William J Baumols Sideward Step: Routinised Innovation and the

Limits of Capitalist Growth

In this essay I will outline the strengths and limitations of William J
Baumols seminal work The Free-Market Innovation Machine: Analyzing
the Growth Miracle of Capitalism. Due to the length of this essay I can
only pay particular attention to Baumols notion of routinised innovation,
and whether the free market guarantees what he labels productive
entrepreneurship.
Baumol challenges us to rethink capitalist growth and the innovation
regime. In doing so, he accepts Karl Marxs challenge to lift our minds to
a point at which it is possible to understand that capitalism is at one and the
same time the best thing that has ever happened to the human race, and the
worst." (Jameson, 1991) However he only meets that challenge partially.
While Baumol does not shy away from mentioning the inequities,
inefficiencies and injustices of capitalism he remains deeply steeped in
neoclassical (Hayek, Friedman) and evolutionary economics (Schumpeter).
In brief, Baumol argues that capitalism main tour de force is the creation,
application and diffusion of innovations. Unlike any other mode of
production capitalism generates a surplus which can be reinvested into
research and development, and innovation (Baumol, 2002:13). For all its
evils, capitalism also creates the necessary conditions which render
uncertainty obsolete. Hereby, he particularly focuses on the role of
capitalist institutions such as the rule of law and the free market
(oligopolistic competition) and the way they effect routinization of
innovation, productive entrepreneurship and technology selling and trading.
While capitalism might be great in creating the conditions for innovation,
Baumol argues that its theorists do not account for it in their models and
theorems of firms and prices(Baumol, 2002: 9).
Baumol uses the computer industry as an example in which firms no longer
compete over price but employ innovation as a prime competitive
weapon (2002:4) in oligopolistic markets. This intellectual shift has
radical implications for even the most efficient firms: these might be driven
out of business by innovating competitors who have less efficient value
chain. This claim remains disputable as undercutting competitors prices
remains common practice as exemplified by acer. Even in the games
consoles market in which Microsoft, Sony and Nintendo are oligopolistic
competitors, innovation and price competition intertwine rather than
replace one another (rf. Derdenger, 2010). Would it not be possible to view
innovations as a variable which drives down prices in mature product
markets such as computing? This is precisely what Baumol does when he
emphasises incremental innovation over radical innovations which render
existing products more desirable or makes them cheaper to produce.

While the history of capitalism is synonymous with male inventors from
Thomas Edison through to Bill Gates, Baumol focuses our attention on the
arms race in R&D and firms unrelenting investment into innovation
(Baumol, 2002: 45). Hence, Baumol replaces the entrepreneur-inventor in
his parents garage as the driver of capitalism with a systematized
innovation regime which eliminates the uncertainties associated with
inventions (rf. Baumol, 2002:4). In doing so, it allows Baumol to introduce
innovation as an integral component into micro-economic theory which is
tantamount to other types of investment (rf. Baumol, 2002:8). This
routinization creates an environment in which entrepreneurial discovery is
more likely. However it is questionable whether bureaucratized R&D
systems have displaced disruptive entrepreneurship. Looking at a previous
era of capitalism, this raises a further question: Are firms innovation
regimes only a step sideward from the former bureaucratic-statist
innovation systems of the USSR and the USA as the surplus is now
commanded by oligopolistic (private) firms rather than oligopolistic
states?

A partial answer to this question lies in the role Baumol assigns to the free
market and the rule of law as capitalist institutions which supposedly
guarantee productive entrepreneurship, technological diffusion and
spillovers, and safeguard against creative rent-seeking and criminal
activities (rf. Baumol, 2002:2,5). While spillovers do have substantial
positive effects on the rate of innovation and growth he does not account
for the downward pressure on profitability as competitors adopt the same
technologies (rf. Brenner 2005; McNally 2010). Bearing that in mind, it
might be argued that creative rent-seeking vis--vis financialisation,
patenting etc. have countervailed declining growth rates in recent years -
rather than firms routinized innovation systems. This ultimately
undermines the argument that a freer market is the precondition for more
growth and innovation given the long capitalist boom (1946 -1973)
premised itself on state intervention and regulation.

In conclusion, Baumol makes a unique theoretical contribution to
neoclassical economics insofar that he is able to account for routinized
innovation in producing capitalist growth. While the dynamic efficiency he
observes in capitalism reaches beyond the latter theory, he is not able to
transcend its free market dogmatism which remains a temporal-contingent
phenomenon rather than a scientific fact. Arguably firms routinized R&D
is only sidestep which, in fact, might only contribute to incremental
innovation if perhaps even creative rent-seeking.

ENDS - Word Count 799
Bibliography

Baumol, William J. (2002) The Free-Market Innovation Machine:
Analyzing the Growth Miracle of Capitalism, Princeton University Press
Brenner, Robert (2005) The Economics of Global Turbulence, Verso
Derdenger, Timothy (2010) Technological Tying and the Intensity of Price
Competition: An Empirical Analysis of the Video Game Industry, source:
http://www.contrib.andrew.cmu.edu/~derdenge/TechnologicalTying.pdf
(accessed 11/02/2014)
Jameson, Frederic (1991) Postmodernism or the Logic of Late Capitalism,
Verso
McNally, David (2010) Global Slump: The Economics of Crisis and
Resistance, PM Press
Schumpeter, Joseph A. (1994) Capitalism, Socialism & Democracy,
Routledge