The process of
innovation has never been studied thoroughly - nor are the effects of
innovation fully understood.
In a new tome titled "The Free-Market Innovation Machine", William
Baumol of Princeton University claims that only capitalism guarantees
growth through a steady flow of innovation:
"... Innovative activity-which in other types of economy is fortuitous
and optional-becomes mandatory, a life-and-death matter for the firm."
Capitalism makes sure that innovators are rewarded for their time and
skills. Property rights are enshrined in enforceable contracts.
In non-capitalist societies, people are busy inventing ways to survive
or circumvent the system, create monopolies, or engage in crime.
But Baumol fails to sufficiently account for the different levels of
innovation in capitalistic countries. Why are inventors in America more
productive than their French or British counterparts - at least judging
by the number of patents they get issued?
Perhaps because oligopolies are more common in the US than they are
elsewhere. Baumol suggests that oligopolies use their excess rent -
i.e., profits which exceed perfect competition takings - to innovate
and thus to differentiate their products.
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