« On legacy ideas | Main | Using models »

December 03, 2015


Tim Worstall


Invention is done roughly equally well by state and market.

Innovation is done much better by market.

Please note, market, not capitalism.


Apple's innovation has been in better marketing, not better technology.


@ Tim - thanks. That distinction is crucial. I'm anti-capitalist in part BECAUSE I'm pro-market.
@ Neal - that's kind of the point. Apple's success has been in creating brand loyalty - a form of monopoly power that allows it to fight off the competition that normally bids down the profits from innovating (though this loyalty comes in large part from good design).

Dave Timoney

Baumol took a micro attitude towards innovation, seeing a marketplace of competitive firms routinising R&D as another production process, but in so doing he downplayed the macro considerations, such as institutionalised R&D (sponsored by the state through education and welfare/defence purchasing) and social factors, such as the cultural status accorded innovators. As something that springs primarily from human curiosity, innovation is fundamentally a social practice.

The free market, as a discovery mechanism, is efficient in discriminating between innovations, but as with any production process, outputs are determined by inputs, which brings us back to Chris's point #2 about capital, both financial and human. Patent reform and capital allowances can help, but a radical approach to maximising innovation would look more like a combination of state-sponsored R&D facilities in every neighbourhood (Libraries with knobs on) and a basic income.

Deviation From The Mean

We probably need some clear definition of innovation so we can clearly set it apart from repackaging and re-branding. And so we can better understanding what underpins it.

We also need to factor in opportunity cost, as for example, innovation in the military may be at the price of innovation in medicine or vice versa.

If I am set a task at work to solve a problem I am not asked to solve it by looking at another unrelated problem in the hope that by some fluke I come up with the solution to the problem I was set in the first place. But this is effectively how innovation works in capitalism as compared with socialism. As in all things capitalist there is a degree of anarchy. The question is does innovation require a degree of anarchy?

Returns on innovation diminish until the next 'big' discovery is made and then a new cycle of innovation takes place. These big 'discoveries' are often state led. So the state does the initial work and the capitalist reaps the rewards by applying that discovery to all sorts of things! Richard Branson has never invented a thing in his life.

Another question is how much innovation potential is there left? Has humanity reached the tipping point of innovation?

The challenge for socialists is to recreate this environment while getting rid of the entrepreneurs. Not beyond the task of humanity surely.

So the ultimate question, can we create a system that innovates better than capitalism? I would say most certainly yes.

Dave Timoney

@DFTM, "looking at another unrelated problem" is actually a well-established technique, often referred to as "technology transfer", but it's less about flukes than decomposing a problem by thinking about it in a wholly different context. You can think of it as structured serendipity.

Deviation From The Mean

"looking at another unrelated problem" is actually a well-established technique"

The question is would the innovation have been better if the problem had been looked at directly in the first place, rather than relying on structured serendipity?

The point is this: Socialism would look at the problem more directly and from this method some innovation may spill over into other areas as a by-product of that direct innovation, such is the law of ALL innovation under any system.

But capitalism has a different set of objectives and priorities, so effectively humanity reaps indirect rewards from innovation that was directed toward making money or retaining power.

*Though I am not writing off the immense dynamics of capitalism*

Peter K.

As Tony Atkinson has said, a strong safety net can help foment entrepreneurship, innovation and risk-talking.

Inequality leads to a vicious circle where the safety net and social insurance are pared down.

That is "capitalism." We need policies to fight that.

Dave Timoney

@DFTM, the oblique approach to innovation is not specific to either capitalism or socialism. It is actually a characteristic of human nature, famously embodied in the absent-minded professor.

The critique of central planning, in the context of innovation, is that it cannot know what might be of value to innovate because the demand/need may be latent. That is the premise behind the Steve Jobs quote: "people don't know what they want until you show it to them".

Of course, this excuses the creation of artificial demand - the belief that you need something because everyone else demands it - and the manipulation of need to suit current supply (if life deals you lemons, sell lemonade etc).

A market (however constructed) remains a useful mechanism for establishing demand because it does not presume what we need. But this does not mean that innovation is better served by a market, merely that a market is a useful mechanism for discrimination, which is only one part of the innovation process.


Socialism with an iPad is not socialism.
It accepts the neoliberal agenda, saying the problem is lack of investment.

It is Michael Burke's, a city economists view.

Like Balls, John McDonnell want's to balance the budget, while making modest capital investment.

Innovation needs excess resources, just as Google provides one day a week for staff personal projects.

