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Economic development, innovation, decision analysis and locational state theory

This article explains how locational state theory has changed the nature of common economic measures into essential representations of significance to the ability of constituents to exercise their pursuit of objectives within these measures. This has an important impact in aligning constitutional questions of opportunity and freedom with economics and economic policy making. The equally important "opening" resulting from this revelation is that this provides a more transparent relationship between human 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 identifying courses of action that raise the probability that the outcome will be successful.

The relationship between economic development, innovation and decision analysis and the central role of constituents in advancing this process is an important example of the validity of the analysis provided by locational state theory.

Locational-state theory not only extends the role of decision analysis it also extends the relevance of constitutional economic analysis and public choice.

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 first of all acquire knowledge and, secondly, to become increasingly proficient in applying it.
MGPF representation of learning curve impact on productivity

  Explicit knowledge is our basis for communication and expression in the form of language, symbols, code, images, sound, music and the foundation for communicating, explaining and teaching and the creation of records used for reference and to pass such knowledge to future generations.

Tacit knowledge is the acquisition of practical competence in applying a specific practical task. This builds up increasing level of skill in a procedure of technique adjustments which results in tasks taking less time, often becoming simpler, involving less waste as a result of fewer mistakes and a reducing in resources required. This process follows a learning curve whose progress can be quantified (measured) generating useful information in the form of explicit knowledge. 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.

The accumulation of tacit knowledge is marked by a better appreciation of what aspects of explicit knowledge or theory are relevant to the task in hand and as a result this helps identify frontiers where knowledge is lacking as well as refining the individual appreciation of what aspects of theory are important. This is the process leading to the changes both in theoretical perspectives as well as what gives rise to economic growth.

The interesting factor here is that some theoretical concepts that are discarded are the result of tacit knowledge and a practical appreciation derived from simplifying processes as opposed to a conscious logical analysis of the theory.

The individual constituent and learning
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 are changed in a specific location for the first time.

Locational state theory deals with space-time dimensions of all phenomena. The introduction of the measurement of time to the activities of constituents transforms the understanding of the significance of common economic measures such as income or real income. Assuming the objective of society is to moderate hours of work, leisure and rest times to something like 8 hours each over a 24 hour daily cycle. The constituent will often be paid in work according to time spent on the job. The income received will be used during the constituent's leisure and rest time. However, many of a constituent's activities are not exchanged for money but, rather, the only cost is the dedication of their time to some activity, including learning. As a result, depending upon the culture of each individual and range of interests, the real income of that individual will encompass a range of activities, including reflection and thinking about issues of interest and exchanges of information with other people. Therefore, the measurement of the real income of each person cannot be represented by dividing their nominal incomes by unit prices of baskets of goods and services that are purchased, simply because much in the basket of each individual, does not have a price tag. The price paid on each of these "items" is the opportunity cost of the individual's time.

Time and freedom of choice.

This analysis can be extended to include the significance of freedom of choice and how each individual can expand opportunities within their own real income domain. Through the acquisition of knowledge and practicing some, tasks which might be useful in work, or as a preparation for improving self-acquired capabilities, individuals can allocated their
MFPF representation of machine operating life and maintenance

time to those activities which expand the number of options they have in performing better at work and hopefully gain some form of advancement, such as increased income or they can look for a source on income where their newly developed capabilities can receive a better compensation. Today, with the web-based flow of information and knowledge, this form of learning is available at ever diminishing costs. Incrementally, individuals who dedicated their time to this form of knowledge acquisition end up with greater freedom of choice of options.


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”, 257 pp, W. W. Norton & Co Inc., 1968). Indeed, the process of diffusion of innovation is not one that is introducing anything that is 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 the "technology transfer process" and 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. However, the initial spark, leading to innovation, is of course, receiving information about a process or technology which can be used on an individual basis as well as in work.

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. Decision analysis is as important to individuals as it is to large logistics operations and corporation investment decisions.

Locational state theory

Locational-state theory gained its first impulse as a result of a concern with the advent of global networks and the risks associated with unreliable information. Clearly, in terms of individuals advancing their acquisition of useful knowledge, all information used to acquire this state of affairs, needs to be truthful, reliable and up-to-date. The same is true for large corporations weighing up decisions of investment options involving considerable sums of money.

Locational state theory states that multi-component systems, 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. This is a statement of the evolutionary principles 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 usually because the rate of change does not fall within the capability of humans to sense and observe, unaided, such change, for example in the case of 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 span and life stages each with distinct physical forms and activities (e.g. reproduction) or the growth of plants, crops and livestock.

As far as the individual is concerned, locational-state is as much concerned with each individual's internal development and identification of options for pursuing desired objectives. The critical point is that time is required to assimilate and at each point in time to decide what the next activity should be to accumulate sufficient certainty to be in a position to select options that are not exposed to unacceptable risk.

Innovation is about practical action which arises from the identification of feasible options

Freedom of choice and action on the part of individual and corporations arise from the careful deliberation over possibilities and what are identified as the means of achieving preferred options. Economic development, at the national level, is the aggregate of changes in technology and the associated real incomes of individual constituents and this general advance only occurs as the result of innovation which, by definition, has a locational-state perspective as well as a practical and applied connotation. All of this contains a critical time component required to assimilate and decide. Locational State Theory remains a convenient explanation of the dynamics of the interacting forces involved both on the part of individual's objectives and corporate decision making, learning and technological evolution. The more individuals and managers exercise their freedom of choice in a practical fashion the more able they are to apply decision analysis methods to take rational decisions on the direction that innovation should take place.

An important conclusion is that individual objectives and the exercise of freedoms remain complementary to the exercise of freedom of choice of managers as long as the importance of freedom to assimilate and innovate is understood to be provided by both sides of this equation to a mutual benefit.

Constitutional economics

Constitutional economics is concerned with the shaping of constitutions and laws to balance the particular interests of the state, all constituents and the individual based on a mutually agreed set of codes of behaviour deemed to be acceptable to all. Almost by default this involves a process of public choice to decide on policies that uphold a basic tenet that the freedom of each individual to pursue their objectives should not prevent the freedom of others to pursue theirs. Thus the dynamic of economic activity should not result in prejudice to anyone either as a result of interpersonal, inter-group activities or policy framework impacts.

Economic growth

The spread of innovation through an economy is the driver of economic growth and the response of productivity to scale or time of deployment of new technologies and techniques follows the locational state laws both in terms of the shape of response curves to inputs in processes and in terms of the geographic spread over time. However productivity and the investment in innovation is most efficiently exercised through supply side economies made to save sufficient funds to invest founded on the explicit and tacit realization of the feasibility of the identified innovations based on experience. As a result investments based on this foundation of knowledge are more likely to be successful.