Innovation under capitalism is devastatingly flawed. A socialist economic system places social interests at the heart of the innovation process – that solves better.

Mainstream Western economics gives capitalism high marks for innovation. The pursuit of profit is supposed to assure a strong incentive to engage in the invention, development, and production stages of innovation, while also inducing investors to provide potential innovators with the necessary financial means. Free entry into markets compels rapid diffusion of innovations. An optimal contribution to human welfare is assured, given the assumption that profitability reflects the ultimate value to society of any economic activity. While capitalism does promote a certain kind of rapid technological change, the above account has serious flaws. The pursuit of profit does not play such a big role at the important invention stage of innovation. Studies show that a large majority of economically important inventions come from university scientists, government researchers, and independent inventors, for whom pecuniary considerations are not typically dominant.6 At the development stage, the still-high risks, plus the sometimes substantial external (and hence uncapturable) benefits from innovation, lead to (successful) demands for government subsidization.7 The profit incentive for innovation is profoundly contradictory. For the profit incentive to operate, innovators must be able to gain monopoly control over the innovation and bar competitors, or else the first innovator’s profit will be small and fleeting. However, the legal and extra-legal means that capitalist innovators use to gain such monopoly power (patents and predatory tactics) prevent the rapid diffusion of new products and processes. The greatest flaw in the capitalist innovation process has to do with the third question, that of the contribution of innovative activity to human welfare. As capitalist innovators follow the guide of profits, the following problems arise: 1) innovations are disproportionally directed at upper income consumers;8 2) public goods are largely ignored in the innovation process; 3) external benefits and costs of innovation, which may loom very large, are not taken into account in innovation decisions; 4) the monopoly power required to stimulate innovation leads to high monopoly prices for the resulting product, limiting the use of the new innovation and hence reducing the benefit from it;9 5) much innovation activity is pure waste, as firms devote innovation resources toward the end of defeating rivals rather than benefitting consumers.10 While capitalism does promote the development of the forces of production, it does so in a manner that is severely flawed. Capitalism can promote innovation only if the state and other non-capitalist institutions play an active role in organizing and financing the innovation process, particularly the invention stage. It can do so only with significant monopoly power and barriers to entry that simultaneously promote and hinder technical progress. And it produces a severely distorted innovation process that, after a certain stage of development, may subtract as much from human welfare as it contributes, or even more. 4. Innovation under Soviet State Socialism The Soviet system was, at best, a highly flawed and distorted version of socialism. However, it was the first large-scale effort to build a modern economy based on public ownership of productive property and coordination of the economy by economic planning. For this reason, the experience of the Soviet economy in the area of innovation is relevant to our concerns here. Spokespeople for the Soviet system claimed that, as a socialist system, it would, and did, outperform capitalism in promoting technical progress. The key advantages cited were the absence of commercial secrecy, the avoidance of the wasteful duplication of R&D effort of capitalism, and the ability to directly incorporate technological advances into the central plan rather than having to rely on the indirect incentive of profitability. However, the Soviet leadership soon discovered that innovation was not as straightforward a process as had been assumed. In the postwar decades the system was frequently adjusted and reformed to improve innovation performance. The mature Soviet system had various institutional components to its innovation system, including the incorporation of major planned new technologies into the central plan by Gosplan each year. However, two institutions were most important in Soviet innovation performance: 1) a system of R&D Institutes, which had innovation as their sole mission; and 2) the individual enterprises, which typically had a design department for new product development and, at larger enterprises, a research laboratory. The Soviet system did have significant strengths in innovation performance.11 Soviet R&D Institutes were staffed with well-trained and dedicated researchers and were reasonably well funded, and they and the enterprises did produce many important innovations. The success was best known in military and space technology, but it extended to some civilian industrial technologies.12 Output per labor hour in the Soviet economy grew rapidly until 1975, much faster than in the U.S. during that period (Kotz and Weir, 1997, p. 46). However, Soviet innovation performance never lived up to expectations. Understanding the problems encountered in the Soviet innovation process -- and the institutional sources of those problems -- is relevant to evaluating the potential innovation performance of a DPPS system, including potential problems that it might encounter. There was a serious incentive problem in the Soviet innovation process. The