The Process of an Innovation Cycle

An economic theory of the process of diffusion of innovations is developed and illustrated. In the theory, adoption is determined by comparative advantage considerations. An innovation is first adopted by skilled and experimenting entrepreneurs and then “diffuses” down the skills scale. If the innovation affects supply substantially, prices may decline, profits eliminated, and early, skilled (and high labor opportunity cost) producers may exit from the affected line of production—hence, an “innovation cycle.” The theory implies that technological change is affected by the distribution as well as by the average level of skills.