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The Free-Market Innovation Machine: Analyzing the Growth Miracle of Capitalism Hardcover – April 21, 2002

by William J. Baumol (Author)

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Why has capitalism produced economic growth that so vastly dwarfs the growth record of other economic systems, past and present? Why have living standards in countries from America to Germany to Japan risen exponentially over the past century? William Baumol rejects the conventional view that capitalism benefits society through price competition--that is, products and services become less costly as firms vie for consumers. Where most others have seen this as the driving force behind growth, he sees something different--a compound of systematic innovation activity within the firm, an arms race in which no firm in an innovating industry dares to fall behind the others in new products and processes, and inter-firm collaboration in the creation and use of innovations.

While giving price competition due credit, Baumol stresses that large firms use innovation as a prime competitive weapon. However, as he explains it, firms do not wish to risk too much innovation, because it is costly, and can be made obsolete by rival innovation. So firms have split the difference through the sale of technology licenses and participation in technology-sharing compacts that pay huge dividends to the economy as a whole--and thereby made innovation a routine feature of economic life. This process, in Baumol's view, accounts for the unparalleled growth of modern capitalist economies. Drawing on extensive research and years of consulting work for many large global firms, Baumol shows in this original work that the capitalist growth process, at least in societies where the rule of law prevails, comes far closer to the requirements of economic efficiency than is typically understood.

Resounding with rare intellectual force, this book marks a milestone in the comprehension of the accomplishments of our free-market economic system--a new understanding that, suggests the author, promises to benefit many countries that lack the advantages of this immense innovation machine.

The Free-Market Innovation Machine: Analyzing the Growth Miracle of Capitalism

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Editorial Reviews

Review

Honorable Mention for the 2003 Award for Best Professional/Scholarly Book in Economics, Association of American Publishers

"Mr. Baumol's contribution is not to emphasize the impact of innovation but to pinpoint how competition forces companies to make innovation routine. . . . The traditional analysis . . . says that capitalism blunders at generating innovation over the long run. Mr. Baumol . . . reverses this presumption. . . . [He] 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."--Michael M. Weinstein, New York Times

"A brilliant book. . . . What makes capitalism uniquely successful is the built-in pressure to generate new products and processes. Provided companies are forced to compete, the market will find a way to generate and diffuse an unending stream of innovations."--Martin Wolf, Financial Times

"The book could not be more timely."--David Propson, New York Law Journal

"Over the past 50 years, William Baumol has made groundbreaking contributions to a wide range of economic fields, including antitrust, the study of productivity, and the nature of growth. . . . At 80, and still going strong, he is among the last working members of the great generation of post-World War II economists."--Business Week

"In this fine volume [Baumol] challenges readers to rethink entirely the conventional wisdom concerning the nature and benefits of the capitalist (or free market) system. . . . [It is] readable, challenging, stimulating."--Choice

"For managers looking for a big picture view, this is a useful account. And while it deflates the romantic view of the maverick innovative company, the book justly celebrates the positive results of this routinized 'innovation machine'--the unprecedented growth rates we've had under capitalism."--Harvard Business Review

"You cannot fault Baumol for being unambitious. In this fine volume he challenges readers to rethink entirely the conventional wisdom concerning the nature and benefits of the capitalist (or free market) system. . . . Readable, challenging, stimulating."--Choice

"An important new book."--David Crane, Toronto Star

"Professor Baumol is a giant in the field of economics. . . . This book displays both his prodigious intellect and the sweep of his scholarship. . . . [T]his is an important book."--Ashish Arora, Journal of Technology Transfer

From the Inside Flap

"A good book and a valuable book by an author whose experience, wisdom, and analytical ability make his thoughts automatically important."--Robert M. Solow, Massachusetts Institute of Technology, 1987 Nobel Laureate in Economic Sciences

"Well written and well organized, this book provides an overriding vision of the economic process, in particular, the strange sense in which competition coexists with what might be termed a cooperative process of learning. It is likely to be an important stimulus to research."--Kenneth J. Arrow, Stanford University, 1972 Nobel Laureate in Economic Sciences

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Product details

Hardcover: 336 pages
Publisher: Princeton University Press (April 21, 2002)
Language: English
ISBN-10: 0691096155
ISBN-13: 978-0691096155
Product Dimensions: 6.5 x 1 x 9.5 inches
Shipping Weight: 1.4 pounds (View shipping rates and policies)
Average Customer Review: 4 customer reviews
Amazon Best Sellers Rank: #1,909,890 in Books (See Top 100 in Books)
- #298 in Books > Business & Money > Economics > Comparative
- #1052 in Books > Business & Money > Economics > Free Enterprise
- #2880 in Books > Business & Money > Economics > Theory

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Michael

Very good.

