There are models of creativity/innovation. There is Hector Sabelli's Bios Theory and Stuart Kauffman's adjacent possible. Both are such models -- but note, that they are also necessarily highly abstract.

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Even if one can predict that a certain kind of innovation will take place (Moore's law being an example), you cannot predict who will do it, or where. Or even when -- Moore's law is a statistical average.

More than that, who could predict the iPod, iPhone, or iPad, though those all came from the same company? There are always innovations that are truly unpredictable. That is almost the definition and nature of innovation.

Innovations can come out of either familiar or unfamiliar territory. Sometimes it requires someone coming in and looking at even familiar territory with new eyes. Who would have predicted 20 years ago the revolution in phones? How long was phone technology essentially the same?

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@ Cyril

Nice to have you on board as to J.C.

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cournot, it isn't a trivial task, but must of this task is already done by people who propose various innovation projects.RJB, that just isn't remotely true.

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I reiterate TGGP's second comment. The stock market it isn't a great prediction market (in particular, it fails at the modularity of this post), but it's the biggest one we've got and we should pay attention to how it is used. Companies used to go public when much smaller, when they were young and innovative. Why did they stop? SarbOx plays a role, but it doesn't match the timing.

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One impediment is a general lack of understanding of how science and technology work among economists. Innovation is a process rather than a discrete event or new technology.

Too often I see non-scientists refer think of innovation in terms of new nouns and then doing a comparison between how many nouns were created in a period of time. What we call an object is irrelevant, the important part is how well it performs its intended function.

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Economists have trouble dealing with innovation for a very basic reason: statistics and game theory require specifying a known "state space" of possible outcomes to which they can assign probabilities. True innovation arises when someone identifies new possible outcomes. Economists are largely at a loss on how to model a setting in which someone can uncover new possibilities.

I am not sure how the same problem won't plague prediction markets. To the extent the market simply determines prices for known possibilities it won't shed much light on innovation. And I don't know how you construct securities whose payoffs are contingent on outcomes that haven't yet been described by anyone at the time the securities are designed.

The market you have actually described just sounds like a more public sort of venture capital market. But there is a reason venture capitalists keep matters close to the vest. Do you believe there are positive externalities that keep VCs from opening markets like this?

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Setting aside the liquidity problems in markets for startups, is it possibleto approach the problem from the other direction, exploiting the highlyliquid market for stocks in established companies? In particular, is itlegal to have a contingent futures option on a stock, contingent one.g. the company bringing a product with stated characteristics tomarket by a stated time?

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Robin said:

"Imagine prediction markets on which innovative ideas will succeed soon, possibly conditional on approach or team style."

This is a non trivial task. Correctly framing the issue so that you've identified the relevant alternatives and the relevant conditionals is a demanding and difficult job -- arguably an important component of investment research. Who is going to do that for a prediction market without direct payoff?

For the most part, that's why we have look to high status experts to serve as filters. The prediction markets you actually come up with may be biased or incomplete in lots of ways and many leaders don't want to work on these a) partly for fear it will erode their authority as Robin tends to assert, but also for b) it (creating the actual vs ideal prediction market) potentially being a waste of time, misleading, or involving effort that they expend in other forms with better compensation and no spillovers to competitors.

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Schumpeter used the term "creative destruction." See the link below to my paper on entreprneurs as heroes. The mythologist Joseph Campbell himself said that entreprneurs were heroes and he used "creation and destruction" to describe the action of the hero in his book "The Hero With A Thousand Faces."

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Innovation relates to entrepreneur.

Candace Allen Smith has written about how entrepreneurs are like heroes. She gave a talk on this at the Dallas Fed in 1997. Here is the link:


I think that got reprinted in the Freeman. She also had a similar, award winning article in the Journal of Private Enterprise in 1996.

Walter Williams also wrote about entrepreneurs as heroes


So did Johan Norberg


I have also written a couple of articles on the subject

The Calling of the Entrepreneurhttp://cyrilmorong.com/ENTR...

The Creative-Destroyers: Are Entrepreneurs Mythological Heroes? (Presented at the annual meetings of the Western Economic Association, July 1992)http://cyrilmorong.com/ENTR...

In one of his books, Israel Kirzner said something like "entreprneurs discover opportunities for economic proft by leading a life of purposeful action."

Lawrence Summers explained his vision for an entrepreneurial future last year at the White House blog.


"An important aspect of any economic expansion is the role innovation plays as an engine of economic growth. In this regard, the most important economist of the twenty-first century might actually turn out to be not Smith or Keynes, but Joseph Schumpeter."

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Nobody has yet invoked Schumpeter, nor for that matter Marxist economists who have looked closely at innovation.

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Specific innovations might be hard to predict, but an overall pattern can become so established as to become a virtual requirement of the employees engaged in innovation. Moore's Law has been the starkest example. Admittedly, there aren't many others, at least not yet.

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I don't think innovation is neglected; economists focus a lot of their attention on "innovation." They just call it by a different name sometimes, like "technological change." Attempting to explain cross-country differences in total factor productivity is basically an exercise in trying to determine why some countries innovate more and adopt new technology faster than others. And many economists also feel that this question -- the same question that motivated Adam Smith to write "The Wealth of Nations" -- is the most important unanswered question in economics.

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Isn't innovation unpredictable? No. If you study something that has been studied to death or use a method that's been used thousands of times, you are less likely to discover something new and interesting than if you study something that hasn't been studied much or use an entirely new method. I agree with Robin's explanation/description of how professors choose research topics. In psychology, most of what innovation there is comes about when a prestige-generating (e.g., expensive, technical) new method comes along. E.g., MRI. Then researchers happily migrate to it. As Robin says, this migration has nothing to do with importance -- a new method does not make what it touches more important.

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