Thursday, May 1, 2008

How to Measure Innovation

In an email Ryan brought our attention to a good forum hosted by Stephen Dubner. Writing at the Freakonomics blog, Stephen asks several commentators to discuss how we should measure innovation and what impact it has on society.

One of the respondents, John Seely Brown, co-chairman of the Deloitte Center for Edge Innovation, provided a thoughtful answer but then asked an interesting question himself by channeling Douglas North:
What innovation over the last several hundred years has led to the most wealth creation?
I was once asked this by a group that was hoping I would say it was the microprocessor. But no, my guess was that it was the creation of the modern corporation (Ltd. in the U.K., Inc. in the U.S.).

The great innovation in the modern corporation was ownership without liability. This allowed shares to be sold on an open market and, unlike other forms of ownership, limited a shareholder’s liability to the price paid for the shares and nothing more. This made it possible for ordinary people to become investors.

My goal here is not to argue that I was right, but rather to suggest that institutional innovations tend to have pervasive and subtle influences on our lives. And in periods of great change, like now, they may well have more impact on us than any other kind.

On a related theme Alex Tabarrock offers some thoughts on the role of limited liability and Stephen Bainbridge responds. The corporation, and the trusts before them, played an important role in the development of the modern economy and facilitated economies of scale and scope. But for Schumpeter, as Phil notes in his article below, the corporation was a funny institition. Schumpeter defended big business and touted the cost savings and innovation that occured when entrepreneurs founded successful companies and reworked the existing methods of production and pushed forward the innovative frontier.

At the same time, however, the large corporation also represented the onset of socialism, as the large, bureaucratic enterprise engulfed small and medium sized businesses and wiped out the entrepreneur. From this dismal future socialism was a natural progression. Of course, it is the entrepreneur in Schumpeter's The Theory of Economic Development that lives on today, and with the downfall of the Soviet Union we no longer worry so much about the threat of socialism. Today it is far more popular to focus on the role of private equity, but the corporation lives on as a useful and important institutional innovation.

Read all of the responses and be sure to follow the links as well. Then offer your comments below. Any thoughts from my co-bloggers? Anything you want to add Ryan?

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