incentive problem was not located at the R&D Institutes but rather at the enterprises. Soviet enterprises were relatively good at minor innovations. The incentive problem involved larger changes in the production process and the development of new products that differed substantially from what had been produced before. The Soviet enterprise director faced a context of relatively low rewards (in the director’s bonus) for successful innovations while the risks attendant upon major innovations were quite high. This tended to make Soviet enterprise directors conservative about innovation, with reluctance to develop new products or processes or to introduce those that emerged from the R&D Institutes. The risk of innovation was not just the result of the inevitable delays and unforseen costs that arise when trying something new. The key factor was the difficult supply relations in the Soviet planning system. Enterprises always worried about whether sufficient supplies would be delivered on time to enable the enterprise to meet its goals. This was a result of the policy of “taut planning,” aimed at achieving the maximum possible output from available inputs. Innovation necessitates unforeseen changes in required inputs, and the taut planning system made it difficult to change the input mix in mid-plan. The hierarchical relations of Soviet planning meant that enterprises did not have close relations with their suppliers, which compounded the problem. These conditions made innovation very risky, with a likelihood of interruption of the enterprise’s regular production, resulting in financial punishment for the director. Another incentive problem was an absence of penalties for failure to introduce available new technologies. A laggard enterprise with outmoded technology might find its costs rising above the industry average, but the ministry tended to protect its enterprises and made subsidies available. There were also problems of the means available for innovation. Innovations that involve radically new products typically entail either the entry by an existing enterprise into a new line of production or the creation of new enterprises. The Soviet planning system had relatively rigid boundaries between industries, and entry into a different line by an existing enterprise was discouraged, as poaching on the territory of others.13 While new enterprises were created from time to time, this was limited and usually faced opposition from existing enterprises. Individual inventors were greatly underutilized in the Soviet system. Most enterprises had an official policy of making small-scale facilities available to aspiring inventors. However, this program was not very effective at drawing out creative individual inventors, perhaps because the passivity bred into individuals by the repressive, centralized, hierarchical Soviet system discouraged individual inventive activity. In the matter of the effectiveness of innovative activity at advancing human welfare, the Soviet system did avoid some of the problems of capitalist innovation. There was no bias against innovation in public goods. There was no problem of monopoly pricing of new products and processes, with the attendant limitation of their use. However, the Soviet system had significant weaknesses in the effectiveness of innovative activity. We will cite three problems in this area. First, while irrational profit criteria largely guide the allocation of innovative effort in a capitalist system, in the Soviet system the “planners’ preference” guided this allocation. The top leadership favored certain sectors, particularly the military, space exploration, and certain industrial sectors, while consumer goods occupied a lowly place in their priorities. Second, there was a problem stemming from the poor relations between the two key institutions involved in innovation, the R&D Institutes and the enterprises. The R&D Institutes had the best researchers and facilities, and they produced a large volume of plans for new products and processes. However, the enterprises, which had to produce the new product or introduce the new process, complained that plans arrived that were incomplete, unrealistic, or unworkable. R&D Institutes complained that enterprises were uninterested in their proposals. The result was that much innovative effort failed to bear fruit. This seemed to be a result of the hierarchical character of the system, in which relations between institutions at the same level of the hierarchy were very poorly structured.14 Third, and perhaps most serious, innovation in the Soviet system generated major external costs, particularly for workplace and environmental health. The reason for this in the Soviet case was not the pursuit of profit but the single-minded emphasis on growth in output and the undemocratic and repressive character of the system which prevented the affected parties from defending their health interests. 