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Innovative Thoughts

Oct 10, 2010 • Businesses, Government, Innovation, Labor, Macroeconomic Measurement • 202 Views    No Comments

Saying we need “More (Steve) Jobs, Jobs, Jobs” journalist Tom Friedman reminded us that economic “stimulation” is more important than economic stimulus. Using the creative, successful, and competitive co-founder and current CEO of Apple as his example, Friedman says innovation has always been the source of U.S. success.

This took me to a recent NPR Planet Money podcast on dying and thriving manufacturers. Pointing out that the U.S.A. remains the world’s leading manufacturing nation, they focus on 2 businesses. A button making business that had once supplied Ralph Lauren with thousands of buttons now is barely functioning because they cannot compete against Chinese factories that have cheap labor and up-to-date technology. By contrast, a firm that creates and constantly updates tiny metal parts for electronic devices is flourishing. Its founder says that its source of growth is constant innovation.

Knowing where we need to go, how can we get there? Economist Mike Mandel tells us that recent reports indicate that only 9% of all firms do product or process innovation. You might want to look at the details he presents to see who does what.

The Economic Lesson

A very simple model that displays economic growth and resource utilization is a production possibilities frontier. To visualize it, you just need to imagine a line that is bowed out to the right on your graph. The bowed out line is important because it represents the best we can do. It illustrates the most that existing land, labor, and capital can produce.

If we want our incomes to keep growing and our standard of living to rise, then we want the “bowed out line” to shift to the right. It will shift only if existing land, or labor or capital (defined as tools, equipment, buildings, and inventory) changes. Typically, through technological innovation, new capital has been the reason the curve has shifted to the right.

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