This book is about the economics of innovation and knowledge. One of the major conclusions drawn is that the perspectives standard economics imposes on society are biased, incomplete and inadequate. The focus on rational choice, allocation of scarce resources and equilibrium only captures some dimensions of the modern economy, notably short-term and static ones. Alternative perspectives, in which the focus is on learning as an interactive process and on processes of innovation, give visibility and direct attention to other, at least equally important and more dynamic, dimensions.

Social science is about human action and interaction, and it differs from natural science in several respects. It does not have access to laboratories where it is possible to organize controlled experiments. In spite of this, standard economics has gone far in adopting criteria and ideals from natural science, more precisely ideals that originate from Newtonian physics. This is reflected in standard economists’ conception of equilibrium as an ideal reference state and their tendency to focus exclusively on quantitative relations, also paired with in its excessive use of mathematics.

In this book, I insist that economics should remain a social science while also taking into account the complexity of the strivings and hopes of human beings. People cannot be reduced to algorithms or automatons. The basic assumption about rational behaviour in economic models (in which individuals and firms act as if they know everything about the future) is absurd and leads to equally absurd conclusions and to dubious policy recommendations.

Taking a departure from more realistic assumptions about how and why people act as they do in society has implications for what constitutes a theory in social science. In social science, a theory should be regarded as a focusing device – no more and no less. This book presents two sets of theories or focusing devices – the innovation system and the learning economy – that differ from those used in standard economics. These alternative focusing devices help us to see the core institutions in the economy (such as the market, the competition regime, the firm, the law, etc.) in a different light than that cast by mainstream economic theory.