Should Capitalism Grow Constantly? Innovation Is Key

capitalismProtest in London on 1 April 2009

These reflections occur to me after reading the blog Monetary Freedom, by Bill Wolsey. To my mind, perhaps erroneously, it seems simpler than what the author says.

Capitalism – or in fact any economy, if an alternative exists – should grow constantly, although not necessarily in quantity. It’s not so much about making a larger amount of exactly the same products and services, but about innovating and producing new goods and services at a lower cost.

The reason is simple: the pressing needs of a large part of society grow constantly, and not just in quantity but also in quality. Even if we were very socialist in our thinking, we would all want better health and education for all, more free time, more leisure etc. And this doesn’t happen by distributing what there is, but by accumulating capital and technology and improving quality.

For that reason, a constant improving efficiency in production – or productivity – is desirable. Therefore companies need to grow, boost economies of scale, innovate, disappear when another more innovative firm invents a new product. Others f0llow this company and a new production nucleus is created in which a few stand out. Meanwhile in the SMEs breeding ground a new surprise is being prepared, a new design, something which we can’t even imagine at the moment.

I believe Hayek was right when he formulated his famous model against state intervention – although I think he took it too far -: the state can never know what this innovation which defines the future will be. The state would act awkwardly and late in the day, compared with, let’s say, Microsoft, both in its daily management and innovation. Impossible. The state’s function is political and this is incompatible with a company as we have defined it here. The state should act in such a way as to interfere as little as possible with this design of capitalism. That said, as little as possible doesn’t mean that it should not have social objectives, like education and health.

The extent of the state’s functions in the economy is a big mystery, but an example of what it shouldn’t be can be found in the Spanish model: too many taxes, too many superfluous and duplicated expenses, too much decentralisation (going against economies of scale) and, of course, too much corruption and weakness in the face of a variety of spurious interests. The famous Transition originated from this, but it degenerated from an exemplary model into an inefficient and unsustainable waste, apart from the constant threat of a break up. The Transition has been a spectacular failure. At least from an economic point of view. And if the economy fails it’s as if everything has failed.

This state of things is demoralising. In this sense, the Spanish left-wing because of conviction, and the right because of weakness, have not been able to provide Spaniards with even the minimum education about how an economy functions. The socialist left has not been able to disconnect with Marxism, although they don’t know it. Their slogans are dumb. For that reason, the big Spanish companies and the best workers have a large part of their investments abroad. There had to be some reason for that.

 

About the Author

Miguel Navascués
Miguel Navascués has worked as an economist at the Bank of Spain for 30 years, and focuses on international and monetary economics. He blogs in Spanish at: http://http://www.miguelnavascues.com/