Measuring Innovativeness: The Dominance of a Ranking of the Ordinal Utility from Consumption

What is it about?

It already is well established that new innovations are the sources of sustainable economic development. In stated respect, presciently, Schumpeter (1928, 1947) advocates the necessity of disruptive innovations for the fostering of meaningful and sustainable economic development. If disruptive innovations truly are the source of meaningful and sustainable economic development, the most important metrics for economic development are measures of the innovativeness of the members of a society, not measures of the output (e.g. GDP Per Capita) of a society. In stated respect, in Sen (1997, 1998), Prof. Amartya Sen, who went on to win the 1998 Nobel Prize in Economics and Obrimah (2020) have provided, respectively, empirical or theoretical evidence that GDP Per Capita is not a robust proxy for economic development. The parameters that, hitherto have been adopted as measures of the innovativeness of the agents in an economy are, respectively the market valuations of the innovations or the innovating firms, or the aggregate numbers of patents that are filed in an economy, and alternatively the rate of growth of patent filings. This study establishes that none of market valuations, the aggregate numbers of patent filings, or the rate of growth of patent filings are robust proxies for the innovativeness of the agents in an economy. This study's formal theory goes on to establish that, intertemporally, with the basket of the uses to which products are applied held time invariant, that it is consumers' ranking of the ordinal utility that they derive from the products that has characterization as a robust measure for the innovativeness of the agents in an economy. For illustration, let the Sony Walkman and the iPod have designation as products that satisfice agents' demand for the following use, namely 'ease of the use, and the portability of their music'. Let U denote ordinal utility. With the Sony Walkman pre-existing at some time, t, it is unequivocal that the emergence of the iPod at time t+1 induced, U(t+1) > U(t), evincing an increase to the innovativeness of the United States of America. Note that we are not at this point in time concerned with the distribution of the innovativeness, only with whether or not there is evidence of access to more innovative products within the population of consumers. But is ordinal utility really a more robust measure for innovativeness than the market valuations of new innovations? Well then, consider the market valuations of the iPhone and the conglomeration of Android phones in, say, India. Apple Inc. is the source of the iPhone and it has no more than a 15% share of the market for smartphones in India. It further is well accepted that, relative to Andriods, the iPhone is the more sophisticated technology. Regardless, collectively, manufacturers of Android phones in India derive a larger market capitalization from sales of Android phones than Apple Inc. Applying ordinal utility, however, if the sole constraint on the adoption of the iPhone is affordability, irrespective of the evidence from market shares, Indians assert they derive higher ordinal utility from owning an iPhone. What then of the aggregate numbers of patents or the growth rate of patent filings as metrics for the innovativeness of agents. Well, at the time that the iPod emerged, Sony held over a thousand patents in relation to the Walkman and Apple Inc. held just over a 100 patents in respect of the iPod. As already is highlighted, it is unequivocal that, relative to the Walkman, the iPod was the more innovative product. Suppose then that we focus on the aggregate economy, such that at time t with the Sony Walkman as the sole product, an economy had 1,000+ patents. Enter then time, t+1, and Apple Inc. generates 100+ innovations. Clearly, we arrive at a negative growth rate for patents, yet the innovativeness of the agents in the USA has improved. Applying, however, ordinal utility to either scenario, there is arrival at the right inference, namely an improvement to the innovativeness of the agents in the USA.

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Photo by Joshua Sortino on Unsplash

Photo by Joshua Sortino on Unsplash

Why is it important?

If we do not adopt the right measures for the innovativeness of agents, we arrive at inferences in respect of the progression to economic development that patently are erroneous. In stated respect, as already is highlighted, neither of GDP Per Capita nor Country Growth Rates are robust measures of the innovativeness of agents, rather solely are measures of the output performance of a country. Relatedly, in presence of placement of emphasis on measures for the innovativeness of agents, agents are incentivized to focus on improvements to their innovativeness. In presence, however, of a focus on measures of output, each of policy makers, innovators, producers, and consumers focus on output, that is, size, not innovativeness. There is arrival, as such at economies that function on output, as opposed to innovativeness, resulting in a focus on the activities and initiatives that are unlikely to result in sustainable economic development. In stated respect, it is well established that people respond to incentives. If then policy makers emphasize output, as opposed to innovativeness, each of innovators, producers, and consumers also will gravitate towards output, equivalently size, as opposed to innovativeness. In stated respect, consider that every new company that lists on a stock exchange in the USA seems to want to become the new 'biggest kid on the block'. Think Uber, Facebook or Meta, Tesla, etc.

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