July 4, 2012

Format: PaperbackVerified Purchase

Interesting book with clear, well developed points defending the importance of free market and its contribution to the process of innovation.

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Arthur M. Diamond, Jr.

Kyle Lear's Review of Baumol's The Free-Market Innovation Machine

June 1, 2010

Format: PaperbackVerified Purchase

Kyle Lear's review was made as part of a critical review assignment for the Spring 2010 Economics of Technology seminar at the University of Nebraska at Omaha, taught by Art Diamond. (The course syllabus stated that part of the critical review assignment consisted of the making of a video recording of the review, and the posting of the review to Amazon.)

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Packed with Knowledge!

May 18, 2004

Format: Hardcover

This book should certainly be on every businessperson's reading list, and every legislator's, and every student's. It is a lucid, well-organized and admirably logical presentation of the role of innovation in capitalism, and the role of capitalism in innovation. Author William J. Baumol accomplishes something rare indeed by spanning the chasm between quantitative and qualitative economic writing. He has the verbal skill to write clearly and accessibly, explaining his points in plain if elevated and austere language, and illustrating them with interesting historical examples. His rigorous mathematical demonstration would satisfy the most demanding academic economist. Baumol's insight that capitalism's great achievement is to make innovation routine distinguishes this book from others on innovation, entrepreneurship and creativity. Although the lone inventor matters, ancient Rome and China had lone inventors and yet those empires did not produce economic growth on the scale that capitalism has produced it. Capitalism is distinctly productive because it makes innovation a self-sustaining and indispensable phenomenon, driving and driven by competition. We find this intriguing thesis well worth serious consideration.

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From The Independent Review

Good Book on Necessity of Institutional Rules

September 3, 2003

Format: Hardcover

"The thesis of William J. Baumol's latest book is articulated clearly at the start. The free-market growth engine depends ultimately on institutional rules. People may have a natural entrepreuneurial instinct, but that instinct can find outlet in criminal, rent-seeking, or other destructive activities as easily as in productive venues. Economic growth depends, however, on more than just rules and norms that channel such inclinations in the "right" direction. It depends also on rules governing the appropriation of intellectual property and on the precise trade-off a society makes between pricing information at its marginal cost (making it free) and providing incentives for invention and innovation by creating rules to allow appropriobility for fixed periods of time. We call this body of rules patent, copyright, and, in general, intellectual property law (although, as Baumol argues, antitrust is also relevant). The dilemma is that in the absence of such protection there are few private incentives for producing new information or discoveries, but in the presence of such protection we impose monopoly pricing and, consequently, static efficiency losses."
"The first section of the book, devoted to the "capitalist growth mechanism," is the most interesting. Here Baumol develops his vision of a capitalist economy as consisting of competitive price-taking sector and an oligopolistic sector in which competition occurs more often on the innovation margin rather than on the price margin. The pharmaceutical and computer industries are cases in point. This oligopolistic sector is the economy's engine of growth. Firms here must innovate or they die; they also must price discriminate or die because the heavy fixed costs of innovation cannot be covered if everyone pays a price equal to marginal cost. These costs must be recouped in the same way that railroads were forced to price discriminate to cover their fixed costs for rolling stock and permanent way. Baumol cautions antitrust authorities against jumping to the conclusion that departures from marginal-cost pricing are necessarily evident of monopoly power."
"As Baumol's book proceeds, it devotes a generally increasing share of space to formal models...[and] it was somewhat dissapointing...to discover how much of the second half of the book is devoted to model building as opposed to discussion..."

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