The need of entrepreneurial-economics

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Because we cannot prestate the ever-changing and emergent phase space of economic evolution, we have no settled relations by which we can write down the equations of motion of the ever new economically relevant observables and parameters revealed ex post by the market process. Nor can we prestate the emergent opportunities of the system as boundary conditions. Thus, we could not integrate the equations of motion even if we could somehow have them.  p. 12

That is from a paper titled "Economics for a creative world" by Koppl et al. It is gated. 
Some ideas in page 13:

(5) If by ‘cause’ we mean what gives a differential effect entailed by law, then we can assign no cause in the evolution of the econosphere. In this sense, the economy is not a causal system. [Emphasis added].
(6) The past does not ‘cause’ the future so much as it enables some futures and
disables others. Thus, ‘enablement’ is a key notion in our analysis.

We can understand their argument on causality with another example they gave: think about division of labor increasing the extension of the market, and the extension of the market increasing the division of labor.  

According to the authors the "creative economy" is better understood with complexity theory, network theory, economic history, and institutional analysis. Theirs is a framework where the entrepreneurs is at the center. 

Innovative Tool in Micro-finance

From this article in the NYT

Banks in 16 countries are using a psychometric test to predict future behavior — specifically, whether someone will pay back a loan. Originally a Harvard doctoral project, the Entrepreneurial Finance Lab’s test has increasingly won the confidence of risk-averse bankers in places where, many economists believe, credit bottlenecks are severely stunting growth.

And

Since Standard Bank, Africa’s largest, first adopted E.F.L.’s model in Kenya in 2008, bankers around the world have used it to lend more than $200 million, in average amounts of $7,500, to entrepreneurs who would not have otherwise qualified, the finance lab’s founders say. Now an independent company based in Lima with about 30 employees, the Entrepreneurial Finance Lab has grown with the help of grants, including a $3.6 million prize for being among the winners of a G-20 challenge for small-business financing in 2011.

Some of the questions are

“I plan for every eventuality,” “I’m in between” or “Planning takes the fun out of life.”

Facinating! Some illustrative videos of how it works are in the Lab's website. 

In Haiti, and probably in most of the developing countries, banks do not lend to new (small) businesses - businesses that have not gotten credit before, which perpetuates a circle of poverty. This new test can help to change that. The test might create a secondary market of information, in the sense that if I need a credit I can ask successful entrepreneurs who have passed the test in the past. Of course the test can change the questions, but just the fact that I can learn what kind of answers or attitudes make people pass the test can be very useful. 

Intellectual Returnees as Drivers of Innovation (China)

In this paper by Neo Siping Luo, Mary E. Lovely, & David Popp "Intellectual returnees" are defined as 

. . . skilled persons who study or work in an advanced economy and subsequently return to their country of origin to engage in technology-related activities (Mountford, 1997; Kapur and McHale, 2005; Zucker and Darby, 2007) (p. 1). 

And their influence seems to be important. From the abstract 

Using nonlinear methods, we find robust evidence that returnees positively influence patenting activity and also promote neighboring firm innovation.

The authors analyze photovoltaic energy production in China, which the authors argue went from being almost non-existent to the world third largest in less than a decade. 

 More specifically

During China’s PV industry development process, intellectual returnees played a crucial role in mastering the technology and techniques needed to produce for export. Pioneers in the industry are the well known “three returnees of China’s photovoltaic,” Huaijin Yang, Zhengrong Shi, and Jianhua Zhao. These three men, originally from Jiangsu province, studied photovoltaic technology in Australia in the 1990s, and then returned to China with advanced technology and foreign capital to start firms using China’s relatively low-wage skilled labor force (p. 5).

Besides the three famous returnees, there are many more working in that sector. 

A draft of the paper is here. 

Can institutions explain cross country differences in innovative activity?

From a new published paper by Cong Wang (Journal of Macroeconomics, September 2013). A draft is here:

Motivated by theoretical arguments (see e.g. and ) that assert a positive impact of institutions on R&D, this paper aims to provide some empirical analysis on the relationship between the two variables. In particular, using a core sample of 98 countries over the period 1996–2009, this paper has found a significant direct effect of institutions on R&D intensity. Countries with better institutions qualities as captured by the World Banks’ Worldwide Governance Indicators (WGI) tend to attract more scientists and engineers into the research field and to spend more on R&D as well. This paper has also found evidence that the effect of institutions varies in different economies characterized by different levels of financial development and human capital accumulation, but stays relatively unchanged across countries with different levels of trade openness.

