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Quotation of the Day…

… is from pages 53-54 of the late Stanford University economic historian Nathan Rosenberg’s excellent 1992 paper “Joseph Schumpeter: radical economist,” as this paper is reprinted in Rosenberg’s 1994 book, Exploring the Black Box: Technology, Economics, and History:

It is, of course, difficult to imagine a more profound rejection of neoclassical economics than is embodied in Schumpeter’s forceful assertion that the most important feature of capitalist reality – innovation – is one to which rational decision-making has no direct application. The nature of the innovation process, the drastic departure from existing routines, is inherently one that cannot be reduced to mere calculation, although subsequent imitation of the innovation, once accomplished, can be so reduced. Innovation is the creation of knowledge that cannot, and therefore should not, be “anticipated” by the theorist in a purely formal manner, as is done in the theory of decision-making under uncertainty. In Schumpeter’s view, it would be entirely meaningless to speak of “the future state of the world,” as that state is merely unknown, but also undefinable in empirical and historical terms.

DBx: Schumpeter’s insight that entrepreneurial innovation is part of the essence of capitalist reality is, I believe, indisputable. But if you’re tempted to dispute this insight, take stock of your immediate surroundings – your clothing; the roof, floors, and walls that surround you and that hide dozens of feet of wires and pipes that bring electricity and potable water, and whisk away filth; the nearby appliances; the very device you’re now using to read my words. These and nearly everything else that you encounter throughout the day in modern society are the results of innovation. Lots of innovations. Creative insights tested in markets.

Proponents of industrial policy mistakenly fancy that they, or the government officials in charge of industrial policy, can either see the future or can craft a future that works better than the future that emerges through competitive market processes. Yet neither of these fancies is realistic. Innovation by its nature is creative; it cannot be anticipated in meaningful detail. Nor can innovation be planned. To the extent that industrial policy is used, innovation must be crushed, for to allow innovation would be to allow disruptions to the industrial-policymakers’ plans. And given that the whole purpose of industrial policy is to turn the economy into what is envisioned by industrial-policy advocates, such a policy is inherently hostile to genuine innovation – and, hence, industrial policy is inherently hostile to the principal source of modernity’s high standard of living for the masses.

There is simply no way to have both industrial policy and innovation. Industrial-policy advocates will, of course, deny the truth of the previous sentence. They will say that innovation will be permitted – indeed, perhaps even accelerated – by their schemes. But these protests will be mere words, grammatically correct and perhaps soaring in their expressed aspirations. But just because someone can say “two plus two equals ninety-eight” does not mean that that someone can arrange for two plus two to equal anything but four.