In order to figure out the main contributor to the long term economic growth and prosperity, one at least partially has to focus on answering a simple question, what comes first supply or demand. And unlike claims by some well known experts that stimulating the demand is the key to all answers in the economics ( Keynesians are so going to hate me ) the answer is possibly NEITHER.
In order to illustrate that neither comes first, let us step back a little and think with the regards of historic perspective. In the XIV century the three Italian city states have become the greatest merchant outposts and maritime powers. Surely, they would dream to have ships capable of approaching or exceeding those powered by sail when no wind is present. One could articulate that given those states had access to an applicable technology, there would be a huge demand and monetary means available to implement it (steam engine.) However no matter the resources and money those ships weren't available and no degree of demand could inspire the production of those, only innovation could. Absolutely the same argument could be applied towards the supply.
And almost everywhere in the history the coming of the age of technology that lead to increase in prosperity and LONG TERM economic development starts with innovation rather artificial attempts to boost ether supply or demand.
So why there are so many economists emphasizing the ability of government to push the demand as the best and main tool to enhance economic growth? Why even those economic models that were acknowledged by Noble prize as to highlight the role of innovation as the main source of sustainable economic growth (Solow's Model *) are not accepted or mentioned widely in public?
The answer is simple and could be predicted by the Game Theory - lack of social & financial incentives. It is rather inconvenient for a government to proclaim, it's quite possible there is nothing we can do. It is much more practical for political reasons to highlight the leadership and proclaim that step that were undertaken are the result of economic improvement and proclaim the victory. So there is a political incentive to reward those in economics that rationalized that certain tools should be used by the government to battle the recessions. As the result those practicing similar views are invited to conferences, government sponsored events and get much wider circulation than those in opposition. Eventually such believes become dogmatic and despite their limited success when all costs are calculated they are deemed as practical and workable. And finally since economy usually eventually recovers, those mainstream (Keynesian) practitioners are only too happy to take credit without any admission that costs of the government intervention (not too mention their inefficiency) might be problematic down the road.
So what is the best government policy to implement the LONG TERM economic growth? Well, it surely isn't the demand masturbation. The best policy is probably to be aware of the nature of business cycle, government limitations and flexibility when considering any economic model. Since our society is constantly changing, it only makes sense for our economic models to be flexible and not to be taken as absolute truth. Besides a honest and serious cost benefit analysis of any policy and taking into account a historic perspective could never hurt.
Finally, it is time to acknowledge the role of innovation in the economic progress and study factors that could contribute to innovation rather than omitting the subject because of its subjective nature. Ironically, the main driver for innovation might be a view within the society that innovators and entrepreneurs are cool. Promoting the view that innovation is cool could be rather cheap and damn, those people more than most well deserve our attention and respect.
* Solow's Model of Economic Growth
http://en.wikipedia.org/wiki/Exogenous_growth_model
Unfortunately, most do not focus on the obvious conclusion, that when it comes to economic growth, the innovations runs the show.
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