Modern capitalist economic theory, like Christianity, is divided into two major faiths: Neo-classical and Neo-Keynesian. Both capitalist wings share belief in the primacy of impersonal, disaggregated “private markets” (driven by the interaction of individual firms). (Are you bored already?) This private market, reflecting a supply and a demand for individual goods and services, creates a price. This is the proverbial “invisible hand”, which allocates the distribution of goods and services produced by the economy. The primary unit of economic activity for both is the firm or the individual consumer and their key variables and concepts, which typically underlie both approaches, are usually more micro-economic (firm/individual-specific) than macroeconomic (national economy). The goal of both is to induce the individual firm or consumer to behave in a manner to achieve the desired ends, usually making a “profit”. Growth economics (a sub-discipline of economic theory and “their” name for innovation economics) arose in reaction to important limitations of the mainstream, orthodox Neo-classical and Neo-Keynesian wings. Since World War II,  Neo-classical economists (such as Glenn Hubbard and Robert Rubin) believe that capital accumulation (wealth, investment, savings, for instance) primarily drives economic growth. If economic growth is desired, one must encourage savings which can then be used to finance new productive assets such as capital equipment and workforce hiring. Savings equals investment (Says Law), investment pays for the injection of new resources which create new demand. Neo-Keynesian economists, (Larry Summers) however, stress that the demand side drives economic growth. Growth can be induced by government spending, in particular, which increases the supply of wealth and savings by “printing” money”. Printing money is another name for budget deficit. When economic growth is desired, government spending is increased to stimulate new investment and hiring–and eventually enhanced demand.

What’s the Theory Behind Innovation and the Knowledge-Based Economy | Journal of Applied Research in Economic Development Saturday, April 26, 2014 @ 1:04pm