Capitalism is Incapable of Supporting Fundamental Innovation

I am going to make a claim, and let readers attempt to disprove me.

Capitalism in the absence of state oversight, support and handouts is incapable of fundamental innovation- technological or otherwise.

Capitalism, like mercantilism, is a zero sum game whose very nature and beliefs are incapable and incompatible with fostering anything other than grab-and-run type social systems. Not only does unregulated capitalism hinder attempts at progress but it also creates a society where high levels of distrust make large-scale efforts to do anything next to impossible.

Capitalism, in the western sense, worked only because it was balanced out by governments, unions, religion and tempered by wars. Left to its own devices, capitalism will consume itself and leave a broken, poor and distrustful society- all without anything to show for progress or innovation.

Comments?

  1. P.T. Barnum
    December 18, 2010 at 6:24 pm

    Intel has just innovated it’s “rent-a-chip” concept. They still own and control the chip, you just rent it till they decide you don’t.

    http://antitheft.intel.com/Libraries/Documents/Intel_R_Anti-Theft_Technology_-_Technology_Brief.sflb.ashx

    They just don’t bother to tell you that.

    For example, if Windows decides you are a potty mouth, Intel can shut down your computer remotely. If the record industry decides that you are stealing music, then intel can shut down your computer remotely.

    And many other EXCITING technological innovations!

    This will be fun until one alienated youth decides it would be cool to “shut the system down”.

    Then it will no longer be cool. Well, some would argue that is when it will GET COOL, but heh, it’s all a matter of perspective

    Slightly more “readable” explanation.

    http://www.techspot.com/news/41643-intels-sandy-bridge-processors-have-a-remote-kill-switch.html

    Could you please combine my posts. This kind of BS ticks me off.

    —-

    I posted that on my facebook page a few minutes before your first post. I can see amazing potential for lawsuits and damages due to hacking or overzealous “honest” officials.

  2. Lao
    December 18, 2010 at 10:30 pm

    Incapable of technological innovation?

    The mapping of DNA?
    Going to the Moon?
    Computers?
    What about the incredible advances in medicine?

    All those examples were REQUISITIONED and FUNDED by the government.

    No, I think you’re wrong in that

    But I think that as things stand “Today”, your thoughts that capitalism will consume itself and leave a broken, poor and distrustful society are absolutely right

  3. Nestorius
    December 19, 2010 at 3:34 am

    Isn’t capitalism a subset of mercantilism?

    A company by definition is a company or association of merchants where each had a share. Companies of this sort existed before the 19th centuries throughout all human history. Companies or individual merchants make money by selling. So there is no difference between capitalism and mercantilism.

  4. December 19, 2010 at 5:32 am

    Your premise that capitalism is a zero-sum game is fundamentally flawed. On the contrary, the very base of capitalism is the idea that two parties exchange something (goods, services, money, …) so that they both feel that they are better off afterwards—a win–win deal.

    • Matt
      December 19, 2010 at 6:00 am

      Actually what you are talking about is the free market. Capitalism rapidly becomes extremely anti-free market. A well known example is Wal-Mart moving into an area and driving local businesses out of business. Too much capital concentrated in one place gives that business the ability to destroy competitors.

      Still, I think there has been quite a bit of innovation in the past, it’s only in the last 15 or so years that the culture (mainly fostered by business schools) has become one of only caring about short term profits and immediate stock prices. In the 1960s, engineers and scientists were well reguarded. Now they are just objects of derision and the business school graduates are making decisions with absolutely no know actual knowledge of the problem domain.

      • w
        December 19, 2010 at 7:15 am

        lots of good points here. you’re not the same matt from the other post are you? just sayin.

      • December 19, 2010 at 7:30 am

        I am not certain that I agree here—and even if I did, capitalism and the free market are conceptually sufficiently closely related that it need not matter. However, to make sure that we are on the same page, could you give your definitions for “capitalism” and “free market” as far as this discussion is concerned?

  5. w
    December 19, 2010 at 7:14 am

    the post is perfect and succinct. can’t argue with it.

  6. Ray Manta
    December 19, 2010 at 8:20 am

    Matt wrote:
    Actually what you are talking about is the free market. Capitalism rapidly becomes extremely anti-free market. A well known example is Wal-Mart moving into an area and driving local businesses out of business. Too much capital concentrated in one place gives that business the ability to destroy competitors.

    That’s the problem I have with a lot of the libertarian and Randian types. They have a habit of becoming apologists to pathological corporate behavior. Walmart’s undercutting of Mom-and-Pop businesses is one example; another is the outrageous executive compensation packages we’ve seen.

    • December 19, 2010 at 9:21 am

      This depends on how it is done. There is nothing anti-“free market” in beating the competition fairly—even if other business lose out.

