ACTIVITY 3 – Innovation – Is it Rocket Science?

Introduction

History is replete with examples of societies in which genius spawned invention but made no long-lasting impact on standards of living because the invention did not initiate the cascade of innovation that produces wealth.  Innovation translates inventive genius into the production of goods and services that improve people’s lives.  Throughout history, the nations that have been consistently able to innovate have been those in which the capitalist institutions of markets and property rights have flourished.  Nations lacking markets and secure property rights also lack the incentives that make innovation-oriented research and development a routine component of modern production.  In the 20th century, the Soviet Union stands out as an example of a society in which the genius of invention had no impact on the standard of living of the masses.  A nation with a vaunted system of scientific education, a culture that admired and exalted scientists, and a government that patronized research with money and resources could only provide a per capita income of less than half that of the United States.  The U.S.S.R. rocked the complacency of the West by leaping into space but because it lacked the incentives for innovation, it could not ensure that its rural hospitals had sewers and hot water. 

The mystery of the Soviet economy’s failure to thrive is solved by looking at its institutions.  Without viable markets, there was no mechanism for discoveries generated by government-funded research to move into the consumer economy.  There were no incentives for innovation to flower from the seeds of invention.  In the West, on the other hand, even the results of government-funded research move rapidly into production as the possibility of profit motivates entrepreneurs to risk innovation.  Profit proves to be such a strong incentive, in fact, that research flourishes even without government sponsorship and has become a major competitive activity for enterprise.

In this lesson students learn the difference between invention and innovation, they hypothesize why so many more inventions were created in western market economies as opposed to socialist economies and they use clues to solve a mystery.

Video Instructions

Key Terms

Competition
The effort of two or more individuals or organizations to get the business of others by offering the best deal. Consumers compete with other consumers for goods and services. Producers compete with other producers for sales to consumers.  

Incentives
A factor, monetary or non-monetary, that encourages people to do something.

Innovation
The introduction of an invention into a use that has economic value.

Invention
The creation of a new product or process. Property Rights Legal protection for the ownership of tangible or intangible resources.  Property rights give the holder the ability to do with that property what they choose, including holding on to it, selling it or transferring it to someone else.

Objectives

Students will be able to:

• Define invention.
• Define innovation.
• Explain why so much more innovation happened in western market economies as opposed to socialist economies.

Voluntary National Content Standards

CONTENT STANDARD 9: Competition and Market Structure

Competition among sellers usually lowers costs and prices, and encourages producers to produce what consumers are willing and able to buy. Competition among buyers increases prices and allocates goods and services to those people who are willing and able to pay the most for them. 

• Benchmark 5: The introduction of new products and production methods is an important form of competition and is a source of technological progress and economic growth.

CONTENT STANDARD 10: Institutions

Institutions evolve and are created to help individuals and groups accomplish their goals. Banks, labor unions, markets, corporations, legal systems, and not-for-profit organizations are examples of important institutions. A different kind of institution, clearly defined and enforced property rights, is essential to a market economy.

• Benchmark 1: Property rights, contract enforcement, standards for weights and measures, and liability rules affect incentives for people to produce and exchange goods and services.

CONTENT STANDARD 14: Entrepreneurship

Entrepreneurs take on the calculated risk of starting new businesses, either by embarking on new ventures similar to existing ones or by introducing new innovations. Entrepreneurial innovation is an important source of economic growth.

• Benchmark 3:  Productivity and efficiency gains that result from innovative practices of entrepreneurs foster long term economic growth.

CONTENT STANDARD 15: Economic Growth

Investment in factories, machinery, new technology, and in the health, education, and training of people stimulates economic growth and can raise future standards of living. 

• Benchmark 5: The rate of productivity increase in an economy is strongly affected by the incentives that reward successful innovation and investments (in research and development, and in physical and human capital).

Time Required

50 minutes