Innovation: history’s great free lunch

By Mark F. Schultz, Director and Senior Scholar, Center for the Protection of Intellectual Property, Antonin Scalia Law School, George Mason University, Arlington, VA, and Professor of Law, Southern Illinois University, Carbondale, IL, United States of America

Innovation as a concept suffers from the paradox of being both overexposed and underappreciated. Countries seek to build innovation economies, regions want to be innovation hubs, companies hope to be seen as innovators, and so on. People certainly see innovation as important and desirable, but they sometimes fail to recognize just how fundamentally important it is to the modern economy.

The role of innovation in driving economic growth is nothing short of astounding. For developed economies, most of today’s economic output can be attributed to the technological innovations of the past 150 years. The world owes much to innovation, and to the intellectual property (IP) systems that secure investment in it.

Defining innovation

The OECD defines innovation as “the implementation of a new or significantly improved product (good or service) or process, a new marketing method, or a new organizational method in business practices, workplace organization or external relations.”

Definitions vary, but this one is useful as it casts a wide net over new, economically beneficial activities. Human creativity is constantly seeking ways to improve economic activity, develop new business models and processes and provide us with new goods and services. 

The breadth of activities covered by the concept of innovation is also reflected in the annual Global Innovation Index (GII) (see article) produced by WIPO and its partners, which benchmarks the innovation performance of some 130 countries against more than 80 factors.

Innovation is more than just invention. People have great new ideas all the time, but creating a marketable product is the challenge. The economist Joseph Schumpeter famously observed that innovation happens when an invention is brought to market so people can enjoy its benefits. This distinction between invention and innovation helps to highlight the importance of IP as a means of securing the investment needed to develop and commercialize inventions so that they can indeed become innovations.

Three key types of innovation

There are many types of innovation, but let us take a look at three specific categories that attract a lot of attention in international policy circles.

The first, breakthrough innovations, needs little explanation. These are game-changing technologies that transform society and business. They disrupt established practice and can spawn whole new industries. Examples include the internal combustion engine, antibiotics, and more recently the mobile telephone.

Before mobile telephony could take off, wireless networks needed an efficient and nimble way to manage a large number of signals sharing limited radio waves. The breakthrough came in the form of not one, but two, separate innovations. CDMA (Code Division Multiple Access) technology, widely used in the United States, was invented by Irwin Jacobs and commercialized by the company he founded, Qualcomm. And GSM (Global System for Mobiles) technology, widely used in Europe was pioneered by a number of European institutions and businesses.

These mold-breaking technologies served as a platform for the development of what has become a near-ubiquitous technology that has wrought significant business and social changes.

By contrast, the second category, incremental innovation, covers marginal improvements to existing technology. Such innovations bring progress in many small steps rather than one great leap. Incremental innovations are sometimes regarded as unimportant. But in reality, most innovation is incremental, and the accumulation of these step-wise developments can bring about significant changes.

To continue with the example of mobile phones, every year smartphones get better, but only in small ways. Apple has made a tradition of dramatically unveiling each successive generation of its iPhone. Yet objectively, each generation differs only slightly from the one before.

But today’s smartphones differ dramatically from early models. That evolution has come about because of an accumulation of incremental innovations.

The third category, frugal innovation, has come to describe an approach to innovation that involves creating greater social value while stripping back the use of scarce resources. It often takes place in resource-constrained environments in response to the needs of low- and middle-income communities.

Interest in frugal innovation has grown in response to concerns that innovation should reach everyone, regardless of their location or means. In the long run, the enormous growth engendered by innovation makes everyone better off, as incomes in general rise, goods become less expensive and new medicines and conveniences improve living standards. But that can take a long time. For innovation to reach some communities, it may need to be tailored to the specific needs of people where they live. For example, for technologies to have any use or value to people living in many remote areas, they have to be adapted to an off-grid environment.

Frugal innovation is a response to the needs of those living in resource-constrained environments, but it is also increasingly recognized as an opportunity both to promote more efficient use of resources and to add value for customers. A growing number of actors are embracing it. Local entrepreneurs are responding to the needs of their communities; non-profit organizations are forming public-private partnerships to adapt technology to local needs, and multinational companies are recognizing the value of integrating frugal innovation into their production processes and breaking into these markets.

