Over the past several years, dozens of economists and politicians have jumped on the bandwagon linking innovation to economic growth. Management gurus and business schools go on about the imperatives of being creative and coming up with new ideas and breakthroughs. Entire volumes have been written on how the future belongs to countries, cities and communities with creative workers.

But is the word innovation starting to lose its meaning?

In February 2009, as part of a project at the Martin Prosperity Institute at the University of Toronto, Richard Florida and Roger Martin — two of Canada’s top minds on the subject of creativity in the economy — delivered a report called Ontario in the Creative Age. The report was commissioned by the provincial government as a way of kickstarting a new conversation about where the Ontario (and Canadian) economy could succeed in a world that has radically changed.

The report stirred controversy. In commenting on Florida and Martin’s urging for more creativity in routine-oriented jobs, Premier Dalton McGuinty was quoted as saying, “I don’t know exactly what that means.”

This sums up the problem. A lot of very smart people — including folks like Roger Martin and even the Premier of Ontario — have bought into the idea of fostering creativity and innovation. But at the root of it, most of us might agree with McGuinty and admit we don’t know exactly what that means.

Innovation has become a flash word, one that flies around corporate boardroom tables, government-sponsored reports and MBA group presentations. It gets nods of agreement and easily deflects any dissent. Who could possibly suggest that the economy needs less innovation? The word itself is full of meaning, but unfortunately it is dangerously close to becoming like other overused words and phrases that business management wonks have beaten to death, like “Think outside the box” and “a whole new paradigm.”

Any discussion of the importance of innovation and creativity in the economy risks mimicking all of the other volumes of books and reports out there calling blithely for more creative workers. But as much as we’d like to, we can’t totally dump the words innovation and creativity. Beneath the jargon-filled baggage economists and sociologists have heaped on them, they do convey a particular notion that is very distinct from being smart, clever, knowledgeable or even wise. American economist Paul Romer, a Senior Fellow at Stanford University’s Center for International Development and the Stanford Institute for Economic Policy Research, is an expert scholar in how creativity and ideas are essential ingredients in the economy.

Economic growth occurs whenever people take resources and rearrange them in ways that are more valuable. A useful metaphor for production in an economy comes from the kitchen. To create valuable final products, we mix inexpensive ingredients together according to a recipe. The cooking one can do is limited by the supply of ingredients, and most cooking in the economy produces undesirable side effects. If economic growth could be achieved only by doing more and more of the same kind of cooking, we would eventually run out of raw materials and suffer from unacceptable levels of pollution and nuisance. History teaches us, however, that economic growth springs from better recipes, not  just from more cooking. New recipes generally produce fewer unpleasant side effects and generate more economic value per unit of raw material. Every generation has perceived the limits to growth that finite resources and undesirable side effects would pose if no new recipes or ideas were discovered. And every generation has underestimated the potential for finding new recipes and ideas. We consistently fail to grasp how many ideas remain to be discovered. Possibilities do not add up. They multiply.

But as wonderful as the economics of new ideas are, Romer also offers a warning:

Leading countries like the United States, Canada, and the members of the European Union cannot stay ahead merely by adopting ideas developed elsewhere. They must offer strong incentives for discovering new ideas at home, and this is not easy to do. The same characteristic that makes an idea so valuable — everybody can use it at the same time — also means that it is hard to earn an appropriate rate of return on investments in ideas. The many people who benefit from a new idea can too easily free ride on the efforts of others.

Clearly, from an economist’s perspective, new and better ideas are the essential backbones of our modern economy. It is out of creative minds that new ideas are born. However, it is through innovation that these ideas are fostered, nurtured and brought to the point at which they start to contribute to our national wealth and prosperity.

Photo: Shutterstock

Todd Hirsch
Todd Hirsch is the Calgary-based senior economist with ATB Financial and author of The Boiling Frog Dilemma: Saving Canada from Economic Decline.

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