Low importance of patents to UK firms

This new paper by Hall et al (May 2013) finds that an unexpectedly low percentage of firms patent in the UK, and it offers explanations of why that is the case. 

From the conclusions: 

Our descriptive analysis shows about one third of UK firms report any form of innovation. Strikingly, we find that only 3% of firms in our sample patent and that even among firms that conduct R&D, only 4% patent. In particular, the share of patenting firms is much lower than what one might expect given that around 20% of firms that invest in R&D report product innovations.

The paper is titled "The Importance (or not) of Patents to UK Firms." 

Do people in countries without patent law innovate?

Petra Moser in a new paper (December 2012) concludes:

Historical evidence suggests that in countries with patent laws the majority of innovations occur outside of the patent system. Countries without patent laws have produced as many innovations as countries with patent laws during some time periods, and their innovations have been of comparable quality. Even in countries with relatively modern patent laws, such as the mid-19th century United States, most inventors avoided patents and relied on alternative mechanisms when these were feasible. Secrecy emerged as a key mechanism to protect intellectual property; its effectiveness relative to patents varies with the technological characteristics of innovations across industries and over time. In industries where secrecy was effective, inventors were less likely to use patents. Advances in scientific analysis, which lowered the effectiveness of secrecy, increased inventors’ dependency on patents.

The paper is here, and it is a very accessible read.  

Economics of Innovation: The Effect of Prizes and Awards

These are excerpts from the conclusions of a new published paper by Brunt, Lerner, & Nicholas (Journal of Industrial Economics, December 2012): 

We have examined one of the longest available datasets of awards for innovation to determine whether prizes spurred technological development. We find that prizes induced competitive entry and that the largest effects are for prestigious medals. . .

Our historical evidence on RASE prizes offers guidance for the design of current inducement prize contests. Mega prizes, such as those offered by the X-Prize Foundation, presuppose that inventors are incentivized by large pecuniary inducements, but R&D costs typically exceed the value of the prize. For example, 26 teams competed for the X-Prize for suborbital spaceflight and collectively spent in excess of $100 million for a ten million dollar prize. Our evidence suggests that non-pecuniary prizes can be particularly effective. They avoid the complex process of linking the magnitude of the prize to the value of a particular technology and inventors are still able to appropriate by winning. The RASE contests offered free publicity and public approbation. Inventors could benefit from the seal of quality ascribed to the invention when selling or licensing their technologies. The RASE lowered administrative costs by using medals rather than financial awards. . . 

Our evidence suggests that in agricultural technologies, the prizes encouraged innovation beyond the patent system alone. . .

Insofar as policy changes require supporting empirical evidence, our findings suggest that inducement prizes for innovation can work.

The abstract:

We examine the effect of prizes on innovation using data on awards for technological development offered by the Royal Agricultural Society of England at annual competitions between 1839 and 1939. We find large effects of the prizes on competitive entry and we also detect an impact on patents, especially when prize categories were set by a strict rotation scheme, thereby mitigating the potentially confounding effect that they targeted only ‘hot’ technology sectors. Prizes encouraged competition and medals were more important than monetary awards. The boost to innovation we observe cannot be explained by the re-direction of existing inventive activity.

A draft of the paper (December 2011) is here.  

One of the Most Innovative Industries (Drug trafficking)

After years of detecting these craft in the less trafficked Pacific Ocean, officials have seen a spike in their use in the Caribbean over the last year. American authorities have discovered at least three models of a new and sophisticated drug-trafficking submarine capable of traveling completely underwater from South America to the coast of the United States. 

The vessel involved in the September chase was an older model that was only semi-submersible. That model presents a silhouette above water barely larger than a kitchen table, but requires a snorkel to bring in air for the diesel engine, which has a range of about 3,000 miles. The three newer, fully submersible vessels already captured were capable of hauling 10 tons of cocaine and, by surfacing at night to charge their batteries off the onboard diesel engine, could sail beneath the surface all the way from Ecuador to Los Angeles.

