INNOVATION OCCURS WHEN MARKET FORCES ARE ABSENT

Socialist systems have silently been innovating while capitalist systems have been tinkering and taking both credit and profit for these innovations.

Socialist/Capitalist systems refer to a particular sector in the economy, example: the defense sector might have a Socialist system,i.e. it is insulated from market competition although other sectors of the economy might be Capitalist. Each system has its own value and an economy formed with a correct mix of systems is likely to be more successful than one that relies heavily on a Capitalist system.

Socialist systems are simply unbeatable when it comes to innovation. Looking at two examples of socialist systems — Universities and Government funded research labs; we find that most of the new ideas which transformed society have originated at places insulated from market competition. Universities (at least the established ones) rarely face pricing pressure and university employees do not experience the same level of job uncertainty as workers in a capitalist system. Government funded research labs would fall into the same category, secure jobs and zero market pressure. Yet the level innovation from these socialist systems is greater than capitalist systems by several orders of magnitude. Nearly every breakthrough in science/technology in the 20th century originated from these systems.

Edmund Phelps (wsj.com, 10/18/2006), writes about capitalist systems producing new commercial products like semiconductor chips, internet browsers, television etc. which transformed society. What he does not mention is that the breakthrough which enabled these new products came from a socialist set up. Its easy for the public to forget where innovation really took place when corporations begin to take credit for churning out new products. How many people remember Stanford University when they hear about Intel’s Centrino Duo or recollect the University of Helsinki when they work with Linux? Corporations have managed to do very little original work and yet they claim to be founts of innovation. Phelps also says that jobs have become more interesting as a result of innovations by corporations and due to dynamic capitalism. However most corporations have only tinkered with innovations and made them more accessible to the common man. So jobs may have become a tad more interesting but the credit should go to those who innovated not those who marketed them.

Capitalist systems are good at delivering products/services to people and creating wealth. This is probably their best and worst point; they efficiently deliver products/services only when profit is guaranteed. They are thoroughly averse to taking risk or indulging in charity. Despite recent concerns about value to society, corporations still exist primarily to create wealth and not to innovate.

What then explains the spectacular failure of innovation in socialist economies? The simple reason is the lack of wealth, i.e. they did not have the resources needed to innovate. Indeed whenever a socialist economy has received funding, innovations have sprung forth quickly. One example would be the well funded Soviet space programs during the 70’s. The mistake these economies made was not having a correct mix of systems, i.e. they did not use capitalist systems to deliver products or create wealth. They overemphasized Socialist systems, failed to create wealth and provide adequate resources to their centers of innovation. The Chinese seemed to have learned from this example. Their delivery systems are mainly capitalist but their Universities, research labs and other centers of innovation are still socialist. We can therefore predict a large increase in innovation from China within a few years. India seems to have taken a different path and is trying to introduce a capitalist system for innovation. We can thus expect to see several tinkered products and technologies but no real innovation.