Capitalism and Innovation: The Historical Record

How does creativity interact with capitalism?

There have been several periods of the world’s economic history that have been interesting in this regard. The period of the Industrial revolution in Britain is a fascinating period. The industrialization of the United States particularly after the Civil War was also a fascinating period in time. So is the industrialization in Asia that is truly of historic proportions and is as “old fashioned” as they come in terms of raw materials demand and brute raw industrialization.

The 1970’s were a disappointment in terms of productivity gains but a lot of that was due to the disastrous experiments the Anglo countries pursued with the failed Keynesian economics. Unsound money, stifling regulation, tariff protection, crippling banking controls on capital movements had a lot to do with 70’s being a lost decade.

When one considers the Thatcher, Reagan and Hawke reforms of the 1980s, it is as if an economic engine was started. There were 20 million new jobs were created in the US alone during the 80’s under Reagan’s watch and the economic expansion created the equivalent of Germany’s economy – an incredible achievement. Productivity takes a back seat in the theatre when you experience that sort of expansion. Australia’s economic expansion (other than the short sharp hiccup in the early 1990’s) has been on a continuous role since the 80’s because of Hawke’s reforms.

Are productivity gains linked to the rise of the Internet? Possibly, however the Internet was not a government creation. Those who suggest that that the world-wide-web would not be around today if not for the US government’s primary introduction of the codes into the public domain are wrong. I’ve seen this argument peddled on numerous occasions used to somehow validate state intervention in the private economy. I think Gore threw this out when he was big noting himself in 2000 presidential debate.

Let me make a contrary assertion. The US government’s release of those codes that supposedly enabled the Internet would have had absolutely zero effect in terms of where we are now.

There has been an Internet/intranet of sorts since the mid-1970’s widely used on a subscriber basis. It was called the Reuter Dealing System. Bank traders could contact each other by tapping a few codes on a key board allowing them to trade currencies and have live conversations across the globe. It was basically a digitized but much more elaborate version of the telex. A lesser-used system was Telerate, which was a collaborative venture between several money market brokers and Dow Jones (the owner of the Wall Street journal). These systems carried global currency rates and banks had individualized pages (like a primitive version of a website of today) with all sorts of financial information such as Eurodollar borrowing and lending rates. News- financial, general, sporting- was also a feature of these systems carried and updated live. Other sectors of the financial markets had their own intranets carrying dealing prices for Government/ Eurobonds and eventually equities. So the idea that the world was a dark “webless” place before the release of those codes is wrong.

To suggest that we would not be where we are now if it hadn’t been for the US government code release is to believe that all the digital developments in the financial markets (I forgot to mention Bloomberg monitor that was a truly remarkable development) would have remained frozen in that industry is laughable. I actually recall Reuters explaining once that IBM was looking into the idea of developing intranet services for non-bank firms and was thinking of collaborating with Reuters on this venture.

This is the trouble with sites like Wiki. It hardly mentions these innovations and people are left believing the code release was the start of the web. It wasn’t.

Let’s see how it went: The running man, courier pigeon, the telegraph, the telephone, the telex, the Reuter dealing system….. then nothing unless the government developed the internet.

20 thoughts on “Capitalism and Innovation: The Historical Record

  1. … the 70’s were a disappointment in terms of productivity gains but a lot of that was due to the disastrous experiments the Anglo countries pursued with the failed Keynesian economics. Unsound money, stifling regulation, tariff protection, crippling banking controls on capital movements had a lot to do with 70’s being a lost decade.

    Of course I agree that over regulation and price controls on credit as well as tariffs are all rather negative burdens on any economy. However I’d argue that unsound money stands out almost alone as the principle cause of the problems in the 1970s. Tariffs and bank controls were present before the 1970s and did not cause severe problems in those earlier decades. And we have more regulations today than we did in the 1970s.

  2. This is a lie: “Yet neither the Internet nor the Web was a product of the market economy, and even now the relationship between market incentives and the social contribution made by Internet-related activities is tenuous at best.”

