Growth and Innovation

Oftentimes, innovation and growth go hand in hand. But is this always the case:

Sustainable economic growth comes from innovation. At The Economist’s Buttonwood conference a few weeks ago, Timothy Geithner spoke of the administration’s commitment to innovation. He claimed you cannot have innovation without growth.

I am not sure that’s true. Often the most desperate economic circumstances spawn some of the best innovation. Nor is the converse true, you can grow without innovation. Putting more capital and labour towards production can yield positive economic growth. But you cannot grow forever this way. Innovation is what allows you to use a finite amount of resources more efficiently, yielding the kind of growth that is sustainable.

As a further thought, note that lots of innovations that are extremely useful don’t have particularly important growth implications. Gregory Clark points out in A Farewell to Alms that there was a huge amount of technical innovation in Europe before the Industrial Revolution, but basically no per capita economic growth. Part of the reason for this is that revolutionizing economically marginal sectors doesn’t really do much to change the overall economic picture. Consider the printing press. Big deal! Important innovation! Changed lots of things. Nevertheless, the books sector of the economy was so tiny that even a drastic increase in the productivity of the books sector didn’t have any macroeconomic impact.


For a contemporary example, you might think of Wikipedia. It’s an impressive technical and social achievement, and certainly counts as innovation. And it’s important — it’s really changed how people look stuff up and live their lives. But it’s not economically important, it’s not driving GDP growth forward, because it’s not a profit-making business and because the encyclopedias sector of the economy has never been large. Similarly, I don’t think instant messaging has really worked as a major profit-generator for anyone, but it’s sure changed how young people keep in touch with our friends.