Continuing my musings on innovation. [Refer to the first blog post here]. I'll keep posting random thoughts, and once I'm done, will compile into a coherent theory.
Say's LawUsing the language of the classics, it is “demand is constituted by supply”. To buy something you must first produce and sell something. The selling is what gets you the money, but the production of value adding output is what first allows you to sell. Without value adding activity, there is nothing to sell and therefore there is no basis for demand.[Source]
Consider the iPhone 5. The following options exist to get someone to create iPhone 5 (innovation):
a) Keynesian: Increase demand: The government could have created an iPhone5 through stimulus (subsidising buyers). Seeing all this money, Apple would have created an iPhone5. This is the Keynesian model
b) Mercantalistic/ Paternalistic: Increase funding for development of iPhone5: The second model says that there is a market failure. Apple is not enthused by potential profits it can make through iPhone5, and so will not invest in research and development. Therefore according to the paternalistic model, government (being much smarter than Apple, and with deeper pockets) should subsidise its R&D and product development. [E.g. Solyndra]
c) Institutions for markets: Say’s law shows that there is sufficient incentive in the market for Apple to invest in its own R&D. There is no need for a Keynesian stimulus, nor for paternalistic dabbling in ‘innovation’ by government. So long as the government ensures a decent intellectual property framework (patents), Apple will invest in developing iPhone5 to exploit the market by offering it a new experience. The Say’s law encourages a government to build institutions that ensure property rights, bankruptcy systems, and other supporting mechanisms.
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