The Equanimist

A Note on Innovation

Posted in Economy, Philosophy, Political Philosophy by equanimist on November 8, 2008

It is oft observed that it’d be great to assemble a sort of “Manhattan Project” to tackle energy requirements within a context of changing climate. This, however, is unrealistic in the present environment.

As incentive, capitalism offers pay. Pay is, presently, a function of the value of profit shares – not performance based except insofar as performance increases profitability.

When pay is proportional to some finite profit, it pays to keep the profit-sharing coterie small because as the number of individuals with whom finite profits must be shared goes up, individual profits go down. That is, pay is inversely proportional to the number of individuals with whom profit is shared.

Collaboration, which must entail profit sharing, is at odds with maximally valuable profit shares.

The same can be observed of coteries acting in collaboration. Developing and maintaining proprietary technology locks up a stranglehold on a particular segment of the market place and further increases profitability, which, in turn, increases the value of profit shares (pay).

However, profit shares are most valuable (and pay in turn is maximal) when the profit-sharing coterie is small, some maximal market share is garnered, and the cost of providing a product or service is minimal relative to the price at which same can be sold. That is, it pays to keep costs down.

Research and development are expensive. Ergo, it may be advantageous to the individual (whose pay is proportional to the value of his/her profit shares) to dispense with research and development altogether! Certainly, pay increases as research and development decrease.

In this way, capitalism rewards dealers in cheap antiquated goods and services who can manage to sell same at some price above their worth. Collaboration, research and development are dis-incentivized. And, innovation suffers as a direct result.

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3 Responses

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  1. The Frugal Libertarian said, on November 11, 2008 at 8:44 pm

    I agree that innovation is expensive and companies who already have a product will have an advantage in the market. But, how do you explain that in spite of this innovation continues? I think future innovation is often priced into a product. Are you paying $300 for the iPhone or are you paying $250 for the iPhone and $50 for the next Apple innovation?Start up companies would of course not have this advantage, but I think this in itself drives entrepreneurs to innovate.I think you may be missing a couple pieces of the puzzle in your evaluation of innovation.

  2. Adam H Klein said, on November 14, 2008 at 7:11 pm

    I am not avoiding this challenge. I am, however sticking to my guns. The very real phenomena that you recognize are not incompatible with my assertions. However, I may not have done a very thorough job presenting same. It was, after all, just a note. My belief remains that the data support my conclusions. As such I am writing up a thoughtful reply, which you can expect within the next couple of days certainly.

  3. Adam H Klein said, on November 17, 2008 at 2:45 pm

    And < HREF="http://equanimist.blogspot.com/2008/11/myth-of-pay-incentive-follow-up-note-on.html" REL="nofollow">here<> you have it. It got pretty long for a reply and, I think it is a good supplement to this (the original) so I posted it.


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