# Is This the Innovation We Mean?


The most durable frontiers of science are usually about **redefining one's object of study in the present environment**. What is public finance? The question reaches into what a state is, where states come from, and whether the state is inevitable. The natural sciences are no different. What is force? Newton and Einstein gave very different answers.

In current economic research, with the introduction of "new quality productive forces" and the latest Nobel Prizes, **innovation** has become the darling of journal topics. But what exactly is innovation? What is it for? My sense is that many occasions blur together **competitive innovation** and **cooperative innovation**. If we take innovation to mean "creating something from nothing," we can actually break that down further: something that did not exist in the world and now does; something the enemy had and I did not, and now I have it too.

Going back to the origin of innovation theory, we first run into **entrepreneurship**. From the start, the word innovation was bound up with inventors, entrepreneurs, and scientists. Our intuition is that **innovation means completing a creation from nothing**: releasing a new product, leading a new industry, discovering a new law.

But the actors in innovation are far more numerous than that. Let's take them one by one.

## Who Innovates

### Innovation by Theoretical Scientists

Is science invention or discovery? What about mathematics? And the social sciences?

Theoretical innovation does not lie in the object of study itself. What theorists create from nothing is, at bottom, **the perspectives and frameworks for understanding regularities**. Creating from nothing has nothing to do with being right or wrong. Geocentrism once had an extremely elegant, highly self-consistent theoretical system, and in that era the concept of the ellipse had not yet been born, so heliocentrism was actually very crude. You cannot dismiss the mathematical tools born from that "wrong" object just because geocentrism was wrong.

Theoretical innovation happens in the viewpoint and means of observation, in the way we understand things, not in whether the object of observation is correct. The quarrel between Western economics and political economy over negating each other's object of observation is just kids scrapping.

A common route for social-science papers is to take a theory and find different applications. The proposition that "childhood experience shapes adult decisions" can be extended to [officials who lived through famine being more inclined to spend money in bursts](https://www.sciencedirect.com/science/article/pii/S0304387824001056), and to [officials who lived through heat waves caring more about climate issues](https://www.sciencedirect.com/science/article/abs/pii/S0095069626000793). Conversely, you can find the same structural constraint across different fields. Economics is the science of choice, and we can rarely have it both ways. Monetary policy has its impossible trinity, and the Phillips curve makes us weigh inflation against unemployment again and again.

The essence of theoretical innovation is, in the end, redefining the "lens" through which we understand the world. The scale of an innovation depends on how large the lens is that it challenges.

To overturn a specific model or formula, you only need to question its assumptions and parameters. To overturn a mature economic theory, you need enough historical contexts to refute it. To overturn a discipline's basic paradigm, you have to shake the default assumptions of the entire academic community. The larger the lens, the harder the argument, and the easier it is to slide into vagueness.

For any given question, we need to know what scale we actually want to interrogate. A lot of people nowadays trace every gender issue back to the patriarchal system. Even if that is true, we can say that physiological structure, patriarchal society, historical evolution, and the wage gap are all bound up in one logical chain, and every entry point can be defended. So which one should we choose? Whichever link is more workable in reality.

Many people jump straight to asking "has anyone done this before?" without asking the other question: how large a lens is this new idea trying to challenge, and at which link of the chain does the conclusion intend to take effect? If you only care about extending a conclusion from nothing, then swapping a dataset or a scenario is innovation. If you care about a larger level and more logical chains, innovation becomes an endless pursuit.

I think the contingency of domestic peer review lies in the fact that journals and reviewers do not share a unified standard. Journals at different levels ought to pursue questions at different levels.

Journals have their standards and reviewers have theirs. Since journals rely on star authors' submissions to raise their own standing, in practice the reviewers' standards usually override the journals'.

### Innovation by Entrepreneurs

Entrepreneurial innovation is more concrete and closer to the public's image of a "feat from nothing." Unless you fold the entire evolution of life from carbon to silicon into a natural process, a computer cannot appear out of thin air. But does that count as innovation?

Professor Zhang Weiying once lamented that most people in modern society choose civil-service exams rather than innovation and entrepreneurship. Without entrepreneurs, development hits a bottleneck.

But for an entrepreneur, is innovation only innovation in product form? What about assembly-line management systems? Or the organizational form of equity investment? I once heard two teachers argue. Teacher Y argued that as long as China still has companies like Xiaomi and Pinduoduo, there is no real soil for innovation. They only play tricks in logistics management and chase cost compression, and they have not brought anything essentially new to the world. Once you can profit easily by integrating the logistics chain, who still has the incentive to create something new? In Teacher Y's view, logistics-chain management innovation is mere imitation, not innovation.

But those two positions point at two different levels of innovation.

**The first is cooperative innovation.** Let the countries with better conditions for innovation innovate, and the countries with cheaper labor manufacture. With each country dividing work and cooperating, as a community with a shared future for mankind, the welfare of the earth as a whole must rise.

**The second is competitive innovation.** In this scenario, innovation can be a lose-lose outcome, competition in a game-theoretic setting.

In the game between political actors, China's technological progress threatens the position the US currently holds in the global division of labor, hence the friction. The innovation China seeks is the autonomous, adversarial innovation of great-power competition. **The "from nothing" here is not from nothing in the world; it is from nothing relative to the US, relative to home.** The US has it, China does not, and now China does.

In that process, welfare for the earth as a whole definitely falls, while China's welfare rises somewhat along with its technological progress.

Back to the teachers' example. The mobile-phone manufacturing industry is a whole, but the individual manufacturers are competing actors. The "from nothing" Teacher Y talks about assumes the mobile-phone industry as a whole: cooperative innovation, welfare innovation from not existing to existing. Xiaomi and Pinduoduo, by contrast, are competitive innovation: integrating advantages or imitating technology when competing actors exist.

Cooperative innovation is good for everyone, but the game-theoretic background of the actors pushes everyone toward competitive innovation. Phone and e-commerce decisions are just a microcosm of great-power competition.

## Unifying Innovation

So the transition from competitive innovation to cooperative innovation hinges on whether competition exists among the actors.

Within a country, or across countries, if there is a higher-level organization to coordinate the division of labor, then the leap from competitive to cooperative innovation becomes possible. The crux is how strong the control of that higher-level actor is. At that point the problem becomes one of asymmetric information and incomplete contracts, such as central-local contradictions.

China's central government, for example, can coordinate the positioning and division of labor of each province and concentrate resources on major undertakings. But each province also has its own little calculations. Local fragmentation and local protectionism are closely tied to central-local issues.

So both kinds of innovation are outcomes of market structure. For efficiency in economic analysis:

First, cooperative innovation is the first-best choice, but it is constrained by the competitive relations among the actors, so it requires strong government intervention.

Second, cooperative innovation implicitly assumes that as long as the division of labor is right, the actors with innovation advantages will throw themselves fully into innovation. But reality lacks that incentive by nature. An environment of competitive innovation, by contrast, is good at incentivizing rivals to innovate.

Third, putting the two together, a real leap may need two conditions. One, a strong government able to adjust the division of labor and promote cooperation. Two, and at the same time, enough incentive for the innovating actors to genuinely invest in innovation, whether through heavy government subsidies or a large enough market incentive (including market profits and the property-rights system).