Frugal innovation is also evident in the area of mobile telephony. Take, for example, how Andrew Bastawrous and his team have harnessed the versatility and power of smartphones to develop their Portable Eye Examination Kit (PEEK). The kit combines an app and a clip-on camera adaptor to create a portable eye exam clinic. PEEK brings affordable, rapid and high-quality eye care to patients living in the most remote and resource-poor communities.

Regardless of how we describe it, innovation delivers huge benefits to society. That’s the bottom line.

Breaking the law of scarcity

Innovation is also a key driver of economic growth. Without innovation, we would live in a world defined by scarcity and constrained choices. The economist Paul Samuelson observed in his introductory textbook on economics that “in the world as it is, children learn that ‘both’ is not an admissible answer to a choice of ‘which one?’”

The law of scarcity – the fundamental economic problem of meeting human needs in a world of finite resources – is often stated in terms of trade-offs. If we want to produce more of one thing with currently available labor and capital then we will need to produce less of another. Put another way, there’s no such thing as a free lunch.

As with most rules, however, there are exceptions, and innovation might just be history’s most important exception. As economic historian Joel Mokyr observes in The Lever of Riches: “Technological progress has been one of the most potent forces in history in that it has provided society with what economists call a ‘free lunch,’ that is, an increase in output that is not commensurate with the increase in effort and cost necessary to bring it about.”

Innovation breaks the scarcity rules by supplying humanity with one free lunch after another, allowing an economy to produce more using the same or fewer resources.

Consider the dramatic increase in agricultural productivity between 1830 and 1990. In 1830, it took a US farmer about 250–300 labor-hours and five acres of land to produce 100 bushels of wheat. By 1990, it took only three labor-hours and three acres of land to produce the same yield. This productivity gain is in large part due to innovation and the opportunities it created for farmers to replace their hand tools with machines and to use better seeds and fertilizers.

Innovation also creates new value for existing resources. Take sand, for example. Once it had little value, but over the centuries innovators have developed a wide range of high-value applications, including its use in the production of mortar, plaster, concrete, bricks and glass, and more recently for the silicon in computer chips.

Innovation results in better products and more efficient methods of production; it also creates entirely new categories of products. Take, for example, computers, mobile phones and electronic commerce. Each has created entirely new industries, business models and opportunities.

Innovation allows people to do more with less, to do new things with old resources, and to create entirely new products and industries. As a result, output increases, job opportunities, wages and the economy grow, and people have wider choices. Innovation enables us to enjoy and do entirely new and different things. Its importance in promoting economic and social development cannot be overstated.

Measuring the impact of innovation

Just how much of a boost does innovation give to an economy? Economists have long credited innovation as the source of the United States’ economic success. In 1957, Nobel Prize-winning economist Robert Solow credited innovation with nearly 90 percent of productivity growth in the United States in the first half of the 20^th century. More recently, William Baumol estimated that in 2011 nearly 90 percent of the current economic output of the United States “was contributed by innovation carried out since 1870”.

IP rights enable inventors and their investors to secure a proportion of the commercial value of their inventions. But the lion’s share of the benefits flowing from their innovations diffuses widely among the general population and throughout the economy. Baumol estimates that 90 percent or more of the benefits of innovation “spill over” to people who made no contribution to its development.

This is, in fact, exactly the outcome the IP system is designed to produce. IP rights enable inventors to protect the fruits of their labor and attract the investment needed to develop and commercialize a product. The IP system does not exist to provide them with the fruits of other people’s labor. The innovator who cures a disease can charge for the drugs used to treat it, but does not get the wages of the people whose lives the drugs saved. Similarly, the smartphone has enabled the development and deployment of a vast number of apps that educate, entertain and make us more productive. App developers, not smartphone manufacturers, benefit most from selling those apps. And as app users we retain the benefits that make our lives more productive, informed and enjoyable.

Innovation, the great free lunch

It really is hard to overstate the important, seemingly wondrous, role of innovation in economic development. As Morton Kamien and Nancy Schwartz observed, faith that beating the law of scarcity is “possible verges on belief in magic, on the plausibility of drawing rabbits out of an empty hat. And yet, bizarre as it may seem, the trick has been performed... through the magic of technology.”

Only innovation and IP rights that drive it can bring about the kind of outsized growth and widespread benefits that can improve the lives of the whole of humanity. Together, they can shape a sustainable future for all.