Monday, November 30, 2009

Who Benefits from Innovation?

I often talk about the power of innovation when arguing why the economy continues to move forward over time. This idea was best articulated by Joseph Schumpeter, an Austrian economist who coined the phrase "creative destruction." One of the most interesting considerations regarding innovation is the question of who benefits: the innovators, or the ultimate users of the innovation? The answer is that they both benefit.

This brings me to a great blog post by Steven Horowitz, an economics professor at St. Lawrence University. Professor Horowitz uses the most recent census data to show that, over the past twenty years, those living under the poverty line have seen a dramatic improvement in living standards. Many more poor people have things like dishwashers and air conditioners than did a few decades ago. It is important to note that he is not saying anything about the gap between the rich and the poor, which is another issue.

The entire topic of living standards, economic prosperity, and the rich-poor gap is complex and very politically charged. I only offer the reference to Professor Horowitz's blog, because I find it to be an interesting approach to the topic. What I like best is the quote at the end of the post, with which I couldn't agree with more:

" long as the Schumpeterian horse of innovation and the Smithian horse of the gains from trade outrun the Government horse of stupidity, the winners will continue to be you, me and our children and grandchildren, even if the stupid horse is running a bit faster than it used to."

Ultimately, economic prosperity is the result of businesses continuing to evolve, innovate, and trade around the world. As long as this remains true, we will work our way through the current economic difficulties.