The Economics of Innovation

There is a theory of innovation that focuses on supply and demand. This kind of thinking implies that there is a market for innovation. I am not sure if this is totally true because it isn't clear that the market has a clearing price or that people are actually trading regularly in innovation capacity. It also isn't totally clear because innovation is not a typical product. You can never be sure when you will have it, you can't strictly control its creation, and you are never sure how much it will cost. This is because ultimately innovation is linked to some gal or guy's creativity and creativity is tough to manufacture.

That said, I think it can be instructive to think of innovation as a market with supply and demand factors. There are certain things that can really increase demand for innovation. It seems to be at least somewhat true that "necessity is the mother of invention." That is why so much innovation has been driven from military / war spending. I think that the clean tech revolution is being largely driven by the necessities imposed as we finally recognize global warming. Further, the increased cost of using traditional fossil fuels also seems to be leading to an increase in the demand for innovation in this area just like it did in the 1970s.

Similarly, I think that there are supply side changes that influence innovation. Funding of basic research programs, increases in entrepreneurship rates, and venture capital all influence the "supply" of innovation. Despite all of this I still think that supply side of innovation, while driven by a bunch of researchers in white coats all over the world, is really more similar to inspiration in art. Artists have to find a muse to get their creative power. The process sometimes seems almost random and sporadic.