From Schmidt and Shanker in the NYT. 
What the next innovation will be? 

Tweakonomics

From Freakonomics:  

Tweaking is present in all inventive fields, and in some—like music—is a very prominent part of the creative process. Perhaps the most important point about tweaking is this: tweaking does not appear to suppress pioneering innovation very much. If anything, it may often encourage it. Many of the most significant and enduring innovations rest on tweaking. As Malcolm Gladwell has argued, the late Steve Jobs of Apple—an icon of our innovation economy if there ever was one, and the man behind the iPhone and iPad—“was repeatedly referred to as a large-scale visionary and inventor.” But in fact, “he was much more a tweaker.” 

Steve Jobs, Gladwell goes on to argue, was “the greatest tweaker of his generation.” Even the iPad, Jobs’ last great success, was a tweak of an idea out of Microsoft.

In some industries copyrights barely exist or do not exist at all, like the fashion industry (a TED video here), and innovation thrives nonetheless. A classic video on how tweaking sparks innovation is Larry Lessing's (here).  

A fascinating case on how magicians protect intellectual property without the law is here. 

HT: Diego Aycinena. 

"Creative Destruction" vs "Creative Accumulation"

From the new working paper "Schumpeterian patterns of innovation and the sources of breakthrough inventions: Evidence from a Data-Set of R&D Awards," by Fontana et. al. 

Schumpeter Mark I industries are characterized by turbulent environments with relatively low entry barriers where innovations are (mostly) generated and developed by new “entrepreneurial” firms. Accordingly, technological competition among firms in Schumpeter Mark I industries assumes the form of “creative destruction” with successful innovating entrants replacing the incumbents. Vice versa, Schumpeter Mark II industries are characterized by stable environments with relatively high entry barriers in which innovations are generated and developed by large established firms. In Schumpeter Mark II industries technological competition assumes the form of “creative accumulation” with incumbent firms introducing innovations by means of a process of progressive consolidation of their technological capabilities along well established technological trajectories (Malerba, 2005, p. 382).

The authors conclude:

Our results indicate that, in general, a Schumpeter Mark I pattern is significantly related with a higher probability of inducing breakthrough inventions. As already mentioned, this result merits particular attention because the source we use to measure breakthrough invention (the “R&D 100” competition) is likely to be biased in favour of breakthrough inventions stemming from the R&D intensive segments of the economy. This finding may perhaps be interpreted as a vindication of the thesis of Jewkes, Sawers and Stillerman (1958) who, long ago, argued that inventive activities undertaken outside the walls of the research and development facilities of large corporation were continuing to play a fundamental role for the generation of breakthrough inventions.

An interesting graph from the paper:

HT: Laura Stefanescu.

Financial systems, innovation, and patents

Although ideas production plays a critical role for growth, there has been only a modicum of research on the role played by financial forces in fostering new inventions. Drawing on Schumpeterian growth theory, this paper tests the roles of risk capital and private credit in stimulating knowledge production. Using panel data for 77 countries over the period 1965-2009, it is found that countries with more developed financial systems are more innovative. A stronger patent protection framework, on the other hand, curbs innovative production.

That is the abstract of the new paper "Risk capital, private credit and innovative production" by Ang and Madsen (2012). 

HT: Laura Stefanescu. 

Incentives and teaching effectiveness

“The most important role for incentives is in shaping who enters the teaching profession and who stays,” said Eric A. Hanushek, a professor of economics at the Hoover Institution at Stanford University. “Washington’s incentive system will attract talented teachers, and it’ll help keep the best ones.”

That is from this NYT article. Monetary incentives for teachers can spur innovation by improving education (this is the argument in Tabarrok's new book).  

Innovation as Tweaking

In the eulogies that followed Jobs’s death, last month, he was repeatedly referred to as a large-scale visionary and inventor. But Isaacson’s biography suggests that he was much more of a tweaker. 

That is from Malcolm Gladwell's New Yorker article titled "The Tweaker."