      Communism and Fascism also work well.. IN THEORY.

      In contrast, executive compensation is a good example of where neither the free market nor capitalism works, because we end up with a “you give me a raise (with someone elses money) and in return I give you a raise”.

      As an aside, there are a number of issues were I, personally, am in favour of regulation, e.g. concerning reductions in “moral hazard” (one of the issues behind e.g. executive compensation) or moving the cost of externalities to those who cause them.

      • Ray Manta
        December 19, 2010 at 3:21 pm

        michaeleriksson wrote:
        This depends on how it is done. There is nothing anti-“free market” in beating the competition fairly—even if other business lose out.

        Of course not, but with Walmart fairness isn’t even in the picture. Its size and political clout in the US gives it an almost insuperable advantage.

        In contrast, executive compensation is a good example of where neither the free market nor capitalism works, because we end up with a “you give me a raise (with someone elses money) and in return I give you a raise”.

        A statute that tied executive compensation to a fixed multiple of the lowest paid worker in the company might be a step in the right direction. The law would have to include contractors so that there’s no incentive to skirt it by firing full-time employees. And obviously it would also have to include total payout, not just base salary.

  7. JWRebel
    December 20, 2010 at 1:43 am

    Capitalism has not been defined:

    Free markets go back millenia, capitalism goes back a few centuries. Free markets are an ideal, not a social system. Even in ancient Egypt they had markets. Probably there were soon schmucks who made you pay “rent” to have a stall on the town square. Probaby didn’t take long before you had to pay protection money to keep your stall on the main corridor or the corners. There will always be a huge tug of war between free-markets and people who want a racket (protection, monopolization, “rent” on social wealth, etc) and unearned money.

    Capitalism is a system in which the economic surplus is re-invested in capital formation. This results — ideally — in a system in which the accumulation of capital goods (“progress”) enables society as a whole to have a higher standard of living (income). Karl Marx was a big fan of capitalism — read him. He just thought that it was illogical that the dividend over capital accumulation should accrue only to a single social class. Is the inherited social wealth (capital improvements and knowledge) bequeathed by our forefathers not the inheritance of society as a whole?

    In fact, Marx thought private hoarding of social wealth would stymy further progress. This conflict is still with us. What’s the better model?:
    – Academic research or proprietary Pharma?
    – Open source or Microsoft monopolization?

  8. marlon
    December 20, 2010 at 8:06 am

    In fact, Marx thought private hoarding of social wealth would stymy further progress. This conflict is still with us. What’s the better model?:
    – Academic research or proprietary Pharma?
    – Open source or Microsoft monopolization?

    Well, rebel you need both. And to limit the monopolistic tendencies inherent in capitalism, you need government. Doing away with laws that grant the corporation personhood would be a start. If a company starts an overseas branch like an octopus, perhaps we could rule that the foreign branch should be nationalised in x years.

  9. December 25, 2010 at 4:43 pm

    Hershey’s , JackDaniels, CottonGin by Ely Whitney
    most brands started out as an innovation of a product a very minor one and developed from there.

    Most if not all research is gov’t funded though I agree but on the fringes etc…

    Html was developed by one guy he coulda commercialized it but he decided to let it be free.

    Its about the individual not really a corporate monolith even Ford etc was more individualistic in beginning (from a founder driven perspective).

    Diesel Engine comes to mind was more or less developed for comercial/capitalistic purposes…

  10. DoesNotMatter
    December 28, 2010 at 9:59 am

    please define capitalism

  11. Ted
    January 2, 2011 at 2:08 pm

    The premise is fundamentally flawed. The current government inserts itself into every endeavor involving more than one person.

    The important word is “current”.

    As such, innovation is almost universally ILLEGAL without state oversight. As an example, Burt Rutan was by no means the first American to try to win the X-Prize. He was, however, the first to be granted permission by the government to launch a private rocket for that purpose. As with all the others, Rutan worked only with private money. That was a condition of the X-Prize.
    —-

    Rent-seekers run the government.

    However unregulated capitalism always creates rent-seeking monopolists or oligopolies.

    100 years ago, on the other hand, the Wright brothers created powered, heavier than air flight, with no interest from the government what so ever. It took them a few more years to even convince the army that it was possible.

    Your views on this subject are plainly those of a man with no experience in either manufacturing or the physical sciences. It’s almost universally accepted among the private engineering community that the state is a hindrance to their creativity, not a prerequisite for it.
    —-

    You are confusing governance with regulations and laws written by rent-seekers.

    I would, however, be interested in your impression of where innovation should come from.

  12. Ted
    January 2, 2011 at 4:08 pm

    No, it’s you who confuse capitalism with governance. One is an economic philosophy, and one is a tangible system of assigning authority.