As with many things it is trying to optomise and incentivised a particular action, especially in basic research.

Bonuses/Stack Ranking etc are both failed examples of this.

It is only collectively we can provide the slack resources, to allow innovation to occur.

Professor Mariana Mazzucato, not mentioned, who highlights that in the area of innovation like so many others the costs of innovation are undertaken by society, with the benefits been captured by capitalism, when the benefits have been identified.

A study identified the factor that determines who would be an entrepreneurs, as access to capital. (Who would have thunk it?).

The reason that people in the UK are wealthier than the third world is the infrastructure provided by society, not the myth of the rock star entrepreneurs.

And where would rock stars be without marketing and media?

http://www.effectuation.org/video/10-myths-entrepreneurship-university-stgallen (Video)

Having capital raises the ability to suffer acceptable losses. And society is best able to bare the risks.

Don't wait for the future, create it, is the message of the video.

Forbes quote of the day.
"We would accomplish many more things if we did not think of them as impossible."
C. Malesherbes


This sort of proves my point. How to make banks work:


Interest rates have to be low as to encourage capital development. It is far better to regulate banks on *what* they can lend. Otherwise in an era of declining returns your project may not get funded.

This is what MMT banking reforms goal is - capital development of the economy. And it does it via asset side disvlipine.

It's simple. You proscribe a list of valid purposes for a loan. Anything outside that list becomes unenforceable in court.

That leaves the courts to decide what fits and what doesn't fit the list. If they decide it doesn't fit, then it becomes a gift of shareholders funds.

Operate like that and I guarantee you that banks will become very keen on their due diligence - because the client just has to argue in court that the loan was 'ultra vires' to get a freebie.

So actually it's ridiculously easy to regulate the asset side.

"A study identified the factor that determines who would be an entrepreneurs, as access to capital. (Who would have thunk it?)."

That is one of the reasons for banking.

"Banking helps prevent the concentration of equity in society. If I want to start a business and the bank won't lend, then I have to find a rich person and sell them most of my business to get the money necessary to get it going. That turns me from an entrepreneur with ownership into an unpaid lackey dancing to the tune of the Vulture Capitalist class. As Felix Dennis puts it in How To Make Money"


The other thing is the State needs to take a more pro-active approach towards attacking rent-seeking.

You can get to that by increasing the heat of competition. Breaking up firms, requiring them to be smaller and there to be many more of them in any particular marketplace.

The natural capitalist approach is to eliminate competition using a variety of techniques – from market niche to oligopoly. The state should spend a lot of its time ‘stirring the pot’ to prevent this happening. And the indication that the pot needs stirring is price rises of any magnitude in any market. That means encouraging and even funding competitors, forcing IP to be shared, etc to break the market power.

This is also why the Job Guarantee is so important.

Switching to a bottom up system starts to move the income distribution curve back to where it should be and the production curve back to where it should be - dealing with needs firsts and then wants.

Wealth is redistributed because the rich suddenly have to start providing services for the poor if they want to earn the money.

Once you have a JG and the 'business confidence' bogeyman that Kalecki mentions is laid to rest then you can be far more aggressive pushing up the living wage. At the top end you give the Ministry of Competition real jack boots to stop oligopolies forming.

Businesses actually hate competition but of course they are supposed to be supporters of it. So you exploit that Janus issue to the full.

Wages are then controlled since excessive wage rises mean that some of the firms go bust and everybody loses their job – falling back to the Job Guarantee.

The level of competition considered ‘acceptable’ by regulators is too low. And that’s because of the ‘business confidence’ meme that scares them into inaction.

Donald A. Coffin

At least in the US, the declining commitment to education at all levels is also an issue, especially if we believe "...that innovation is best done when it is bottom-up and market-tested to satisfy people's needs..." As it has become ever-more difficult for people to afford to continue their educations and as political pressures have degraded elementary/secondary education, the number of people with the *human* capital (as well as access to the financial capital) to try to develop innovative methods/products may well have declined.





The government has a pretty good record in backing innovation: interchangeable parts, electricity, steel, computers, networks, explosives, plant & animal breeding, aviation, medicine, automobiles & trucks and I'm probably missing a few hundred others. Just as evolution is often driven by the duplication of genes creating redundancy and increasing the possible benefits of mutation, government waste and industrial policy create an economic space for real innovation. When all resources are being used at full efficiency in the pursuit of profit, innovation is impossible.

The comments to this entry are closed.

blogs I like

Blog powered by Typepad