Economic studies of innovation are relevant to the mental health sector, not just for innovations in more conventional industries, such as telecommunications. We present an economic examination of the impact of an innovation in the mental health sector. The innovation examined here was first adopted in 1980 with the publication of a new edition of the nosology (or classification) for the diagnosis of mental illnesses and disorders, which is known familiarly as the

. In our analysis, we incorporate the impact of that innovation, and another major force relevant to psychiatric diagnosis during that time period, i.e. a trend in the West towards the medicalisation of normal sorrows. This is now a documented phenomenon. By using conventional price–quantity space and focussing attention on the quantity outcome, we are able to consider the impact of these concurrent forces on the false positive rate in the diagnosis of mental illnesses in the West and on efficacious diagnostic practice in this sector. Diagnostic efficacy is relevant to treatment, but it is relevant also to resource allocation in the mental health sector. Our analysis highlights the vital place of innovation in diagnostic practices, and the funding of this, in the mental health sector.