01 · Why innovation exists

The economic formalisation of this third property is owed to Joseph Schumpeter, who in The Theory of Economic Development (1934, original German edition 1911) draws the distinction on which the whole discipline rests: invention is the generation of a new idea or of a new technical artefact; innovation is its first successful introduction into the economy. The two phenomena are separate in fact, in the competencies they require and often in the people who carry them out. The history of technology is full of inventions that remained inventions for decades, and of innovators who invented nothing: they made other people's inventions economically real.

Three joint conditions define innovation: novelty, implementation and the creation of value for a user. The reference statistical definition, that of the OECD's Oslo Manual (fourth edition, 2018), takes them up with operational precision: an innovation is a product or a process, new or significantly improved, that differs appreciably from previous ones and that has been made available to potential users or brought into use. The words that carry the weight of the definition are the last part: made available, brought into use. A patent never worked, a prototype never industrialised, an algorithm never integrated into a service are inventions, knowledge, potential assets; they are not innovations.

Downstream of innovation, Schumpeter places the third term of the sequence: imitation. When an innovation succeeds, other players copy it, adapt it, improve it; the novelty spreads through the economic system and the profits of the original innovator progressively erode. The sequence invention, innovation, imitation describes the mechanism by which technical progress propagates, and at the same time explains why the innovator's advantage is temporary by construction: the theme of who manages to retain the value, and with which instruments, will occupy chapters 11 and 12.

Schumpeter adds two contributions worth fixing straight away. The first is the breadth of the notion: the "new combinations" do not concern the product alone. His five forms (a new good, a new method of production, a new market, a new source of supply, a new organisation of the industry) anticipate the modern taxonomy, which distinguishes innovation of product, of process, of market and of business model. The second is the concept of creative destruction, formulated in Capitalism, Socialism and Democracy (1942): the competition that counts in capitalism is not price competition between similar firms, but the competition brought by the new product, the new technology, the new organisational form, which does not compress the margins of existing players: it threatens their existence. Innovation creates value also by redistributing it, taking it away from structures it renders obsolete. For anyone assessing a new company, the practical consequence is that competitive analysis must estimate not only the market to be won but the reaction of those who hold it.

In September 1928 Alexander Fleming, at St Mary's Hospital in London, observes that a mould of the genus Penicillium contaminates a culture of staphylococci and inhibits its growth. He publishes the observation in 1929, identifies the active substance and calls it penicillin. It is an invention, indeed a discovery of the first order; but in 1929 it cures no one. The substance is unstable, extremely difficult to isolate and to produce in appreciable quantities, and for more than a decade it remains a laboratory curiosity.

The second phase begins in 1939 in Oxford, where Howard Florey and Ernst Chain take up the work again, purify the active principle and in 1940-1941 demonstrate its therapeutic efficacy, first in animals and then in humans. But the problem that decides the fate of penicillin is not scientific: it is one of production. The yields of laboratory processes are minuscule; for the first patients penicillin is recovered even from the urine of those treated, so scarce is it. The turning point comes with the transfer of the project to the United States: the Department of Agriculture laboratory in Peoria, Illinois, develops submerged fermentation in large tanks and identifies far more productive strains of Penicillium; a programme coordinated by the United States government in wartime involves several pharmaceutical companies (among them Pfizer, Merck and Squibb) in industrial-scale production. In 1943 production is still rationed to the military fronts; in 1945, the year in which Fleming, Florey and Chain receive the Nobel Prize, penicillin is available to the civilian population.

The case condenses almost all the themes of the essay. The distance between the two phases: thirteen years between observation and availability, and the most costly and organisationally complex part is not the discovery but the production. The systemic nature of the second phase: it requires industrial microbiology, process engineering, capital, public coordination and the manufacturing capacity of several firms together. The role of public financing in the phases that the market alone does not cover, a theme we will meet again in chapter 09. And time as a constitutive variable: every year of delay is measured in lives not saved, which is the most concrete form that can be taken by the statement with which the chapter began: a solution that does not arrive adapts nothing.

• J.A. Schumpeter, The Theory of Economic Development (1934): the source of the invention-innovation distinction and of the five forms of new combination; chapters 1 and 2 are enough.
• J.A. Schumpeter, Capitalism, Socialism and Democracy (1942), chapter 7: the seven pages on creative destruction, among the most cited in twentieth-century economics.
• OECD/Eurostat, Oslo Manual 2018, chapters 1-3: the current statistical definition of innovation, useful as a shared terminological reference.
• E. Lax, The Mold in Dr. Florey's Coat (2004): the complete historical reconstruction of the penicillin case, from discovery to industrial production.