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The Free-Market Innovation Machine
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The Free-Market Innovation Machine

Analyzing the Growth Miracle of Capitalism

William J. Baumol
Princeton UP, 2002
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Editorial Rating

9

Qualities

  • Innovative

Recommendation

This book should certainly be on every businessperson’s reading list, and every legislator’s, and every student’s. It is a lucid, well-organized and admirably logical presentation of the role of innovation in capitalism, and the role of capitalism in innovation. Author William J. Baumol accomplishes something rare indeed by spanning the chasm between quantitative and qualitative economic writing. He has the verbal skill to write clearly and accessibly, explaining his points in plain if elevated and austere language, and illustrating them with interesting historical examples. His rigorous mathematical demonstration would satisfy the most demanding academic economist. Baumol’s insight that capitalism’s great achievement is to make innovation routine distinguishes this book from others on innovation, entrepreneurship and creativity. Although the lone inventor matters, ancient Rome and China had lone inventors and yet those empires did not produce economic growth on the scale that capitalism has produced it. Capitalism is distinctly productive because it makes innovation a self-sustaining and indispensable phenomenon, driving and driven by competition. getAbstract.com finds this intriguing thesis well worth serious consideration.

Summary

Capitalism and Innovation

In 1847, Karl Marx and Friedrich Engels wrote:

"The Bourgeoisie [ i.e. capitalism] cannot exist without constantly revolutionizing the instruments of production...Conservation of the old modes of production in unaltered form was, on the contrary, the first condition of existence for all earlier industrial classes...The bourgeoisie, during its rule of scarcely one hundred years, has created more massive and more colossal productive forces than have all preceding generations together."

Ironic though it may be, Marx was one of the very few economic analysts to see that innovation is the central, defining feature of capitalism. Capitalism is a machine that produces economic growth, and its fuel is innovation. Under capitalism, firms decide to invest in innovation as they decide to invest in any other alternative use of capital. Innovation is routine, and its very nature as a routine makes capitalism so stupendously productive.

The ancient Chinese had gunpowder, paper and movable type. Yet they never turned these inventions into a platform for economic growth and productivity. The ancient Romans had the steam engine; they used it to...

About the Author

William J. Baumol is Senior Research Economist and Professor of Economics Emeritus at Princeton University and Professor of Economics at New York University. His books include Microeconomics, Superfairness and Entrepreneurship, Management and the Structure of Payoffs.

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