-Caveat Lector-
6/6/99
No matter what changes and inovations Capitalism goes through, there
always
remains the deadly constants.
1- Private ownership of large amounts of capital ALWAYS causes
concentration
of wealth into few hands. With that ALWAYS comes control and
exploitation
of society.
2- Capitalism, like cancer, is defined by growth. The ecology of the
planet
can no longer tolerate systems based on waste and growth.
3- Capitalism is theft. Its success depends on how much the capitalist
can
steal from the worker on one end, and the buyer on the other.
4- Capitalism causes mental illness in the form of addiction to money.
5- No Capitalist is really supportive of competition. Competition is
wasteful and chancy. Monopoly is the true aim of capitalists.
Joshua2
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"Taylor, John (JH)" wrote:
>
> -Caveat Lector-
>
> New York Times
> June 5, 1999
>
> Revising Capitalism: Coorperative Innovation Steals Competition's Thunder
> By MICHAEL M. WEINSTEIN
>
> Capitalism, every undergraduate student of economics learns,
> thrives on competition. The brilliant virtue of the invisible hand
> of competition is that it forces firms to reduce costs, cut prices
> and thereby enrich consumers. This engaging tale has buttressed
> every economics narrative since Adam Smith lucidly explained more
> than 200 years ago how competition channels the natural greed of
> individuals into serving the social good.
>
> Now William Baumol, an economics professor at New York University,
> wants to rewrite the basic tale. Yes, competition creates wealth.
> But in his new formulation, price cutting becomes a sideshow.
> Innovation takes center stage as the "primary weapon of
> competition." And the key to innovation is a clever form of
> collaboration among rivals.
>
> Innovation, the process of translating inventions and new ideas
> into commercial products, is largely responsible for the tenfold
> rise in the living standards of American families over the last 100
> years, he says in a new manuscript. Baumol's contribution is not to
> emphasize the impact of innovation but to pinpoint how competition
> forces companies to make innovation routine, much as marketing and
> advertising are.
>
> In Baumol's analysis, capitalism emerges as a system that hums
> because it has figured out how to make innovation humdrum.
>
> Baumol shows how companies pour money not only into their own
> research and development but also into such operations by their
> rivals. Yes, their rivals. Firms participate in joint ventures that
> hire teams of researchers to develop technologies that the firms
> will share. They also engage in the largely unrecognized practice
> by which companies enter into technology-sharing compacts. Under
> these compacts, a company like IBM writes contracts with
> competitors, like Hitachi. The companies promise to license future
> innovations to each other for a set fee. That way, if Hitachi comes
> up with a spiffy next-generation disk drive, IBM is guaranteed the
> right to incorporate Hitachi's new drive in its own computers.
>
> It might seem odd for an economist like Baumol to herald
> collaboration among potential competitors. By jumping into the arms
> of rivals, companies appear to dull their incentive to innovate on
> their own. After all, if they can imitate rivals, why bother to
> innovate on one's own?
>
> To understand Baumol's point, put yourself in the place of IBM. You
> could try to piggyback off Hitachi's innovations, dismissing your
> own engineers. But that strategy would collapse. At the very least,
> you would be dishing out hundreds of millions of dollars each year
> to rivals without getting anything in return. Worse, Hitachi would
> soon drop the agreements, because they make sense only if it
> expects to get about as many new products from IBM as it provides
> to IBM.
>
> Nor would it make economic sense to beef up your investment in
> innovations without entering technology-sharing contracts. If four
> or five of your major rivals share innovations among themselves,
> then they will generate lots of ideas, drowning out the efforts of
> your one research department. And anything you don't figure out on
> your own will be offered to consumers by all your rivals. You
> simply cannot afford to bear that risk. The compacts eliminate the
> threat that a misstep in the technology race will drive you out of
> business. Besides, Baumol says, the compacts generate licensing
> fees that have become "a substantial business activity in itself."
>
> Baumol's analysis makes a bigger point, far beyond the benefits and
> costs to individual companies. Technology-sharing contracts also
> help the economy -- that is to say consumers -- by spreading the
> benefit of innovation far beyond the customers of any one company.
> You don't have to buy Hitachi to get the benefit of its
> breakthroughs.
>
> Drawing on his career as a consultant as well as scholar, Baumol
> says "that of the 20 or so firms that engage in substantial
> research and development for whom I have consulted over the past
> few years, almost all had technology-sharing agreements of one sort
> or another with other firms in their industries." The managers of
> these companies, he says, often agreed to them reluctantly. But the
> scientists, especially the engineers, often required them as a
> condition of their employment: they simply refused to work for a
> company that would not allow them to communicate with their peers.
