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… is from page 1 of the late William Baumol’s 2002 book, The Free-Market Innovation Machine [2]:
Under capitalism, innovative activity – which in other types of economy is fortuitous and optional – becomes mandatory, a life-and-death matter for the firm.
DBx: Indeed so. And so, all efforts by government to determine the specific firms, outputs, and jobs that will be created and survive in a market economy are inherently inconsistent with a market economy.
By its very nature, innovation is creative; it can neither be planned nor predicted. Therefore, if an industrial-policy scheme is pursued, innovation must be suppressed, for otherwise the scheme will be upset. If, instead, innovation is allowed, then industrial policy must be abandoned.
Most proponents of industrial policy will deny the above. They’ll insist that their industrial policy not only welcomes, but encourages, innovation – as long as, of course, it’s the correct sort of innovation. But as I and others have written elsewhere, all such denials merely reveal the unseriousness of the thought of these industrial-policy proponents. Such denials indicate a failure to understand what innovation is and what its existence in an economy entails. Anyone issuing such a denial should not be taken seriously when he or she discusses economic matters.