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Updated: May 23, 2025
In a new tome titled "The Free-Market Innovation Machine", William Baumol of Princeton University claims that only capitalism guarantees growth through a steady flow of innovation: "... Innovative activity-which in other types of economy is fortuitous and optional-becomes mandatory, a life-and-death matter for the firm."
Why are inventors in America more productive than their French or British counterparts at least judging by the number of patents they get issued? Perhaps because oligopolies are more common in the US than they are elsewhere. Baumol suggests that oligopolies use their excess rent i.e., profits which exceed perfect competition takings to innovate and thus to differentiate their products.
Baumol maintains that oligopolies are the real engines of growth and higher living standards and urges antitrust authorities to leave them be. Lower regulatory costs, economies of scale and of scope, excess profits due to the ability to set prices in a less competitive market allow firms in an oligopoly to invest heavily in research and development.
In a recently published discourse of innovation and property rights, titled "The Free-Market Innovation Machine", William Baumol of Princeton University claims that only capitalism guarantees growth through a steady flow of innovation.
According to popular lore, capitalism makes sure that innovators are rewarded for their time and skills since property rights are enshrined in enforceable contracts. Reality is different, as Baumol himself notes. Innovators tend to maximize their returns by sharing their technology and licensing it to more efficient and profitable manufacturers.
Capitalism makes sure that innovators are rewarded for their time and skills. Property rights are enshrined in enforceable contracts. In non-capitalist societies, people are busy inventing ways to survive or circumvent the system, create monopolies, or engage in crime. But Baumol fails to sufficiently account for the different levels of innovation in capitalistic countries.
In his recently published tome "The Free-Market Innovation Machine Analysing the Growth Miracle of Capitalism", William Baumol of Princeton University, concurs. He daringly argues that productive innovation is at its most prolific and qualitative in oligopolistic markets. This is achieved by constant innovation and by incessant advertising.
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