The importance of innovation is at the center of a second, and rapidly growing, body of research. Capital, labor, and land, the basic factors of production, have lost much of their fascination for those looking to understand why economies grow and prosper. The key question asked today is no longer how much capital and labor an economy can amass, but how innovation helps employ those resources more effectively to produce more goods and services. This line of research makes clear that new technology, by itself, has little economic benefit. As economist Nathan Rosenberg observed, “Innovations in their early stages are usually exceedingly ill-adapted to the wide range of more specialized uses to which they are eventually put.” Resistance to new methods can impede their adoption. Potential users may avoid commitments until the future is more certain; as early buyers of Betamax video players can attest, it is risky to bet on a technology that turns out to be a dead end. Even after a new technology is proven, its spread must often wait until prior investments have been recouped; although Thomas Edison invented the incandescent light bulb by 1879, only 3 percent of U.S. homes had electric lighting twenty years later. The economic benefits arise not from innovation itself, but from the entrepreneurs who eventually discover ways to put innovations to practical use—and most critically, as economists Erik Brynjolfsson and Lorin M. Hitt have pointed out, from the organizational changes through which businesses reshape themselves to take advantage of the new technology.
from Liberalism by Ludwig von Mises, 1927, reprinted 2010
