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How to Measure the Economic Value of Ideas

(Bloomberg Opinion) -- The dot-com bust was a conundrum for Joseph Davis, Vanguard Group's global chief economist and this week's guest on Masters in Business. Creativity drove the boom, but there was no good method for measuring innovation’s impact on productivity and the economy. 

Davis said an “ideas multiplier” turned out to be a better way to think about technology and growth. The concept, he said, captures more information than gross domestic product or trade statistics.

Davis and his team started by tracing the development of 2 million new ideas. New ideas ebb and flow, and the ratio of good to bad ideas has varied from about 40-to-1 in 1980 to 400-to-1 today.  Over the past decade, this leading economic indicator has foreshadowed productivity gains by four or five years. Davis has identified four fields today that have a higher idea multiplier than computers did in the 1990s during the tech boom: materials sciences, oncology, agriculture and plant sciences, and genetics.

Davis's favorite books are here; the transcript is here.

You can stream/download the full conversation, including the podcast extras on iTunesBloombergOvercast and Stitcher. Our earlier podcasts can all be found at iTunesStitcherOvercast and Bloomberg.

Next week, we speak with Neil Dwane, portfolio manager, and the global strategist with Allianz Global Investors, which manages almost $600 billion in assets.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Barry Ritholtz is a Bloomberg Opinion columnist. He founded Ritholtz Wealth Management and was chief executive and director of equity research at FusionIQ, a quantitative research firm. He is the author of “Bailout Nation.”

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