ECONOMIC GROWTH, PRODUCTIVITY AND INNOVATION

INTRODUCTION: THE IMPORTANCE OF ECONOMIC GROWTH

The functioning of welfare states profits immensely from a fair measure of economic growth. It enables them to cope with structural changes of their economies and labour markets, to address new challenges such as those stemming from the ageing of the population and climatic changes, and to enact reforms to modernise its social arrangements. Furthermore, economic growth provides the means for realising the demands of the population for more economic progress and more welfare. Therefore, it is interesting to assess the extent to which innovation can contribute to the emergence of economic growth.

THE CONTRIBUTION OF INNOVATION TO ECONOMIC GROWTH

Innovation is considered an important factor of economic growth, and more often than not, as the single most important factor. William Baumol thinks that it is obvious that “a reliable stream of innovation is the most important requirement for the remarkable long-run economic growth that has been experienced by the industrialised economies in the past two centuries” (Baumol 2004: 186). In the same vein, Paul Romer is convinced “beyond any doubt” that “discovery, invention, and innovation are of overwhelming importance in economic growth” (Crafts 2004: 205).

However, the role of innovation is seldom given its full due because its meaning is limited usually to that of economic growth. Its importance in general with regard to welfare is even greater. Of the seven major factors that affect happiness only two concern economic values: income and work (Layard 2005: 63). The other five are family relationships; community and friends; health; personal freedom and personal values, which can all profit immensely from innovation as well. The scientific progress in the medicine and health care sector may be of vital importance in many cases. The same can be said of the social sciences, which help us to understand and improve human relationships.

The assertion that innovation is the “mainspring of economic growth” (The Economist 2007: 29) has been the subject of a great deal of research. From an historical point of view, economic growth is a rather recent phenomenon. Over the past two centuries, per capita income has risen 14-fold world-wide. Prior to 1820, economic growth was quite limited and parallel to the increases in population, which left per capita income roughly unaltered (Maddison 2004: 29).