    Every protocol did come from DARPA originally, but everything we use now is the product of a market economy. Javascript, Flash, etc, are all products of a market economy.

  3. The internet was invented by British postwar migrant to Australia who was at the time unemployed in a state that he described as “computer psychosis” after working for the government on university campuses. A bit like Humphreys, except that this guy lived on the Mornington Peninsula in Victoria and did not expect political victory in the mainland whilst based in Asian brothels most of the year.

    The yanks got hold of his papers and the rest is your reality.. Do the research.

  4. Al Gore also inveted new words, like ‘invent’, because people like the ‘n’ sound. He also invented the Allegory, algorithms, aligators, and other useful stuff, some too gory to mention on a wholesome family page like this.

  5. Despite having invented the internet and wireless internet, we don’t really have the internet in Australia yet as such. Not when compared to advanced capitalist nations in the region and around the world. In fact, developing nations have better internet services, ie contract free, faster, no download limit, free or low cost etc.
    Australia is pretty much 4th world (ie a weird blend of command monopoly capitalism manned by befreckled bisexuals, a class of its own) and the privatised sector (Telstra) and the government are to blame for the 4th rate nature of its internet economics. The economy has suffered and we may never make it to developed nation status. The economic growth of Australia is primitive in nature, ie orientated towards fossil fuels and meat. We don’t even have a decent war machine because no one wants to invade thousand of kilometres of desert when multinationals can just set up and take what they want anyway, and this is referred to as economic growth…
    Okay ca va,
    bring us a bottle of the house red JC pronto!

  6. JC,

    I think the onus is really on you to make some reasonable estimation of when we would have seen the internet (i.e., 20 years later?) and how it would be different, given that the way things panned out was that it was basically a spin-off from basic research paid for by the government.

  7. I did make an estimate, Conrad. I suggested we would be in exactly the place we are now with respect to the web with or without the code release.
    To be perfectly frank, Gore’s assistance in releasing the codes was to set up a sort of intranet for the education sector (i believe) sounding very similar to what Wall Street was using.

  8. Why Conrad? All those Government programmes were based on prior research and the accumulation of capital and technology.

    The programmes often never had a positive rate of return. Why wouldn’t the private sector have a higher growth rate? Why are US weapons generally better than the Soviets?

  9. I wasn’t talking “all” Mark, I was talking “internet”. There are lots of things that can never make a profit for individual firms or the profit takes so long appearing that they are not pursued by private firms. If it wasn’t for publically funded universities using the internet, for example, perhaps we would be 10 years behind now. Simply saying “the same” isn’t very convincing.

    If you don’t believe that, look up the history of computer chips, subtract the public part, and have a non-biased think where we’d be now. If you want more current examples, look up where the initial research into nanotechnology, stem cells, and cloning came from. They’ll all be profitable one day, but the initial technology wasn’t. I’m not saying private firms don’t have a role here (far from it), but the initial unprofitable groundwork wasn’t done privately.

  10. I think if your going to compare the internet to anything you would compare the IP packet to the IEEE 802 packet. The 802 was designed to span the world not just a network segment.

    The internet differs greatly from the switched network. The switched network establishes a circuit and then transfers the data. An IP packet is sent into the cloud with a prayer.

    The things you mention in the article are all just toys.

    I would argue that the Internet is a classic example of the advantage of Libertarian principles. It was a set of protocols freed from government and corporate control and it won.

  11. We would have seen the internet far earlier without government. Since greater capital accumulation and sound money would have driven technology ahead. How far do you want to begin the start date?

  12. I’m not saying the internet and the closed systems were identical, Charles. I’m not making that claim and no one has as far as I can understand.

    I am asserting that there was plenty of evidence of the Internet’s beginnings to swallow crap that the only way we got here was through the code release. Sorry but I don’t buy that swill and neither should you.

  13. but the initial unprofitable groundwork wasn’t done privately.

    Most large important research universities in the US are privately owned. Some , like Harvard have enormous endowments.
    How would you categorize their ” non profitable” research? As government funded?