    Theory is not reality- Look at how things work, not they should work.

    eg- Communism is not supposed to create totalitarian regimes, but it always does that in practice.

    It’s in the best interests of any business to get the state to require patronage. But business has no power to compel such legislation. If the bureaucrats refuse to accept the bribes, the business is forced to compete on it’s own merits. Of course, the bureaucrats rarely refuse. If they have the power to do so, or believe that they can usurp the required power, then a deal is usually made. The more power the state has, the more deals it can make. A state with no limits on it’s power can simply require that all property be turned over to whomever it makes a deal with. By that point, though, the state generally has no need to make deals with anyone, so said property simply reverts to the state, and ultimately the bureaucrats. Such is the case with any dictatorship.

    Businesses, however are not entrusted by citizens to run the country. And they have no power to compel the state to accept their bribes. It’s up the the bureaucrats, not the businesses, to serve the needs of society. But in every country on earth, ever, they’ve chosen their own interests over those of their constituents. I see the man offering a bribe as far less problematic than the man accepting it. In actual fact, if the bribe is refused, the former is entirely irrelevant.

    To expect a government to simply refuse to auction off it’s power, is to expect something that has never happened. So the only possible method to reduce rent-seeking, is to reduce the state’s powers to regulate citizens. This goes to your point about “current” governments. Past governments, particularly ours, weren’t any less corrupt. They simply had less power to sell. That’s why the Wright brothers not only could, but had to, work on their own. Today, the government’s power extends far enough to eliminate the competition for any business with which it’s made a deal. With such a threat constantly hanging over their heads, even businesses with no desire to purchase special protection, must do so merely to avoid being shut down.
    —-

    So why are third world countries so dysfunctional? They have very limited or non-existent governments.

    My experience is in manufacturing. It’s far from a secret that things like ISO certifications exist merely because large companies paid the government to keep small manufacturers small. A soul proprietorship machine shop, like the one I used to run, simply can’t attain ISO certification. It’s mathematically impossible without at least 2 people. (secondary verification, etc.) So, in addition to the costs of certification, (typically mid 5 figure range, up front) I’d have had to have hired an employee, which itself requires an expensive restructuring or the company. All of this is because the state claims authority to require it, and was willing to sell that power to existing large shops, to whom $50,000 for a certification is a minor operating expense. For a one man shop, $50,000 is a decent year’s profits.

    Is the solution to give the state still more power to sell? Or is it to get the state out of our affairs completely. The latter seems more productive.
    —-

    The solution is to destroy those who create and enforce unfair laws.

  13. Ted
    January 6, 2011 at 7:33 pm

    I have no idea what you’re trying to say, in your first comment. It’s the very ability to regulate which allows the rent-seekers to purchase said regulations. That’s NOT capitalism. That’s, at best, fascism. More realistically, it’s just plain extortion. If you want to define capitalism as being any and every self-interested action, then there’s astonishingly little that isn’t included. Even communism, it’s apparent polar opposite, (though I’d refute that claim) is nothing more than the have-nots trying to get what the haves have. How is that not capitalism?

    I have to say, though, that you’re fundamentally wrong about communism. By definition, it MUST be totalitarian. The only way it could be otherwise would be if Marx were correct, and the entire proletariat was identical and interchangeable. Because not all people are the same, some will always produce more than others. Communism requires that said excess production must be distributed, by whatever means necessary. Hence, totalitarianism.

    As to the second comment, there are two clear reasons why third world countries are dysfunctional. First, they lack consistency. Ever changing laws, random enforcement, and despotic fiats, are generally worse for business than even the most totalitarian systems.

    The second reason is the general deficiency of intelligence in third world countries. Blame the schools, blame diets, blame genetics, blame emigration, blame the aforementioned inconsistency, or any other problems you can think of. Regardless of the reasons, the simple fact is that third world countries have almost universally low scores on standardized tests. And those who are intelligent, tend to do whatever they can to leave those countries, exacerbating the problem further.

    How exactly does one “destroy those who create and enforce unfair laws” by handing them still more power? And how is that relevant to the topic you presented? (Capitalism is Incapable of Supporting Fundamental Innovation) I was trying to explain how it’s the state, not capitalism, which stifles innovation. Capitalism, in essence the desire to improve one’s own situation, is the driving force behind almost all innovation.

    I fully agree with the concept of your solution. But to expect the state to police itself, is to expect that which has never occurred. While there have been occasional, brief exceptions, all positions of power inevitably end up in the hands of the self interested. The only way to keep them from abusing that power is to give them no more than is necessary for the task at hand.

  1. January 5, 2011 at 3:37 pm

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