risk, yet innovation comes through trial and error and is prone to failure e.g. plane crashes, toxic waste spills, and financial crises. In the words of Joel Mokyr, "innovation is a messy process inevitably with some negative bite-back. But I have this sense we have become more risk-averse; we are less willing to accept the fact that things can go wrong." (Greg 4).

Lastly, innovation is hindered by time. More-optimistic economists note that it takes years for breakthrough innovations to transform the economy. For example, it took 40 years after the introduction of the electric lightbulb for electricity to have a measurable impact on national growth. The same can be said for personal computers which took 20 years before boosting productivity. Erik Brynjolfsson says, “there has been a burst of innovations recently, especially in artificial intelligence, that we will see come to fruition in the next five to 15 years." (Greg 2).

Question 4 answer

Innovation slump in America would mean a decline in standards of living and a dissatisfied middle class. To promote greater innovation in America, the society will have to employ more resources in research and development (R&D) to produce innovations of more benefit than in the past. This means a larger workforce as researchers and more funding.

A second way is to promote innovation through exploiting the knowledge in other countries. Countries such as China caught up to rich ones by copying their ideas. America can exploit the vast knowledge base in science, medicine, and technology in countries such as India and China.

Lastly, regulators can encourage innovation in America by relaxing restrictions on the commercialization of new ideas. Regulations hinder innovation. This can be seen in the number of lost opportunities during restrictions on the use of commercial drones. Drones provide an advantage in consumer delivery by the likes of Amazon and have the potential to save lives. They are also very reliable in labor-intensive and dangerous work such as flying low enough in remote regions to spot problems on railway roads.

Work cited

Greg Ip. (07 Dec 2006), the wall street journal, eastern edition, economy’s hidden problem: we’re out of big ideas, New York.