  14. but the initial unprofitable groundwork wasn’t done privately.

    Car and aviation companies, especially Japanese car companies, also fund research that is not immediately and directly applicable to their business. Admittedly I don’t know what happens to the research that never makes it to commercialisation, but nonetheless private industry does employ research scientists to do relatively ‘pure’ research.

  15. “If it wasn’t for publically funded universities using the internet, for example, perhaps we would be 10 years behind now. ”

    That is not the same argument Conrad. If universities were private, they would have used the internet anyway.

    “There are lots of things that can never make a profit for individual firms or the profit takes so long appearing that they are not pursued by private firms.”


    Such as? Please show me using the time value of money concept why this is ever a good idea. Why isn’t it just another form of subsidy?

  16. Conrad,

    Like Mick said; private firms often engage in unprofitable activity that leads to research on a later, more profitable project: take the Apple Lisa which was a failure but set the groundwork for the iMacs and Powerbooks.

    Furthermore, firms don’t know if something is profitable at the outset. Given the proliferation and utility of the internet, it would be interesting to see why firms would think they couldn’t have a gain from this kind of technology either as a producer and user of the product or simply as a supplier to the market.

    The lack of an initial mass market for the internet would not be a reason for it not being developed or produced. Microsoft itself was a niche software provider pre DOS – which it marketed better than the originator, then along comes Windows.

    The private sector is generally better at marketing and so can have new technologies returning positive returns and having reinvestment where the public sector probably wouldn’t.

    This is a good reason to let innovation up to the market. In a broader sense it has lower opportunity costs to the rest of the economy.

  17. “How would you categorize their ” non profitable” research? As government funded?”

    A lot of it is — they get billions and billions of government funding from the NIMH and NSF.

    “Such as?”

    I gave you three already that were clearly invented with public money. If you want a fourth that is an end product (rather than the initial work), then new generation antibiotics are a good one. They don’t get invented because there is no profitable market for them, and that’s well known beforehand. It’s also a well known problem of not being able to get exclusive rights to technology you invent for long enough — this is also one of the problems of doing basic research — by the time anyone can make money from it, it is long out of copyright (or copied or uncopyrightable). It’s one of the reasons China gets no-where with new technology — no-one bothers to invent things because you don’t get exclusive rights for long enough.

  18. Conrad, you are making the same mistake with regards to “public”. Public money and “non market” are not exactly the same.

    What is spent with public money covers more than the strict category of public goods. Public goods (decidely non market) and publicly owned (including profitable or poorly run Government business enterprises) are not always the same.

    The new generation of antibiotics wouldn’t have been invented in 1939 by a private firm because they would be science fiction back then…whereas the first generation were obviously profitable.

    Conrad…I have doubts with what you say about China.

    “Maskin suggested that software patents inhibit innovation rather than stimulate progress. Software, semiconductor, and computer industries have been innovative despite historically weak patent protection, he argued. Innovation in those industries has been sequential and complementary, so competition can increase firms’ future profits. In such a dynamic industry, “patent protection may reduce overall innovation and social welfare.” A natural experiment occurred in the 1980s when patent protection was extended to software,” wrote Maskin. “Standard arguments would predict that R&D intensity and productivity should have increased among patenting firms. Consistent with our model, however, these increases did not occur.” Other evidence supporting this model includes a distinctive pattern of cross-licensing and a positive relationship between rates of innovation and firm entry.”

    China probably doesn’t need to or can’t prodice much new technology – yet. It hasn’t developed yet and it has only had knowlegde workers for a couple of decades. If you force it, the situation will be reminiscient of 1960’s industrialisation and import substition policies that did little to raise wages and capital intensity in some SE Asian countries.

  19. “Our business model is one of very high risk: We dig a very big hole in the ground, spend three billion dollars to build a factory in it, which takes three years, to produce technology we haven’t invented yet, to run products we haven’t designed yet, for markets which don’t exist. We do that two or three times a year.”
    – Paul Otellini, CEO of Intel

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