5. Innovation in a Democratic Planned Participatory Socialist System What kind of innovation performance would be expected under a DPPS system, by comparison to that of capitalism and state socialism? Three features of DPPS, as laid out in Devine (1988), are relevant to innovation performance. First, the main features of the overall economic plan would be determined by a democratic process (Devine, 1988, p. 190). Second, the planning and coordination of the economy would take place, not through market forces or top-down central planning, but through a process of “negotiated coordination” (Devine, 1988, ch. 8-10). This means that resource allocation decisions would be made by boards -- industry boards and local and regional negotiated coordination bodies -- that have representation of all affected constituencies, including workers, consumers, suppliers, the local community, and even “cause” groups such as environmentalists, job safety activists, feminists, etc. These bodies would arrive at decisions through compromise among the interests represented on them. In addition, the basic units of social production, or enterprises, are considered social property and have governing boards that include representatives of all groups affected by the activity of the enterprise, including workers, consumers, suppliers, and the local community. Third, each individual would be expected to spend part of her/his work life in each of the main types of labor, which Devine defines as planning and managing labor, creative labor, nurturing labor, skilled labor, and unskilled/repetitive labor (Devine, 1988, 171). This would eliminate the social division of labor, while preserving the technical division of labor with its efficiency advantages. In the absence of competitive pursuit of profits, or a Politburo demanding innovation, what would be the source of innovation under DPPS? First, the democratic, participatory institutions of that system would empower the population to demand innovations aimed at its own benefit. Under such a system, people would stand to benefit from innovation, in the three roles that people occupy – that of consumer, worker, and community member. Consumers can benefit from new, better, and cheaper products. Workers can benefit from less arduous toil and a more satisfying experience at work. Members of the community can benefit from products and work processes that improve, rather than harm, community life. DPPS, like every economic system, can also tap a second potential source of innovation. That is the species trait of human beings of having a propensity to look for ways to change and improve their methods of doing things, entirely apart from any desire for more goods or less labor. This drive, present in most people, although not in equal measure in all, represents an important source of innovative behavior at the stage of invention, if the economic system allows it to operate freely. How would a DPPS economy translate the potential benefits of innovation into actual effective innovative activity? How would it encourage, within the economy, the expression of human beings’ natural tendency to create new things? If the populace wants innovation, they would have to build into the system significant incentives for those who are in a position to carry it out. Enterprise managers, along with everyone else who participates in any of the stages of innovation, should be eligible for rewards for successful innovation. It is not sufficient to assume that decision-makers will automatically innovate -- it must be communicated to them, via a reward system, that society values innovation. Such rewards would be needed regardless of the mix of material versus moral incentives. Pay incentives need not be huge to elicit innovative behavior, as long they are large enough to bring a noticeable consumption benefit to the innovator. As the Soviet experience indicates, a planned economy can increase the risk associated with innovation, deterring innovative activity. However, DPPS should not suffer from the problems of uncertain supplies and inflexibility that characterized Soviet planning. With representatives on one another’s decision-making boards and with opportunities to communicate on negotiated coordination bodies, there should be reliable and flexible relations between suppliers and customers. It would be necessary to eschew the Soviet policy of taut planning and operate the economy with sufficient excess productive capacity to accommodate the unforeseen changes in inputs that innovation requires. Without the spur of competition to compel laggard enterprises to adopt the best technology in the industry, could an enterprise management, perhaps backed up by a workforce unenthusiastic about change, simply refuse to make improvements? As was noted above, an enterprise under DPPS is not the sole property of its workers but is social property, upon which constituencies outside the enterprise have a legitimate claim. Industry boards would have to keep track of laggard enterprises, and consumer representatives on both industry and enterprise boards would have to be powerful enough to exert pressure to make appropriate changes, imposing financial penalties where necessary. In order for this system to work effectively, it would be desirable to have more than one enterprise in each industry, except in cases of natural monopoly.15 The purpose is not to impose a market form of competition in which the cheapest producer drives out the rest, a process which often yields socially irrational outcomes. Rather, the purpose is to permit the gathering of comparative information about enterprise performance, from market exchange as well as other sources, so as to make informed decisions about what changes enterprises should be asked to make. It would not always turn out that the higher-cost producer is the one asked to change; the lower-cost producer might be found to have achieved low costs by anti-social practices rather than superior technology. Long ago Adam Smith complained that the detailed division of labor tends to make workers stupid. The DPPS practice of assuring everyone participation in the highest types of labor should have the opposite effect. This practice, along with the widespread participation in decision-making fostered by a DPPS society, should encourage the creative, innovative behavior that is natural to our species. DPPS should create conditions for a substantial outpouring of creativity from the population, some of which would take the form of innovation in the economic sphere.