And this is part of the article Gladwell refers to when talking about why tweaking was key for British Industrial Revolution: 

During the Industrial Revolution technological progress and innovation became the main drivers of economic growth. But why was Britain the technological leader? We argue that one hitherto little recognized British advantage was the supply of highly skilled, mechanically able craftsmen who were able to adapt, implement, improve, and tweak new technologies and who provided the micro inventions necessary to make macro inventions highly productive and remunerative.

Is Gladwell a great tweaker--writer--himself ? If he is, he is one of my favorites! But probably we all are . . . or try to be. 
HT Free Exchange.

My first Mac

Tim Harford has a very interesting piece on Apple, innovation, and Steve Jobs, which motivated me write down the story of my first Mac:

I still remember the hot weather, the sticky sweat, and the sense of danger, when I was biking the streets of Accra on my way to buy my first Mac. Yes, I bought it in West Africa. There was something nerdy, artsy, unorthodox, and cool about it. It was a $ 1,400 toy, a good chunk of my semester salary.

Before entering the store I left the bike with a street vendor, begging him to take care of it, it was my only means of transportation in the city. I bought the white mac and a red backpack. Riding the bike with the Mac in the back was epic. The musty and hot air of the Golf of Guinea, and the heavy traffic of Accra make bike riding a pretty out-of-place, but not less exciting, event.

It was shocking however to see the next day that there was an awful, perfectly vertical line, crossing the screen of the Mac, and it stayed there no matter what. Fortunately people at the store changed the screen in only half an hour, leaving it neat. And this was Ghana where things were not supposed to be done that fast. But it was an Apple store and that made all the difference.

Finding the Mac in Accra was not that easy though, especially if you wanted it immediately, like I did. Previously, I had crossed the city by tro-tro looking for one of the Apple stores listed in the phone book. The place was far away, in the suburbs of the city, close to a train line. The store was on a dusty road. The building was not finished, and the air was very heavy. There seemed to be dust on the tables. But there was something really cool about the place. Everybody had a Macdesktop. The Macs were of a light blue color, almost transparent. A heavy mean, the manager, told me that they only had desktops and the latest, and more expensive, Macbook. I did not buy it. On my way home I kept thinking about this technology compound Mac-only place in the Golf of Guinea.

Why some of us wanted the apple products so badly. The reliability, effectiveness, etc, are well talked about. But Steve Jobs was also a master of marketing, the creator of a product that sells itself. He appealed to people’s desire to be different. His secret of marketing focused specifically on creating a product that didn’t need to be advertised. And this was probably the key to his success. Very few people in the world have Jobs' meticulousness. He said:

When you're a carpenter making a beautiful chest of drawers, you're not going to use a piece of plywood on the back, even though it faces the wall and nobody will ever see it.

His most important legacy still is what we do not see.

Steve Jobs was a man who had his 10,000 hours, using Malcom Gladwell lingo. When inspiration came, he had done his homework. Think for example on his calligraphic training, the genesis of the Mac aesthetics. His timing in history was perfect, only matched by Bill Gates, and few fortunate others. The Mac was what the economic historian Joel Mokyr calls a macro-invention, meaning those innovations that have very few or no precedent. The Mac as well as the personal computer were at the core of the Solow residual, as theorists of economic growth call new creations that drive long term rates of income per capita. Indeed the computer constitutes the nucleus the information revolution.

Back to Accra. My new Mac had to pass one if its most important test. It happened when I was riding the bike in the Labone neighborhood. The breeze from the sea was fresh, the afternoon sunlight on the walls was orange, and the reggae music was smooth. There were some beautiful Ghanaian ladies by the road watching the obruni ride with gusto. Almost nothing could go wrong. But something did. When I realized I was with my face right on the asphalt. There was a problem with the chain of the bike . . . it was embarrassing, but the Mac was OK.

The interesting history of the Wi-Fi

All started in Hawaii

The journey started back in the early 1970s. The University of Hawaii had facilities scattered around different islands, but the computers were located at the main campus in Honolulu. Back then, computers weren't all that portable, but it was still possible to connect to those computers from remote locations by way of a terminal and a telephone connection at the blazing speed of 300 to 1200 bits per second. But the telephone connection was both slow and unreliable. Keep reading . . .  (HT The Browser).