Quotation of the Day…

by Don Boudreaux on May 22, 2014

in Competition, Complexity & Emergence, Creative destruction, Growth, Innovation, Other People's Money, Subsidies

… is from page 255 of 2006 Nobel laureate Edmund Phelps’s 2013 book, Mass Flourishing: How Grassroots Innovation Created Jobs, Challenge, and Change:

The problem is that subsidies redirect the economy’s innovation toward politicians, who lack deep specialized knowledge, and away from the private sphere, where judgments are made by idea men, entrepreneurs, financiers, and market people who consider whether there are not better initiatives to think about or develop.

Yes.  But the importance of the market for directing innovation lies not only in the fact that each innovator in the market is a specialist who has skin in the game, but also in the reality that the field of innovation is open to all and that the test of any innovation’s value is how well it sells on the market (that is, whether or not consumers choose to buy it, or its fruits, in sufficient quantities to justify the expenditure of resources on that innovation).

In her forthcoming book (Bourgeois Equality), Deirdre McCloskey calls such innovation “market-tested innovation.”  The competitive market process – guided ultimately by consumer desires that are revealed by actual, voluntary consumers’ expenditures of their own money – selects which innovators are rewarded with profits and which are punished with losses.  This competitive process is truly one of open-ended discovery.  And everything about political institutions ensures that these institutions cannot possibly match, much less surpass, competitive private markets at the task of sparking and wisely directing genuinely innovative activities.

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