This masterpiece from the Princeton University Press is an amalgamation of some of the most intelligent minds in economics. The contributors include: Eytan Sheshinski, Robert J. Strom, William J. Baumol, Robert M. Solow, Kenneth J. Arrow, Michael M Weinstein, Melissa A. Shilling, Corey Phelps, Sylvia Nasar, Boyan Jovanovic, Peter Rousseau, Edward N. Wolff, Deepak Somaya, David J. Teece, Naomi R. Lamoreaux, Kenneth L. Sokoloff, Yochanan Shachmurove, Ralph E. Gomory, Jonathan Eaton, Samuel S. Kortum, Alan S. Blinder, Robert J. Shiller, Burton G. Malkiel, and Edmund S. Phelps. These brilliant minds address the micro- and macroeconomics of growth, the importance of independent and corporate entrepreneurs and innovators, the employment of technology and the patent system, innovation and trade, and the relationship between innovation and finance.
Arrow and Solow provide the foundation for the remainder of the book by explaining the micro and macro conditions that are conducive to growth. They explain how particular markets and knowledge influence micro and macroeconomics and that the legal system of licensing and patents is the major institution of property rights. Competition is discussed as an incentive to create further innovations which lead to an “optimal portfolio of innovations”.
Nasar, Jovanovic, and Rousseau explore the continuing role of indep
endent innovators and entrepreneurs. They focus on the flexibility of new firms over the older more established companies. They also provide data on Initial Public Offerings (IPOs) and touch on the optimal timing for initiating an IPO. Explanation is given as to how some firms exploit irrational exuberance leading up to and during their IPO, yielding themselves significant amounts of capital. They conclude that the small younger firms thrive when fast technological change exists, where the older larger firms do better when it is “business as usual”.
The section on technology and the patent system focuses on the opportunities and challenges in multi-invention innovation. It explains how the patent owner may need good negotiating skills when dealing with a multi-invention innovation. Solutions are also provided for patent owners and their potential infringers. This section explores the costs associated with licensing and where they are most appropriate. The establishment of the U.S. patent system is also discussed along with the growth and trading of patents in
more recent years.
“Innovation and Its Effects on International Trade” is a section outlining how the global economy plays a growing dynamic role in innovation. Labor, capital, and knowledge are brought to the table by multiple countries creating a synergistic fuel for bringing new products to market. Next, the topic of research is discussed, where the wealthier countries are more heavily invested. It also explains the pitfalls of two countries pursuing an identical technology, where opportunities and advantages can actually be eliminated.
Next, Blinder introduces chapters by Shiller and Malkiel. Shiller’s section explains “Radical Financial Innovations”. Here, Shiller discusses hedging and risk management performed by insurance firms. He indicates that imperfect risk sharing exists between income and consumption with
in and across countries. He then explains the innovations in home insurance and provides proposals to use price indexes that cannot be distorted by individuals.
Malkiel’s section focuses on the “Free-Market Innovation Machine”. He explores the importance of venture capital firms providing the key money and managerial support for innovation to become a reality. The dominance of U.S. venture capital over that of European finance is discussed in relation to IPOs. Malkiel also points out how the large amount of investment outlets leads to overinvestment and market bubbles.
Finally, Strom makes an introduction to be followed by Phelps and Sheshinski about free-market innovation and its relation to western European economies and the economic welfare of developing economies. Phelps touches on how the western European countries are failing to create a successful free-market of innovation. Sheshinski focuses on “Pharmaceutical Patenting in Developing Countries and R & D”. He analyzes competitive and monopolistic pricing strategies on global welfare, the economics of developing countries, and incentives for firms and industries to participate in R & D.
To conclude, I feel that this book is a great comprehensive collection of intelligent economic thinking and analysis. It reminds us of the importance of innovation in driving economic growth in our free-market economy. I would recommend it to anyone interested in this subject.
Thia feature originally appeared in http://seekingalpha.com/article/174797-book-review-entrepreneurship-innovation-and-the-growth-mechanism-of-the-free-enterprise-economies
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