>
> He points to a compact that Perkin-Elmer Corp., which sells
> scientific instruments using precision optics, has had with Hitachi
> for the right to license innovations that either company might
> adopt. Under the compact, each company provides a menu of
> innovations under development, any of which it promises to make
> available for a fee that often ranges from 6 to 7.5 percent of the
> price of the product that incorporates the innovation. Perkin-Elmer
> has entered compacts with about 100 other companies. United
> Technologies' Pratt & Whitney, a manufacturer of aircraft jet
> engines, has technology-sharing agreements with a rival, General
> Electric.
>
> The computer industry, Baumol says, is littered with
> technology-sharing agreements. Baumol's point is that innovations
> are no longer left to historical quirk or random feats of genius.
> Rather competition has forced corporations to bring to market a
> steady diet of innovative products from their own scientists or, if
> not, from scientists working for their competitors.
>
> Baumol's focus on innovation may not seem novel. Joseph Schumpeter
> and others made it the core of their theories of economic progress.
> But in fact, the Baumol formulation overturns the thrust of modern
> textbooks.
>
> The typical (dreary?) presentation starts with chapter after
> chapter about how upward sloping supply curves and downward sloping
> demand curves interact in idealized markets to determine prices.
> When all goes well, market prices produce efficiency, a wondrous
> social outcome whereby the economy churns out the most output
> possible with its limited amounts of labor, land and machinery.
> Nothing goes to waste.
>
> But market prices do not produce wondrous results in the presence
> of imperfections like monopolies. One imperfection, called an
> externality, is crucial to understanding the important message of
> the Baumol manuscript. Markets go haywire when the impact of a
> trade between buyer and seller extends beyond the two parties
> directly involved.
>
> Take innovation. The profit from innovation routinely leaks to
> third parties. A firm spends a lot of money bringing to market a
> clever new electronic organizer or tennis racket. Ten nanoseconds
> later, another firm tears the product apart and reverse engineers a
> variation that gets around the patent. So the first firm winds up
> making relatively little money, a heavy disincentive for would-be
> entrepreneurs.
>
> Professor Edward Wolff, a colleague of Baumol at New York
> University, estimates that innovators can expect to earn about 10
> cents a year from each dollar they invest. But because the
> innovation leaks to other companies and other sectors, the economy
> as a whole reaps a benefit of about 50 cents. The implication,
> according to the textbooks, is that capitalism provides
> entrepreneurs too little of the profit that investments create for
> the economy. So they invest too little in the development of
> products. Consumers suffer from high prices, restricted choice and
> delayed innovation.
>
> The traditional analysis, then, says that capitalism blunders at
> generating innovation over the long run. Baumol's manuscript
> reverses this presumption. Competition forces firms to innovate,
> engaging in what Baumol says "is tantamount to a technological arms
> race." The technology-sharing compacts, by generating a steady flow
> of licensing fees for IBM, Perkin-Elmer and other innovators, turn
> innovation into a routine profit-making activity. The competitive
> system, he says, goes "a long way, perhaps all the way, toward
> generating the right amount of innovation." The compacts overcome
> leakage by pouring more of the economy's gains from innovation into
> the bank account of the innovator.
>
> By reducing the risk of innovation (a company that goes down the
> wrong technological road can lease the innovations it did not come
> up with) and increasing revenues, technology-sharing compacts make
> innovation profitable, routine and plentiful. As proof, he points
> to nonmarket societies that generated plenty of inventions but few
> applications. Medieval China, for example, invented gunpowder,
> paper, the printing press and probably the compass and the water
> wheel. But these inventions failed to raise living standards until
> adapted into consumer products by societies that were less hostile
> to commerce. The genius of Western capitalism was to translate
> invention into the goods and services that enrich everyday life.
>
> Baumol tells a tale rich in details about the market's use of
> collaboration to overcome problems of innovation. Along the way he
> turns standard analysis upside down. Textbooks congratulate markets
> for their short-run efficiency, even though the short run is
> nothing spectacular. Entrenched monopolies, labor-market
> rigidities, perverse management incentives and many other problems
> are pervasive. The standard analysis goes on to criticize the
> market for shortchanging innovation and growth, when in fact
> "spectacular growth is the market's outstanding accomplishment."
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