Friday, March 20, 2009

Innovation and global economic crisis(I)

Schumpeter made a case connecting economic cycles, with the optimizing nature of industry behaviour .Behind every economic crisis , or any period of economic progress, lies the dynamic of industry specially when it has lost its equilibrium path, which it happens with the end of an innovation cycle .How is it possible for an industry to miss the equilibrium path, and as a consequence to get the whole economy into a depression ?.
Within the four stages of economic cycles, economic contraction, depression, recovery and expansion ,there are different forces which should be considered on its own, somehow independent from one another. In other words, what it is relevant to explain an economic contraction, it might not be so to explain the economic recovery due to the cyclical life span of innovation.-
Industrial revolution, railways disposal , availability of steel and electricity, the assembly line , and information age , all represent innovation cycles throughout economic history , associated with an economic contraction . Industry must adapt to the new situation which is costly and time consuming. Thus, to be out of the equilibrium path for an industry ,means to be outdated with the new developments and it represent the adjustment cost to the impact of the innovation.-
The traditional automobile industry collapse, is a good example of these fluctuations due to the innovation cycle .Therefore, a key question which apply to the current global economic crisis is : To what extent , this crisis has the seeds of a new age of global economic expansion?. The answer to this question is not a trivial one, because it deals with the tools used to overcome this crisis . If they are not efficient enough, it will not be an efficient way to get out of this global economic adjustment, as long as it might abort those seeds before they come out to the light of prosperity.-