Socialism, Capitalism, Risk, and Innovation

One of the themes that comes up often in debates between socialists and capitalists is the idea of ‘punishing success’.

‘When someone, a genius, a person of distinctive intelligence, comes up with a brilliant idea that makes huge savings and improves people’s lives, and in consequence becomes very rich, why do socialists want to punish them, by depriving them of their rewards? Such people are doing great services for humanity – why does socialism hate them?’

To this the simple response is that there are two personalities here: the big capitalist, who has skillfully accumulated a lot of capital, or otherwise come by it, and the innovator, someone who performs or has performed a particular productive sort of intellectual labour. Sometimes the two overlap – often they don’t. Socialists are hostile to the former, but not the latter.

Indeed, the argument is perhaps analogous to something like following, from a defender of an Classical (i.e. not racialised) form of slavery:

‘When a slave of distinctive intelligence, a genius, comes up with a brilliant idea that makes huge savings and improves people’s lives, and in consequence gains their freedom and enough money to buy themselves many slaves, why do anti-slavery advocates want to punish them, by depriving them of their rewards? Such people are doing great services for humanity – why does anti-slavery hate them?’

The fact that these two roles are distinct is also why socialism aims not to attack them both but to separate them. That is – let us grant, for the sake of argument, that in practice measures that attack big capitalists will sometimes have the consequence of disparaging innovators (except, of course, the ones who either don’t pursue wealth and content themselves with a nobel prize or two, or who never get rich because some company snaps up the rights to their innovation).

If such an unfortunate disparagement happens, then it is a goal of socialism to undo it, by ensuring that there are no big capitalists around to make innovators look bad. Under collective ownership, would such productive people be disparaged or distrusted? Of course not: they’d be rewarded as fully as possible.

The form of the reward would depend on the specifics of the system – obviously, the more fully communistic is the economy, the less scope is there for economic rewards, but certainly there would be no stinting, I imagine, on the awards ceremonies, fame and statues. (Indeed, a non-hierarchical and non-militarist society would probably need a lot more statues of inventors and innovators, to fill the spaces where the statues of politicians and generals used to be).

Even if there were economic rewards, they’d likely be something moderate – 2 or 5 times the average income, for whatever period of time, etc., rather than hundreds of times higher. After all, what good does someone receive from the extra millions? There’s only so much actual consumption you can indulge in – really high levels of wealth are primarily about status and respect anyway (or, of course, about extending that wealth further through creating an ‘empire’).

A related tack that’s sometimes taken though is to talk about entrepreneurial wealth as a compensation for entrepreneurial risk: the idea shifts to the value of capitalism in allowing anyone with an idea to test it, as long as they can get a loan and access to markets – but requiring them to take the risk if it goes wrong. This, supposedly, produces more innovation and more ‘dynamism’ than would a system that didn’t give individuals that freedom.

This is a pretty shaky argument, though, when you think about it. Its essential claim is that it is easier to get someone to bear personal risks (and, of course, to persuade investors or banks as well…), than to get society to bear the same risks more collectively. But the same risk that would be terrifying for an individual (bankruptcy, perhaps homelessness, general personal failure) are fairly minor for society as a whole (a diminution of resources).

So it’s not at all clear that this isn’t actually an argument for socialism: that socialism, by socialising risk, will be able to support a higher level of innovation and technological dynamism than capitalism. It simply demands that just as risk is socialised, so too must be the benefits.

Added to this, of course, is the argument that socialism will be able to get more innovation by expanding the number of people with the personal and social resources to innovate – making it easier for people who are neither well-off nor heroic boot-strap-puller-uppers-by to contribute to progress.

EDIT: A third argument that I forgot, for the same conclusion, is that one of the best things about innovation is that once established, it can be spread and extended very easily – when I tell you the new idea, you gain and I don’t lose anything. But capitalism is unhappy with this, so it wraps up every new idea in secrecy and concealment, or lets the knowledge get out, but prevents people from making use of it. Conversely, socialism can allow the most complete publicity and sharing of information.

Of course, as a final note, a possibly-valid argument may be swept up in the invalid ones here. The claim that science and technology will advance faster in a liberal capitalist society than in a totalitarian society may well be true – because totalitarianism stifles creativity and criticism. But it does that at a political level, not an economic one.

6 Responses to “Socialism, Capitalism, Risk, and Innovation”

  1. despicable Says:

    Everything on the planet and in the universe evolves. It is a cause and effect process that is an objective manifestation that is independent of subjective notions of what should and shouldn’t be.
    Political and social change is not the result of secret conspiracies by large national and international organizations.
    All change is something that occurs because at a particular point in time, due to objective circumstances, situations and conditions, it becomes imperative and necesary that a particular change takes place, a change that is the only possible thing that can happen, because all other options had been exausted.
    The “Global Economy” and the “New World Order,” evolved, … and is something that was predictable and was not the result of a world wide secret conspiracy of international bankers and liberal politicians. It evolved because the capitalist system could evolve in no other way.
    “Capitalism” has outgrown Nationalism” and the only possible direction that the system of capitalism can move toward so that it could continue to grow, … is toward the system of “Globalism!”

    http://blogdespicable.blogspot.com/

  2. Colm O'Connor Says:

    >Even if there were economic rewards, they’d likely be something moderate – 2 or 5 times the average income, for whatever period of time, etc., rather than hundreds of times higher.

