As Reihan Salam argues, economic innovation is not just about basic research and technological breakthroughs. As Amar Bhide has said, “the willingness and ability of lower-level players to create new know-how and products is at least as important to an economy as the scientific and technological breakthroughs on which they rest”. History in fact provides us with at least two prominent examples where basic scientific research and invention did not translate into adequate economic innovation.

The first is the experience of the Soviet economic system. In The Soviet Union, most of the research and development was conducted by designated research institutes who were also partially responsible for implementing the new discoveries and inventions within the relevant industrial enterprise. The Soviets were reasonably successful in coming up with new inventions in their research institutes. Yet even when new products and technologies had been invented, the Soviet research institutes struggled to convince incumbent firms to introduce them into production.

Now how is this example relevant to a capitalist economy? Some of you may argue that unlike the communist enterprises in the Soviet Union, capitalist enterprises are strongly incentivised to jump upon any innovation that would come out of a research institute. But in reality there was no shortage of positive incentives to innovate or increase production for managers of Soviet enterprises. Soviet managers were not motivated by the communist ideal but by that most capitalist of incentives, the bonus. The economist Joseph Berliner estimated that a director of a coal-mine could earn as much as 150% of his base salary as a bonus just for outperforming plan production targets by 5%. On top of this, Soviet managers were provided with 'innovation' bonuses as the Soviet planning authorities became increasingly concerned with the slow pace of productivity growth in the 1950s and 60s. But none of these bonuses worked. In fact the bonuses served to further discourage the rollout of any risky innovation that could endanger the fulfilment of short-term plan targets. Managers would focus on low-risk process innovation to fulfil their innovation targets and focused on maximising their short-term 'plan fulfillment' bonuses. Ultimately the Soviet system could not replicate the real threat of failure that compels firms in a free enterprise economy to chase disruptive innovation for fear that an upstart new entrant may overtake them.

The second prominent example is the history of modern capitalism itself. Invention and scientific research are not what define the modern era of rapid growth that started in Britain in the early 19th century. As Jack Goldstone has argued, the technical innovations underpinning the “engine revolution” that England underwent in the early 19th century were present elsewhere. Countries like France were even widely regarded to be more advanced in the sciences than England. Yet it was in England that these innovations were so effectively put into economic use.

None of this is meant to undermine the importance of basic research funded by the government. But disruptive economic innovation also requires a truly competitive private sector where incumbents are faced with the threat of failure and barriers to entry for new firms are minimal. The ‘Great Stagnation’ is not driven by the lack of basic research and invention. It is driven by the lack of competition for incumbent large firms and the excessive barriers to entry that new firms and small businesses have to face in the neoliberal era.


Michael Strong

This is why the sectors with the greatest barriers to entry are the least innovative, law and governance being the biggest example of all. For a path to innovation in law and governance, see the work of the Startup Cities Institute, For why we don't see significant, scaleable innovations in education, see "Why We Don't Have a Silicon Valley of Education,"


I think the British did have an advantage in precision machining, coming off of decades of making clocks and nautical instruments for navigation. But I agree that it wasn't the primary factor - the primary factors were the cost of labor in the UK and British reliance on coal.


I remember the end of USSR. In Soviet times there was a factory called Norma in Estonia which was famous for its toys, they were more complex, diverse and of higher quality than the ones produced in on other factories within USSR, and were almost on par with the ones produced in Eastern Germany. During perestroika I remember reading an interview with its director and he was asked what makes them introduce new designs, colors, shapes etc. I still remember his response. He basically said that it's not worth doing something new. They just have to do "something" anyway since forms, presses etc are worn out anyway. If they are to replace press forms anyway, their idea is to replace them with something different.

Ashwin Parameswaran

Michael - Thanks for the comment. Agreed - reducing barriers to entry is key. Brett, kosmik - Thanks for the comments.


A key barrier to entry is the access to information - many parrot Adam Smith and the “invisible hand,” but fail to realize that in the Smith viewpoint, all competitors have access to the same information at the same time thereby achieving competitive balance in the market place. Modern capitalism creates asymmetry of information in the marketplace - as a result innovators may not be able to compete fairly due to concentrations of actionable information in the hands of key market players who own market share. Its' a bit Hobbesian in its’ construct but as large players aggregate information, it puts innovators at a product introduction disadvantage. Since most innovators are not well heeled in access to money and power, it is difficult for them to disrupt to status quo - they simply lack the leverage to secure first-order wants (market access), despite having the vision, capability, and determination. Often innovators feel forced into development labs, incubators, agreements with larger players to co-opt, cash-out, or JV their innovations or inventions to secure market access. In essence, as a result of information asymmetry, innovators frequently entertain yielding control of their innovation or invention to overcome this barrier to market access. Is it truly an innovation or invention if it’s laundered through a big market player? In the current climate the answer is, “likely sort of….” The going rate, is the number of patents held in defense, not the innovation and invention put into the market – which is in essence hoarding knowledge and information exacerbating the asymmetric in the marketplace.

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[...] maximum competitive intensity where the big boys can fail and startups have low barriers to entry. Ashwin Parameswaran points out, for instance, that although the Soviet Union’s scientific establishment was highly [...]

Tim Worstall

William Baumol has written extensively on this point. Worth reading him on it. Invention can be done by state or private actors about equally well. Innovation (by which he means getting it into general circulation) is done vastly better by a market system.

Ashwin Parameswaran

Tim - Thanks for the reference.