The Role of Free-markets to Innovation

QUESTION

Market and “Non-Market” Dimensions of Innovation

The “market-centered” organizational view of how innovation is best achieved – rooted in Adam Smith’s work, seen in The Economist, implied in “supply and demand” models and in Zakaria’s discussion of “Western” culture – has been central to political and intellectual debates for the last 40 years, particularly in the United States. However, virtually all of the other authors you’ve read have suggested that market-centered models of innovation are either limited, or they fail to capture a more nuanced or complex set of dynamics involved in ‘where innovations come from.’

First, based on the accounts of any authors in the first half of the course, name and concisely but accurately explain three of what you believe to be the most important conditions or characteristics that contradict, correct, or qualify some aspect of Smithian-inspired accounts of the role of “free markets” to innovation. In other words, what are the three most compelling “non-market” or “extra-market” concepts, dimensions or characteristics that various authors suggest are critical to the generation of innovations? Be specific about the ideas or concepts you describe, specify which author(s) proposed or suggested them, and explain clearly how/why those dynamics contrast market-centered views.

Second, market-centered explanations are relatively common and often presented with a straightforward set of prescriptions (as represented in The Economist’s recommendations, or in “supply-side” and “demand-side” models). In your view, could the dimensions you described be made to “fit” with market-centered reforms or, in your view, do they require a fundamentally different approach? Concisely explain your answer.

ANSWER

The Role of Free-markets to Innovation: Morality, Government Involvement, and Routine Management

The free market, as seen by Smith, is majorly constituted of freedom in producing and exchanging goods. At the same time, Smith considers people’s natural self-interest important to the markets, as does less government influence. Based on this argument, morality, political characteristics, and routine management qualify Smithian-inspired accounts of the role of the free markets in innovation.

Morality may either drive innovation or diminish its capabilities in individuals and businesses. Moral sentiments in competition reflect the aspect of regulation and a sense of responsibility not to disregard others. While Smith discusses the importance of morals in the free market as crucial to driving thriving in innovation, some theorists may have created a different account hypothesizing how market competition with disregard for morals drives altruism and broad social ties. However, regulated market interactions contribute to a sense of responsibility to others and reduce instances of self-interested behavior and empathy leading to a healthy business environment to be creative and innovative (Sutter et al., 2020). Therefore, a free market led by morals will contribute to healthy competition and the development of new ideas to keep the interactions alive.

The influence of the government in what is deemed a free-market impacts innovation depending on the level of its involvement. This political characteristic qualifies Smith’s accounts on the role of the government in a free market. Smith argues that the market is self-regulating and the government can only protect its markets from invasion by outside forces, enforce justice and protect its citizens, and maintain public works and institutions for the interest of all people and not individuals. According to Costa Pereira (1997), real innovations are sourced from free-market economies where the government provides a secure environment for business but does not dominate the economy. Costa Pereira continues to explain that the government meddling in innovation, especially through technologies, is the reason SMEs in Russia are facing major problems when it comes to innovation. Therefore, the involvement characteristic qualifies Smith’s account of less government involvement in the market for its growth and, thus, the innovation aspect.

Routine management as an extra-market factor determines how innovators get their income, which is attributed to income provision. Provision of income and its derivation point to production- a market factor. Therefore, routine management validates the Smithian-inspired view of the role of the free market in innovation. Smith explains the chain of labor and capital in a free market, which can be validated by sentiments from other authors who deem landowners, workers, and returns to capital to be linked to the sufficiency of the production economic function. For instance, Courvisanos and Mackenzie (2014) write that although landowners’ rent and workers’ wages are distinct, returns to the capital invested are precise. The contrast between routine management and the market factors is that after the completion of the economic function (provision of income), there comes uncertainty in innovation when each factor works independently.

In summary, morality, government influence, and routine management do not provide a straightforward prescription for the role of free markets in innovation as market-centered explanations would. Therefore, they require a fundamentally different approach as their dynamics vary greatly from the market. For instance, regulating morality requires an approach far from business thinking as compared to how the business would have managed the ever-changing customer demands and sophistication. Still, routine management of the now-market factors like capital and labor need a different approach that requires individuals to think as entrepreneurs without a support system.

References

Costa Pereira, G. D. (1997). Innovation, Free Market Economy and Information Technologies. In From Central State to Free Global Market Economy (pp. 155-156). Springer, Dordrecht. https://doi:10.1007/978-94-015-8955-0_14

Courvisanos, J., & Mackenzie, S. (2014). Innovation Economics and the Role of the Innovative Entrepreneur in Economic Theory. Journal of Innovation Economics Management, (2), 41-61. https://doi.org/10.3917/jie.014.0041#xd_co_f=MDE5YmFkOTUtOTRiNy00ODI1LWExNjAtZTY4MWI4ZmQ0ZGVh~

Sutter, M., Huber, J., Kirchler, M., Stefan, M., & Walzl, M. (2020). Where to Look for the Morals in Markets? Experimental Economics, 23(1), 30-52. https://doi.org/10.1007/s10683-019-09608-z