    This kind of reward is actually more natural in a capitalist framework. Because we have a system of intellectual “property” (I hate calling it that), the rewards for innovation (or ‘getting lucky’ as it is so often) can be incredibly, amazingly high.

    Suppose you invent some fantastic new drug, via patents you are granted a monopoly on the production of such a drug. This will make you an overnight millionaire. However, without patents/IP you’ll have a temporary advantage before some other capitalist catches up with you and copies you. You’ll get richer but not fantastically so. It changes the incentives so that a capitalist will be seeking a series of incremental and gradual innovations rather than trying for the one big hit that he’ll be able to derive rent from for the rest of his life.

    This is probably a healthier process – the ‘innovations’ which are truly huge are typically the result of somebody striking proverbial gold. The patents system thus encourages gambling.

    The gradual accumulation of many slow and steady (and mostly unrecognized) innovations are responsible for the improvement of our standard of living over the years. Nobody got a statue for inventing espresso, or bringing it to my doorstep, but goddamn if it hasn’t made my mornings easier.

    >The form of the reward would depend on the specifics of the system – obviously, the more fully communistic is the economy, the less scope is there for economic rewards, but certainly there would be no stinting, I imagine, on the awards ceremonies, fame and statues. (Indeed, a non-hierarchical and non-militarist society would probably need a lot more statues of inventors and innovators, to fill the spaces where the statues of politicians and generals used to be).

    A) Who says that they give a damn about having a statue being made of them? I wouldn’t care.

    B) Like Isaac Newton said, he was standing on the shoulders of giants. Who ends up getting the accolades and rewards tends to be rather random, very concentrated, and unlikely to correlate to the work produced. I hate the idea of rewards being produced this way because it encourages large go-for-broke gambles, which is an unhealthy investment, whether scientific or industrial.

    C) If any of the previous historical attempts at anarchism are to be believed, it’ll need some serious defense from invading statist forces. So some militarism would probably be necessary for the survival of the society.

    >Even if there were economic rewards, they’d likely be something moderate – 2 or 5 times the average income, for whatever period of time, etc., rather than hundreds of times higher. After all, what good does someone receive from the extra millions?

    One added benefit of extra millions is the ability for you and your family to never have to work again, and live in relative luxury. 2-5 times average income wouldn’t provide this.

    Not that that would necessarily reduce innovative action by the people, but the fact that your idea wouldn’t necessarily let you retire early could put a damper on you developing it.

    >This is a pretty shaky argument, though, when you think about it. Its essential claim is that it is easier to get someone to bear personal risks (and, of course, to persuade investors or banks as well…), than to get society to bear the same risks more collectively. But the same risk that would be terrifying for an individual (bankruptcy, perhaps homelessness, general personal failure) are fairly minor for society as a whole (a diminution of resources).
    >
    >So it’s not at all clear that this isn’t actually an argument for socialism: that socialism, by socialising risk, will be able to support a higher level of innovation and technological dynamism than capitalism. It simply demands that just as risk is socialised, so too must be the benefits.

    Risk is already partly socialized through our system of limited liability corporations, loans and fractional reserve banking (and venture capital). This to me seems more efficient than where risk/reward is purely socialized (making both the upside and the downside pretty meh, so the incentive to make it work is lower) and where the risk/reward is purely personalized (making upside = huge riches and downside = bankruptcy which as you rightly point out is frightening).

    You have the potential for a limitless number of ideas to be implemented, and a limited supply of capital available (whether socialist or capitalist – you have capital in either society). Somehow that has to be allocated, and personally, I’d bet on the guy who took a decent amount of personal risk for his idea over the guy who took zero personal risk but politicked his way into getting approval from the people (however that is done) at zero or very low personal risk.

    >Of course, as a final note, a possibly-valid argument may be swept up in the invalid ones here. The claim that science and technology will advance faster in a liberal capitalist society than in a totalitarian society may well be true – because totalitarianism stifles creativity and criticism. But it does that at a political level, not an economic one.

    I think that the problem of how fast science and technology advance is one that is orthogonal to how socialist or capitalist a society is. Scientific enquiry has to be funded somehow, so it’s more of a question of how much of society’s resources (10%? 20%?) are dedicated towards that aim – a proportion that is easy to select in either case, will probably lead to equal levels of achievement, but will take resources away from other developments (e.g. healthcare, decent housing, feeding people, entertainment, etc.)

