Innovation: Action That Could Be Considered a Ridiculous Error in Judgement

Innovation drives economic evolution and growth.

That’s one of the core ideas from Joseph Schumpeter, and it’s one of the reasons that the group for people studying evolutionary economics is called the International Schumpeter Society.  I’m at the 15th ISS Conference right now in Jena, Germany, where I got to hear Stan Metcalfe, one of my favourite evolutionary economists, speak today.

Stan Metcalfe

Stan is just a wonderful speaker, and his talk today was filled with gems.  Even though he was presenting a paper that was very theoretical, there were a lot of lessons in the talk for all of us. The quotes from Stan are in bold, followed by my comments:

Innovation is action which, ex ante, could be considered a ridiculous error in judgement.  This is a critical point – the whole issue with innovation is that we can’t know in advance if it’s going to work or not.  If we know it will work, it’s not innovation, it’s just a financial decision.  Many of the struggles that people have with innovation comes from this – we want certainty. But if we’re going to innovate, we must actively seek out uncertainty.

This creates tension for many of us.

Innovation is the bridge between scientific knowledge and economic action.  Stan frames the core question in economics as: how do develop wealth from knowledge?  This question drives the growth of firms, and the development of economies.  One of the themes that has consistently come up in the conference so far is the difference between invention and innovation – it’s innovation that bridges knowledges and economics.

Quoting Schumpeter: No one can give an account of the principles by which innovation is done.  This is a tough one for those of us that try to teach innovation.  I think that this quote is almost certainly true. The implication of this is that to manage innovation, we need to be trying out lots of ideas, and live with having a fair number of them not work out.

Stan had another quote from Schumpeter:

Most innovative ideas come to nothing, of those that do not, 90% still fail.


Picking out my cat Schumpeter from the veterinarian

Picking out my cat Schumpeter from the veterinarian

We think of the economy as knowledge-based, but it’s really ignorance-based – otherwise we couldn’t innovate. This is an idea from the often overlooked economist George Shackle.  Shackle’s entire research program was based around the question: how can we act when we don’t know what will happen?

You make a profit by having different expectations from everyone else. If innovation is a leap into uncertainty, it means that people will have different expectations of how new ideas will work out. Some will be excited by them, others will think that that they are ridiculous errors in judgement.  It’s only when we try them out that find out who was right.  But no matter what, there’s no money in a consensus.

Stan also talked a lot about how he’s not interested in averages, he’s interested in outliers.  When we’re studying innovation and business, that’s absolutely correct.

However, if we look at the average evolutionary economist, we find someone that is interesting and generous – Stan is an outlier on both dimensions, but the average is still pretty good.  That’s why I like hanging out with them for a few days whenever I get the chance.

Student and teacher of innovation - University of Queensland Business School - links to academic papers, twitter, and so on can be found here.

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9 thoughts on “Innovation: Action That Could Be Considered a Ridiculous Error in Judgement

  1. Tim – great comments from the conference. It’s good to see some of the foundations of innovation being discussed without the noise (and unnecessary complication) that often surrounds the idea.

  2. Reminds me of a friend’s uncle’s idea. Joe had only one arm, his right arm. This was in the days when you needed to signal which way you turn your car, out the driver window with your left arm – Left turn, arm bent down, right turn, arm straight. Well, he didn’t have an arm, so he couldn’t drive. He wanted to drive, so he invented a device that he could trigger with his right arm, which would light up and blink, either from the left or right side of the bumper, from front and back. Joe was so pleased with his device, that he showed a friend. Joe said, “Maybe we should market this!
    His friend Fred said, “Joe, you idiot. How many drivers have only their right arm?”

  3. The most interesting ideas are the ones that get a polarized reception: The ones that half the group think are awesome and the other half thinks is terrible. This fits nicely with the quotes you provided.

    You were in Jena recently? Pity – we could have met up.

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