Economics of Innovation
§1: Search, variety and selection
Innovations: new combinations of existing resources
Invention: first occurrence of an idea for a new product or process, innovation is the first
attempt to carry it out into practice - innovation is first attempt to carry it out into
practice
Role of innovation:
- Schumpeter’s notion of creative destruction: growth is brought about by the
introduction of new technologies and creation of new firms, replacing existing
firms and technologies
- introduces variety in economic sphere - when novelty dries up: economy will settle
into “stationary state”, with little or no growth
→ innovation is engine of growth
Neoclassical approach vs evolutionary approach
1.
Neoclassical approach
-substantial rationality: if the consequences of the action are considered desirable
by social actors
- maximization and equilibrium
- perfect information: all consumers and producers have complete knowledge of
market
- a-historical and a-contextual firms ???
- technology is an exogenous shock (blackbox)
- technology as information
Richard Nelson:
“
, “
2. The evolutionary approach
- bounded rationality and satisficing behavior: ability to make rational choices is
bounded and we make satisfactory choices, instead of optimal
- process, dynamics and transformation
- disequilibrium
- competences and variety of firms
- technology is endogenous
- technology as knowledge - use older technology as knowledge to innovate
Main evolutionary process
1. Generation of novelty: perturbations increase variety
2. Selection: mechanisms that reduce variety systematically
3. Preservation and transmission: inertial forces which give continuity to the system
Biological vs technological evolution:
Main difference: scope of change
- biological variation occur through myopic random mutation “by nature”
- technology evolves myopically as consequence of computational complexity
Main similarity: interdependencies
- effect of mutation on reproductive success is a function of both selection
conditions and structure of interdependencies
The NK-Model: generation and selection of technological innovation
- theoretical justification for the assumption of bounded rationality
- epistatic relations: technologies are complex systems with interdependent
components
- trade-offs: improvements in one component may damage other components
- thus: design is a complex search process resulting from trial and error, rather than
optimization
→ bounded rationality and local research, path dependency, sub-optimality
The possibility space:
- N: number of components in a technology
- A: number of possible states
- S: total number of options ⇒ S=A^N
The fitness landscape:
, → NK model finds most efficient technology by scoring
all possible components, finding the acreage efficiency
and comparing all results
Properties of fitness landscape:
- when K=0 there can only be 1 global optimum
- agents innovate by myopic (short-sighted)
trial-and-error until local peak is found
- search process is path dependent: only if you start within the basin of attraction of
a global optimum you can end up there
- probability to reach global optimum depends on K and on search distance
- “Innovation can be understood as a walk through a design space” - Frenken
Decompostability:
→ Higher decomposability is the result of the same components always affecting each
other; decomposability decreases computational complexity
Variety in competitive markets:
- different designers will find different local optima, leading to variety in designs
- selection takes place during the search process, but also through imitation and
users choices
- competing firms as competing designs
Architectural innovation
- interactions between components as epistatic
relationships
- beyond radical-incremental innovation dichotomy
- successful product development requires both
component and architectural knowledge
“innovation that change the way in which components of a
product are linked together, while leaving the core design
concepts untouched”
§1: Search, variety and selection
Innovations: new combinations of existing resources
Invention: first occurrence of an idea for a new product or process, innovation is the first
attempt to carry it out into practice - innovation is first attempt to carry it out into
practice
Role of innovation:
- Schumpeter’s notion of creative destruction: growth is brought about by the
introduction of new technologies and creation of new firms, replacing existing
firms and technologies
- introduces variety in economic sphere - when novelty dries up: economy will settle
into “stationary state”, with little or no growth
→ innovation is engine of growth
Neoclassical approach vs evolutionary approach
1.
Neoclassical approach
-substantial rationality: if the consequences of the action are considered desirable
by social actors
- maximization and equilibrium
- perfect information: all consumers and producers have complete knowledge of
market
- a-historical and a-contextual firms ???
- technology is an exogenous shock (blackbox)
- technology as information
Richard Nelson:
“
, “
2. The evolutionary approach
- bounded rationality and satisficing behavior: ability to make rational choices is
bounded and we make satisfactory choices, instead of optimal
- process, dynamics and transformation
- disequilibrium
- competences and variety of firms
- technology is endogenous
- technology as knowledge - use older technology as knowledge to innovate
Main evolutionary process
1. Generation of novelty: perturbations increase variety
2. Selection: mechanisms that reduce variety systematically
3. Preservation and transmission: inertial forces which give continuity to the system
Biological vs technological evolution:
Main difference: scope of change
- biological variation occur through myopic random mutation “by nature”
- technology evolves myopically as consequence of computational complexity
Main similarity: interdependencies
- effect of mutation on reproductive success is a function of both selection
conditions and structure of interdependencies
The NK-Model: generation and selection of technological innovation
- theoretical justification for the assumption of bounded rationality
- epistatic relations: technologies are complex systems with interdependent
components
- trade-offs: improvements in one component may damage other components
- thus: design is a complex search process resulting from trial and error, rather than
optimization
→ bounded rationality and local research, path dependency, sub-optimality
The possibility space:
- N: number of components in a technology
- A: number of possible states
- S: total number of options ⇒ S=A^N
The fitness landscape:
, → NK model finds most efficient technology by scoring
all possible components, finding the acreage efficiency
and comparing all results
Properties of fitness landscape:
- when K=0 there can only be 1 global optimum
- agents innovate by myopic (short-sighted)
trial-and-error until local peak is found
- search process is path dependent: only if you start within the basin of attraction of
a global optimum you can end up there
- probability to reach global optimum depends on K and on search distance
- “Innovation can be understood as a walk through a design space” - Frenken
Decompostability:
→ Higher decomposability is the result of the same components always affecting each
other; decomposability decreases computational complexity
Variety in competitive markets:
- different designers will find different local optima, leading to variety in designs
- selection takes place during the search process, but also through imitation and
users choices
- competing firms as competing designs
Architectural innovation
- interactions between components as epistatic
relationships
- beyond radical-incremental innovation dichotomy
- successful product development requires both
component and architectural knowledge
“innovation that change the way in which components of a
product are linked together, while leaving the core design
concepts untouched”
