An Economy of Innovative Dynamism

Abstract

Economies have grown where innovative dynamism has flourished, especially in the United States from roughly 1830 to 1930. Innovations are not inevitable, but occur when inventors can invent and entrepreneurs can innovate. Individual inventors matter and are scarce. Thomas Edison was not the only one to invent a light bulb but was the first to invent a bulb that would stay lit at a price that ordinary people could afford. Leapfrog competition occurs when an innovation improves on, and at least partly replaces, an older technology. The best size for a firm varies with technology, industry, and business model. With John D. Rockefeller’s process innovations, Standard Oil succeeded as a big firm. But horizontal mergers failed in many other industries during the same period. Big incumbent firms can implement innovations, but are disadvantaged at starting breakthrough innovations. Baldwin Locomotive and Netscape illustrate that firms can contribute and then exit with honor.