Innovation and wealth creation

The relationship between innovation and wealth creation appears, prima facie, to be very straight-forward. For example, an industrial innovation that increases labour productivity can contribute to aggregate wealth creation in an obvious manner: the average labourer can make a larger contribution to wealth creation in a fixed period of time. However, when we study this relationship in greater detail, it becomes much more complex, and multi-faceted. Firstly, it has become common to distinguish between (at the very least), three definitions of wealth creation, and a particular innovation may primarily contribute to one of these and not to the others. Secondly, the literature on innovation now distinguishes many categories of innovation, and these different categories contribute to wealth creation in quite different ways. Third, while we hope that innovation makes a positive contribution to wealth creation in many (or most) cases, it is recognised that there are, without doubt, instances in which a particular innovation can work against a particular aspect of wealth creation. To make sense of all this, we need to develop a simple model which recognises the many different categories of innovation, how they impact on the different definitions of wealth creation, and whether that impact is to create or erode wealth. Then we can draw all this together, and create a simple theory of the evolution of innovation, and its impact on wealth creation.