13 Microeconomics of “The New Economy”: Innovation and Growth The Bourgeoisie [I.e., capitalism] cannot exist without constantly revolutionizing the instruments of production. . . . The bourgeoisie, during its rule of scare one hundred years has created more massive and more colossal productive forces than have all preceding generations together. KARL MARX AND FRIEDRICH ENGELS, THE COMMUNIST MANIFESTO, 1847
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13 Microeconomics of “The New Economy”: Innovation and Growth The Bourgeoisie [I.e., capitalism] cannot exist without constantly revolutionizing the instruments.
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13Microeconomics of “The
New Economy”: Innovation and Growth
The Bourgeoisie [I.e., capitalism] cannot exist without constantly revolutionizing the instruments of production. . . . The
bourgeoisie, during its rule of scare one hundred years has created more massive and more colossal productive forces than
have all preceding generations together.KARL MARX AND FRIEDRICH ENGELS,
THE COMMUNIST MANIFESTO, 1847
● The Free Market’s Incredible Growth Record
● What’s New about the New Economy?● The Firm and Innovation● Three Growth-Creating Properties of
Innovation● Do Free Markets Spend Enough on R&D
Activities?● Conclusion: The New Economy and the
Innovation Assembly Line
● The Free Market’s Incredible Growth Record
● What’s New about the New Economy?● The Firm and Innovation● Three Growth-Creating Properties of
The Free Market’s Incredible Growth Record The Free Market’s Incredible Growth Record
● Since the Industrial Revolution the growth in per-capita income and productivity in free-market economies has been enormous compared to the 1,500 years before the Industrial Revolution.
● Since the Industrial Revolution the growth in per-capita income and productivity in free-market economies has been enormous compared to the 1,500 years before the Industrial Revolution.
What’s New about the New Economy?What’s New about the New Economy?
● Externality = incidental benefits or damages of an activity that affect others not directly involved in the activity.
● Network Externality = entry of an additional participant into a group of connected individuals or organizations benefits the initial members of a group.
● Externality = incidental benefits or damages of an activity that affect others not directly involved in the activity.
● Network Externality = entry of an additional participant into a group of connected individuals or organizations benefits the initial members of a group.
● If the firm seeks to maximize its profits, it will expand its spending on R&D up to the point at which its anticipated marginal cost of R&D equals its anticipated marginal revenue from R&D
● If the firm seeks to maximize its profits, it will expand its spending on R&D up to the point at which its anticipated marginal cost of R&D equals its anticipated marginal revenue from R&D
● Perfectly competitive industries permit firms to earn just what they need to pay investors for the funds they provide.
● Perfectly competitive industries permit firms to earn just what they need to pay investors for the funds they provide.
How Much Will a Profit-Max. Firm Spend on Innovation?How Much Will a Profit-Max. Firm Spend on Innovation?
● Due to barriers to entry for innovation, we cannot be certain that economic profits to invention will tend exactly toward zero, but we can still expect them to be very low on average.
● While inventive activity sometimes pays off enormously well, large R&D investments also can fail spectacularly, so that the average comes out close to zero.
● Due to barriers to entry for innovation, we cannot be certain that economic profits to invention will tend exactly toward zero, but we can still expect them to be very low on average.
● While inventive activity sometimes pays off enormously well, large R&D investments also can fail spectacularly, so that the average comes out close to zero.
How Much Will a Profit-Max. Firm Spend on Innovation?How Much Will a Profit-Max. Firm Spend on Innovation?
● Another arrangement is technology trading in which a firm voluntarily makes its privately owned technology available to other firms either in exchange for access to the technology of the second company, or on payment of an agreed-upon fee.
● Another arrangement is technology trading in which a firm voluntarily makes its privately owned technology available to other firms either in exchange for access to the technology of the second company, or on payment of an agreed-upon fee.
The Profits of InnovationThe Profits of Innovation
● Many firms and industries engage in the practice of cross licensing where each of two firms agrees to let the other use some specified set of its patents, either at a price specified in their agreement or in return for access to the other firm’s patents.
● Many firms and industries engage in the practice of cross licensing where each of two firms agrees to let the other use some specified set of its patents, either at a price specified in their agreement or in return for access to the other firm’s patents.
The Profits of InnovationThe Profits of Innovation
♦ If firms do not keep up with competitors in terms of product attractiveness and improved process efficiency that lowers costs, they will lose out to their rivals and end up losing money.
● Why do firms innovate?♦ Expensive and risky
♦ Expected economic profits approach zero
♦ If firms do not keep up with competitors in terms of product attractiveness and improved process efficiency that lowers costs, they will lose out to their rivals and end up losing money.
A Kinked Revenue Curve Model of Spending on InnovationA Kinked Revenue Curve Model of Spending on Innovation
● All firms in an industry continue to invest same amount until one has research breakthrough leading to a new product.
● Firm then expands its investment in the breakthrough product, because doing so will pay off even if the other firms in the industry match the increase.
● All firms in an industry continue to invest same amount until one has research breakthrough leading to a new product.
● Firm then expands its investment in the breakthrough product, because doing so will pay off even if the other firms in the industry match the increase.
A Kinked Revenue Curve Model of Spending on InnovationA Kinked Revenue Curve Model of Spending on Innovation
● This arrangement holds technological spending steady, permits it under certain circumstances to move forward, but generally does not allow it to retreat.
● This arrangement holds technological spending steady, permits it under certain circumstances to move forward, but generally does not allow it to retreat.
A Kinked Revenue Curve Model of Spending on InnovationA Kinked Revenue Curve Model of Spending on Innovation
Do Free Markets Spend Enough on R&D Activities?Do Free Markets Spend Enough on R&D Activities?
● Innovation as a Beneficial Externality♦ Because the acquisition of new technical
knowledge generates large beneficial externalities, private enterprise may not devote enough resources to innovation.
♦ Basic research refers to research that seeks to provide scientific knowledge and general principles rather than coming up with any specific marketable inventions.
● Innovation as a Beneficial Externality♦ Because the acquisition of new technical
knowledge generates large beneficial externalities, private enterprise may not devote enough resources to innovation.
♦ Basic research refers to research that seeks to provide scientific knowledge and general principles rather than coming up with any specific marketable inventions.