An information economics perspective on innovation.

Introduction

This paper has three main objectives: to

(1) introduce the information theoretic or economics of information approach;

(2) show how this relates to innovation, i.e. how it improves our understanding of the innovative process compared to a more conventional economic approach; and

(3) illustrate an example of an information economics model of innovation.

Information economics

Nobel prize winning economist Kenneth Arrow (1984) describes information as an interesting category of goods generally ignored by economists. Information economics treats information explicitly as a resource. Such a perspective takes account of the basic economic characteristics of information and seeks to bring within the economic calculation the value and cost of information. This approach often leads the analyst to quite different conclusions about particular issues than those obtained from more conventional analysis.

An information economics perspective may be more consistent with the reality of a rapidly emerging information age than conventional views. Global society would appear to be in transition from an industrial era to an information era. There are different ways of describing and analysing this phenomenon. From an economic perspective, the economy is becoming more information-intensive. The production, use and communication of information assumes the central importance in the information era that mass production of ordinary goods and services assumed in the industrial era. Studies that have measured the extent and growth of information activities in the economy include Lamberton (1987), Mandeville and Macdonald (1985) and OECD (1981).

As information activities grow in importance, it is likely that the economic characteristics of information will increasingly influence economic activity and the nature of institutions governing it. Thus some understanding of these matters may have considerable efficacy for economics, other social sciences and for policy guidance.

Lamberton (1986) has summarised the more important economic characteristics of information and propositions central to the economics of information into 12 points as follows:

(1) There is a great deal of difference between personal and group or organisational use of information. The division of information gathering may well be the most fundamental form of the division of labour.

(2) The cost of producing information is independent of the scale on which it is used.

(3) The greater part of the cost of information is often the cost incurred by the recipient.

(4) Learning takes time so that there is a limit to the rate at which decision makers can absorb information.

(5) There are usually significant information differentials in terms of possession of information, access to information and capacity to use information.

(6) The stock of information and the organisations created to handle information have the characteristics of capital.

(7) The output of the information sector is used to a significant extent by industry as opposed to consumers.

(8) The demand for information equipment, e.g. telecommunications equipment and computers, …