economist.com | Article Link

 OVER the past few decades it has become clear that innovation—more than inputs of capital and labour—is what drives a modern economy. In the developed world, the application of technological know-how and scientific discoveries by companies, institutions and government establishments accounts for over half of all economic growth. Because of its seminal influence on wealth-creation in general and employment in particular, the manner in which innovation functions—especially, the way it comes and goes in Darwinian bursts of activity—has emerged as a vital branch of scholarship.

What researchers have learned is that waves of industrial activity, first identified by the Russian economist Nikolai Kondratieff in 1925, have a character all of their own. Typically, a long upswing in a cycle starts when a new set of technologies begins to emerge—eg, steam, rail and steel in the mid-19th century; electricity, chemicals and the internal-combustion engine in the early 20th century. This upsurge in innovation stimulates investment and invigorates the economy, as successful participants enjoy fat profits, set standards, kill off weaker rivals and establish themselves as the dominant suppliers.

Over the years, the boom peters out, as the technologies mature and returns to investors slide. After a period of slower growth comes the inevitable decline. This is followed eventually by a wave of fresh innovation, which destroys the old way of doing things and creates conditions for a fresh upswing—a process Joseph Schumpeter, an Austrian economist, labelled “creative destruction”.

Back in the late 1990s, Babbage noticed that the waves of innovation had begun to speed up (see “Catch the wave”, February 18th 1999). The industrial waves Kondratieff observed in the 1920s came every 50-60 years or so. By the late 1990s, fresh ones were arriving twice as often. Fifteen years on, their frequency appears to have doubled yet again. Waves of new innovations now seem to be rolling in every 10 to 15 years.

Read more...