Why has capitalism produced economic growth that so vastly dwarfs the
growth record of other economic systems, past and present? Why have
living standards in countries from America to Germany to Japan risen
exponentially over the past century? William Baumol rejects the
conventional view that capitalism benefits society through price
competition--that is, products and services become less costly as firms
vie for consumers. Where most others have seen this as the driving force
behind growth, he sees something different--a compound of systematic
innovation activity within the firm, an arms race in which no firm in an
innovating industry dares to fall behind the others in new products and
processes, and inter-firm collaboration in the creation and use of
innovations.
While giving price competition due credit, Baumol stresses that large
firms use innovation as a prime competitive weapon. However, as he
explains it, firms do not wish to risk too much innovation, because it
is costly, and can be made obsolete by rival innovation. So firms have
split the difference through the sale of technology licenses and
participation in technology-sharing compacts that pay huge dividends to
the economy as a whole--and thereby made innovation a routine feature of
economic life. This process, in Baumol's view, accounts for the
unparalleled growth of modern capitalist economies. Drawing on extensive
research and years of consulting work for many large global firms,
Baumol shows in this original work that the capitalist growth process,
at least in societies where the rule of law prevails, comes far closer
to the requirements of economic efficiency than is typically understood.
Resounding with rare intellectual force, this book marks a milestone in
the comprehension of the accomplishments of our free-market economic
system--a new understanding that, suggests the author, promises to
benefit many countries that lack the advantages of this immense
innovation machine.
