It's pretty hard to see your own faults. You know that's true, don't you? We need others to act as a sounding board, and to make us aware of our personal quirks and faults. Likewise, it's pretty damn difficult to see the shortcomings of our current capitalist free market economy, especially when there are so many lies and misconceptions going around about it. So today we're going to tackle the myth that capitalism leads to innovation; the opposite is true, and here's why.
Image by thinkpublic - source: Flickr
First of all we need to define what capitalism is exactly; it's a system of production where the means of production are owned by one person or a small group of investors, shareholders or managers. These owners typically don't do any of the work needed to produce the goods or services; that's the rest of us, the employees. Without work it's impossible to create value; a tree doesn't turn in to a table or a chair by just staring at it. Since profit is a key feature of capitalism, this means that workers never get paid the same amount of value their labor ads to the end product; capitalism is therefore based on the exploitation of workers. Defenders of capitalism will now protest and claim that the exchange of work for pay is voluntary, and therefore can't be labeled "exploitation". They're wrong of course; we need money to exchange for food and a place to live, and we simply can't all be producing everything we need ourselves and we can't all be our own boss, so if we don't want to collectively return to prehistoric times, it'll always be the case that the vast majority of us will work at some larger production facility, like a factory, hospital or restaurant.
In short: capitalism is a system of production where private owners own the means of production and decide everything themselves. That's it. Now, where in this system is innovation stimulated? You've guessed it: nowhere. You've noticed that the "free market" is nowhere to be found in capitalism's definition; the notion that these markets are intrinsic to capitalism is one of modern times' biggest misconceptions. For an economy we need two components; a system of production AND a system of distribution. The markets are on the distribution side of this equation and therefore it's much more accurate to describe our current world economy as "free market capitalism" instead of just "capitalism". Believe it or not, there's also a system called dirigism, where the means of production are still privately owned, but the state does all economic planning:
Dirigisme or dirigism (from French diriger, meaning 'to direct') is an economic doctrine in which the state plays a strong directive role as opposed to a merely regulatory or non-interventionist role over a capitalist market economy.[1] As an economic doctrine, dirigisme is the opposite to laissez-faire, stressing a positive role for state intervention in curbing productive inefficiencies and market failures. Dirigiste policies often include indicative planning, state-directed investment, and the use of market instruments (taxes and subsidies).
source: Wikipedia
Then there's state capitalism, in which the state owns the means of production:
State capitalism is an economic system in which the state undertakes commercial (i.e. for-profit) economic activity and where the means of production are organized and managed as state-owned business enterprises (including the processes of capital accumulation, wage labor and centralized management), or where there is otherwise a dominance of corporatized government agencies (agencies organized along business-management practices) or of publicly listed corporations in which the state has controlling shares.
source: Wikipedia
Socialism, like capitalism, is a system of production, but one where the means of production are collectively owned by the workers, which means there's no more unelected boss who decides everything; it's like a representative democracy in the workplace. Notice that free markets can exist next to a socialist system of production, that's called market socialism:
Market socialism is a type of economic system involving the public, cooperative or social ownership of the means of production in the framework of a market economy. Market socialism differs from non-market socialism in that the market mechanism is utilized for the allocation of capital goods and the means of production.
source: Wikipedia
There's even something we call libertarian socialism, sometimes referred to as socialist anarchism; Noam chomsky identifies as a libertarian socialist for example. And then there are countless combinations between socialist and capitalist systems of production, far too many to contain in this one post. I mention all of this to illustrate how narrow-minded it is to simply say that the system we now globally operate under is "the best system there" is, or "the best we can do"; it isn't, and anyone with eyes, ears and a functioning brain knows it.
So the answer to the question posed in the title can already be answered with a resounding "NO"; capitalism, or any other system of production has nothing to do with innovation, nothing at all. But even if we play along and conflate capitalism with free markets, even then our globalized economy does anything but stimulate innovation. The story we've all been told revolves around competition and goes something like this: producers compete among each other to gain the favor of the consumer, they want them to buy their products after all. For this, the producers have several tools; first they try to make their products cheaper (wages are getting lower and lower because payroll costs are among the first to be lowered). This has its limits of course. Another option is to make a better product, to innovate, which is the story we've been told about free market capitalism; competition leads to lower prices AND better products. This would be wonderful if this theory translates into practice, but it doesn't. Innovation is a process that takes years and costs a lot of money, so when one company invests all this time and money to make a better product, all its competitors can sell their products at a much lower price; the "good" company will be out-competed for sure. That's why there are no "good" companies in capitalism; they can't be "good" if they want to survive.
What really happens is this: companies invest in marketing. That's much cheaper and produces the desired effect; just say your product is better, repeat that message a million times, and the customer will believe you and buy your product. Marketing has become a billion dollar industry for this reason. I've written about this many times before, but I'll repeat it here: real innovation comes from university research, which is paid for by our tax-dollars. Apple didn't invent anything at all, but they're good at marketing and good at suing anyone who steals their stolen technology or even the shape of their products. The same goes for medicine; all truly new medicine is developed at universities, big pharma only makes small changes to existing medicine and calls that innovation. If you're old, like me, you should know that VHS wasn't the best VCR system; Betamax and Video 2000 were both better, but VHS was the first to allow porn on their medium, which was brilliant marketing but had nothing to do whatsoever with technology.
Real innovation is caused by simple human curiosity, and not by any system we can devise. So this post is not meant to claim that there's another system that's better at stimulating innovation, but that capitalism and free markets only delay innovation to reach us, the end consumers. Capitalism doesn't allow for direct communication between the producers and the consumers; distribution of products is "regulated" by the markets, a highly inefficient system of supply and demand. In your new iPhone there's technology that has existed for decades. Your self-parking car uses technology that's been in use for decades in space exploration. Nano technology is already here, with paints that have almost zero cohesion so that dirt and water will immediately fall off; when do you think that'll be readily available for you and me? The electric car is more than a century old with the first being produced in 1880 (really, look it up), and the only reason we're still burning gas is because of the "best economy we've ever had". We produce enough food to feed more than 10 billion people, yet one billion go hungry, most cities have more buildings without occupants than homeless people; is that a hallmark of an efficient economic system? Just think about it, and please keep an open mind when you watch the video.
Why capitalism doesn't lead to innovation.
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