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Economic development, innovation, decision analysis and locational state theory
A Note

Economics Unit

This note is a short outline of how economic development results from learning and innovation. Innovation is defined to be a practical change in the way something is done for the first time in a specific location. The decisions that give rise to practical change are those best orientated by applying decision analysis as a basis for raising the probability that the outcome will be successful. The relationship between economic development, innovation and decision analysis is an important example of the validity of locational state theory.

Economic development

In 1962 Kenneth Arrow, the American Economist, published a paper entitled "The Economic Implications of Learning by Doing" (The review of Economic Studies, Vol 29, No 3, June 1962, pp. 155-173). In this paper he explained, based on empirical evidence that the main generator of economic development is learning resulting in beneficial change as a result of practical changes in the way things are done, or, as a result of innovation.

The process of learning however has two knowledge components which people use to acquire knowledge and to become proficient in applying it. Explicit knowledge is our basis for communication and expression in the form of language, symbols, code, images, sound, music and the foundation for communicating and teaching and production of records used to pass such knowledge into future generations. Tacit knowledge is the acquisition of practical competence in applying knowledge or skill in doing practical tasks. Tacit knowledge is refined as a result of practice a personal refinement in technique and the effect of the learning curve. So as a result of observation, learning, explicit and tacit knowledge people become adapt at perceiving the means of changing the way things are done through innovation. This is the process leading to the changes that give rise to economic growth.

Innovative ideas

Theoretical research that creates new concepts clearly change the way we think about a specific issue. Such ideas can be demonstrated to be new and therefore might be considered to be innovation. The advance of knowledge does indeed stimulate what is often referred to as "innovative thought" or "innovative ideas", but innovation, by definition, only occurs when the way things are done in practice and changed in a specific location for the first time.

The definition of innovation has not really changed for a long time. According to Edwin Mansfield innovation occurs when something is done in a new or different way in a specific location. Thus what is innovation in one location might not be considered to be innovation in another location. (Mansfield, E., “The Economics of Technological Change”, 257pp, W. W. Norton & Co Inc., 1968). Indeed, the process of diffusion of innovation is not one that is introducing anything that it strictly new but rather is introducing to new geographic locations information and know-how-do to apply the latest state-of-the-art which has been demonstrated elsewhere. This is part of the role of extension services. In these new frontiers, innovation only occurs if the newly introduced technology and techniques are taken up and applied.

Decision analysis

Decision analysis is an advanced set of methods and procedures designed to orientate decision-makers to take rational, effective and efficient decisions. However, in decision analysis a decision is defined as an irrevocable commitment of resources to do something to achieve defined objectives including new ways of achieving these objectives. (Matheson, J.E., Howard, R.A. “An Introduction to Decision Analysis”, Decision Analysis Group, SRI, 1968). An intent or the mental process that decides what decision to take or which model to apply is not in itself a decision because to that point in time there has been no commitment of resources to some action.

Locational state theory

Locational state theory states that multi-component system states, including inanimate and animate phenomena change in space time. More directly, the state of properties any object is a function of its current and past location in space and time (McNeill, H. W., "Introduction to Locational State Theory", SEEL, 1988). This is a statement of the evolutionary principle of change and adaptation or change and decay embodied in geological formations, ecosystems, the weather and in the genetic evolution of plants, animals and mankind. Where humans sense there is no change, this is because the rate of change does not fall within the capability of humans to sense and observe, unaided, such change, for example in geological erosion. On the other hand we can observe many changes with ease such as in the case of insects that have a very short life and life stages each with distinct physical forms and activities (e.g. reproduction) or the growth of crops and livestock.


Innovation is about practical action. Economic development only occurs as the result of innovation which by definition, has a locational state perspective as well as a practical and applied connotation. This is why decision analysis is one of the most effective methods of orientating decisions that are related directly to innovation. Locational State Theory remains a convenient explanation of the dynamics of the interacting forces involved.