INNOVATION AND INVESTMENT IN CAPITALIST ECONOMIES 1870-2000: Kaleckian Dynamics and Evolutionary Life cycles

Ever since the start of the Industrial Revolution in Britain in the 1760s, innovation and investment have been crucial elements in economic explanations of the dynamics of capitalism. Classical economics recognises that innovation embodied in the form of new machines through fixed capital investment is the essential process for realising economic development. This study sets up a theoretical linkage between innovation and investment in historical time, without reference to any static equilibrium model. Instead, a Kaleckian-based investment cycle model is set up with the double-sided profit and investment relationship, upon which is added the innovation industry life-cycle processes that provide the stimulus for investment. By threading together evolutionary life cycle of industry development through innovative processes with Kaleckian extended reproduction through volatility of the investment process, the instability of cycles and their trend growth can be identified. Tension between virtuous and vicious cycle effects operates to create uncertainty and strategic planning that lead to patterns of industry and economy-wide development of cumulative expansion (and booms) along with periods of cumulative destruction and insecurity. The latter produce problematic efforts to innovate, which can result in renewed strong investment expansion or extended periods of small investment (mini-) cycles. A historical quantitative (HQ) approach to time series data is used to understand these dynamic processes for the period 1870 to 2000. Five OECD countries * for this period are examined using data on patents (proxy for innovation), GDP and investment. The HQ approach shows the plausibility of these important linkages between innovation and investment that have been missed when examined through static analysis of these relations. In terms of evolutionary industry life-cycle form, the complete period is separated into sub-periods to examine how the changes in technological paradigms through these sub-periods affect differently investment cycles and GDP growth trends. Conclusions from this work indicate the need to reexamine the way strategies are formed and developed in both the private and public sectors for more effective appropriation of innovation into the investment planning process. * The OECD countries in this study are USA, UK, Japan, France and Germany. 2 …Kalecki's analysis provides for an endogenous rate of growth, albeit one which rests on the stimulating effect of innovation on investment. Post Keynesian economics has a strong claim to being dynamic in terms of handling historical time without reference to some statical equilibrium concept. Innovation is a concept that has recently been analysed with much …