The study of innovation is missing from most undergraduate economics textbooks. When it is included, it is often relegated to the back of the book. But we’d argue that understanding the economics of innovation is fundamental to understanding growth and technological progress, which is why we have released our first entirely new unit for more than a year (Unit 20), titled Innovation, information and the networked economy.

Professor Diane Coyle (University of Manchester), one of the authors of the unit (the others are Georg von Graevenitz of Queen Mary University of London, Sam Bowles and Wendy Carlin) points out that:

“The economics of innovation has tended to be part of courses in industrial organisation, and tends to get postponed until later years and optional courses. But now is the right time to put innovation in the first year, as there is a lot of focus on technology, and there is a vigorous debate among economists about how much innovation is occurring and whether or not digital technologies are contributing to growth.”

Also she says, innovation is a concrete way to understand the concepts and models in the rest of the course:

“Innovation decisions by firms involve strategic interaction, decision-making under uncertainty, competition and market structures, and the interaction between public policy and private sector action. And for anybody who thinks economics ignores the ‘real world’, this area of the subject will reassure them that it doesn’t.”

U20 Q8The unit introduces students to:

  • The institutions and social norms that incentivise and facilitate innovation. Students are encouraged to think critically about the benefits to society and the inventor from the trade-off between incentivising innovation and encouraging rapid diffusion of new ideas (see figure, right).
  • Knowledge as a public good with massive economies of scale.
  • They’ll learn about the pros and cons of intellectual property rights as ways to encourage the creation of new knowledge (we have economist in action videos on this subject from Petra Moser and F.M. Scherer). We model the optimum length of a patent, and study what the role of innovation systems and governments might be in encouraging innovation.
  • Al Roth coverWe also look at the increasing importance of digital platforms to create innovation through matching markets (also with a video: this time featuring Alvin Roth, right).
  • And we model the effect of innovation on the people in the economy, and the future of work.

As Wendy Carlin, CORE Director, notes:

“…[W]hen Paul Anand and Jonathan Leape surveyed members of the government Economic Service, and asked “Are there any changes in your university economics training that would better prepare you as a professional economist?” the single most common response was to wish they had greater focus on practical application of the principles they learned.”

Therefore Professor Coyle suggests that this is also a practical unit on how to do economics, not just learn about it:

“There are some profoundly important public policy questions about how to regulate these markets and ensure there is competition. It’s also a very exciting area of economic research, one for which Jean Tirole won a Nobel prize. Competition authorities, government bodies and the big digital firms are hiring lots of economists, so it’s an interesting area for students thinking about where they might want to work in future. Or for that matter, for any planning to become an entrepreneur and set up their own digital platform business!”