Reviving and assessing the Kuznets law on innovation

In the earlier years of the twentieth century economists were beginning to gain a deeper understanding of the nature of the economic change. Joseph Alois Schumpeter, for example, argued that the first key step in understanding economic change is to think carefully about innovation. When Kuznets began his work in economics in the mid 1920s economics had begun to develop the quantitative and mathematical dimensions that now characterise the discipline. In particular, Kuznets discovered what he argued was a second key step in understanding economic change, namely: the analysis of sectors where innovation actually takes place. He was a quintessential empiricist and adept at finding empirical regularities. It is the contention of this paper that Kuznets' early empirical work on sectoral growth enables us to formulate an empirical law on innovation. The paper is organised around a number of questions: What is the Kuznets law on innovation? Has this law been ignored? What is the relationship between the Kuznets law on innovation and the law of diminishing returns to innovative effort? What are the intrinsic limitations regarding the applicability of the Kuznets' law? The last part of the paper provides a summary and notes some limitations of the law.