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Innovation Economics

Innovation Economics is a school of thought combining two or more individual sciences related to what is known about Innovation and what is known about Economics. The objective of Innovation Economics is to predict the characteristics of an Innovation Economy based on the assumption that human knowledge is, in itself, highly tangible outside of the legal and organizational structure of a corporation.

Historical origins

The history of Innovation Economics began in 1994 shortly after the ratification of the North American Free Trade Agreement (NAFTA) relating specifically to the Mutual Recognition Document for Engineering Professionals. One objective of NAFTA had been the free trade of professional services, that is, the treatment of professional knowledge as a financial instrument subject to international trade. The NAFTA MRD failed in the market and Innovation Economics began as a research effort at CETYS University in Mexicali, Mexico, to analyze and correct the failure (NCEES, California BORPELS, NSPE Engineering News 1994).

The work was further developed by Knowledge Management communities in the Seattle area and is currently under development by Ingenesist, an open source community of practice in which anyone can participate. Academic papers have been presented on the subject with the International Society for the Advancement of Management, The Boeing Technical Excellence Conferences, and the Comparative and International Education Society.

People

Innovation Economics is largely a collection of ideas from many disciplines in finance, social sciences, and knowledge management citing the work of Robert Putnam, Jane Jacobs, Richard Florida, Milton Friedman, and a variety of mainstream sources.

Theory

Innovation Economics can be summarized as follows:

1. The factors of production for an Innovation Economy are social capital, creative capital, and intellectual capital + entrepreneurs.

2. Innovation is defined as the rate of change of knowledge with respect to time. Knowledge is defined as the rate of change of Information with respect to time. As such, innovation can be defined, measured, and predicted as the first derivative of knowledge and the second derivative of information. (Innovation here is not the same as invention; rather, an invention is the collection of many small innovations each of which are comprised of many smaller innovations, etc.)

3. A knowledge inventory should exist in a form that emulates a financial instrument, specifically, all elements, components, and subsets of knowledge must be described in terms of a quantity and a quality. If it looks like money, it can trade like money. A representative taxonomy includes the Universal Decimal Classification System(UDC).

4. A Percentile Search Engine is a computer enabled application that allows for the calculation of probabilities that various combinations of knowledge assets can execute a given business objective. Empirical data is fed back to perfect the algorithms.

5. The institutions of Innovation Economics are analogous to financial institutions and include social networks and communities of practice acting as vetting mechanisms for knowledge assets. Probabilities are derived from normal distributions of knowledge assets that exist naturally in a society, demographic, or geographic area.

6. The Entrepreneur then matches most worthy knowledge surplus to most worthy knowledge deficit in a fair knowledge market to assure that knowledge assets are allocated efficiently using an "Innovation Bank"[1] not unlike a financial bank.

7. Where innovation is predictable, it can be pooled among similar risk exposures. Innovation risk can then be diversified away and cash flows can be combined such that innovation bonds can be issued to fund additional innovation, hence the term Innovation Economics.

The notable benefit is that knowledge assets may become tangible outside the organizational or legal structure of a corporation (as NAFTA had intended) and improved allocation of knowledge assets toward social and environmental causes that have the greatest net impact on increasing human productivity. Further, it is predicted that current social networks in the so-called Web 2.0 revolution will ultimately converge to Web 3.0, the state of the Innovation Economy.