  3. Colm O'Connor Says:

    >To this the simple response is that there are two personalities here: the big capitalist, who has skillfully accumulated a lot of capital, or otherwise come by it, and the innovator, someone who performs or has performed a particular productive sort of intellectual labour. Sometimes the two overlap – often they don’t. Socialists are hostile to the former, but not the latter.

    Capitalists also (often) skillfully allocate capital. It takes more skill to pick a winner than it does to get the money.

    There is also a free-riding aspect to capitalism – the innovative kind, at least. As a society, we are constantly growing richer because of the financial risks taken by overly optimistic capitalists with their own money to compete in a free market (assuming that’s what they’re doing… which an awful lot of the time they are not).

    This isn’t to say that you couldn’t have a better, more equitable, more fair and more efficient socialist system – just that capitalism does produce some social goods for free – which we can see, for instance, in the heavy deflation on many goods despite the overall inflation of our currency.

  4. Alderson Warm-Fork Says:

    “This kind of reward is actually more natural in a capitalist framework. Because we have a system of intellectual “property” (I hate calling it that), the rewards for innovation (or ‘getting lucky’ as it is so often) can be incredibly, amazingly high…It changes the incentives”

    That’s a good point, though I wouldn’t want to separate capitalism too much from intellectual property laws – capitalism means the power of the capitalist class, and equivalently a grand push for profit. Changing the law to make more things more profitable is one emanation of that.

    “Who says that they give a damn about having a statue being made of them? I wouldn’t care…Who ends up getting the accolades and rewards tends to be rather random, very concentrated, and unlikely to correlate to the work produced.”
    Right, so this is reasonable criticism of the idea that progress is mainly about the work of occasional geniuses, who will demand to be recognised for their efforts. You’re probably quite correct in criticising that idea. I guess I was writing the post to argue that even if this were true, it wouldn’t have the pro-capitalist implications that are usually drawn from it, so I largely assumed it for the sake of argument.

    “So some militarism would probably be necessary for the survival of the society.”
    Well yes, certainly some military defense would. But I think the prominence of the military, the value put on it, etc. would hopefully be quite deeply reconfigured, such that the label ‘militarist wouldn’t be appropriate. Although I’ll admit I didn’t have a hugely clear or specific meaning in mind.

    “One added benefit of extra millions is the ability for you and your family to never have to work again, and live in relative luxury. 2-5 times average income wouldn’t provide this.”
    Well, it could easily be for the rest of their lives, a sort of pension. Or just an exemption from expectations/requirements to work.

    “Somehow [capital] has to be allocated, and personally, I’d bet on the guy who took a decent amount of personal risk for his idea over the guy who took zero personal risk but politicked his way into getting approval from the people (however that is done) at zero or very low personal risk.”
    Well, I’d bet on the people likely to be affected, since the sum of their interests is pretty much the benchmark for what count as ‘rational’. So the question for me would be how effectively is the ‘guy who politicked (or was just taking his turn)’ held accountable by whatever constituency is relevant – vs. how effectively the entrepreneur is.

  5. despicable Says:

    The political and provincial “RIGHT WING” are fearful of moving forward, away from their tribal beginnings and their established customs. What is on the other side of the mountain is met with suspician and fear that translates into angry hate! “People that are not of the same clan, religion, nation” etc. according to the immoral Right Wing “should be killed.”
    It is either us or them according to the bigoted torture approving genocidal fascist loving ignorant separatists that are the political right in every nation on the planet.
    Those that say that the Political Left is precisely the same as the Political Right are politically ignorant of politics and are most likely are ignorant of most everything that exists on the planet.
    Most Fundamentalists of all orthodox religions appear to have tendencies that would prefer to retrogress backward into the time that existed in our ignorant past. They have always opposed scientific and techonological progress.
    The “Progressive Political LEFT Wing” are the forward looking political wing that is the opposite of the reactionary fearful and hateful political rightwing!
    And what about the Political “Centrists?” …These fence sitting non commital opportunists will compromise the guts out of every proposal so as to keep everything at a standstill so that we do not move backward into the ways of the past, or forward into the ways that will be our future.
    When the “Political Center,” becomes no longer relevant to the existing changing circumstances, situations, and conditions, the followers of the centrist position will move into the ranks of those that want to move backward into our no longer relevant past, and into the ranks of those that want to move forward into our not yet known future.
    Without a Political Center to compromise the differences of the Right Wing and the Left Wing these extreme wings of the political spectrum will clash!
    The clash between the “Future: and the “Past.” will eventually be compromised by a new “Relevant Center.” A CENTER that will come into being and replace the “Old Center,” that is dumped into the trash can of the no longer relevant and exisiing past.

    http://despicable.wordpress.com/

  6. LT Says:

    What of the many small businesses (like myself) who put up all their own money and capital (earned from being an employee) to create goods and services to better their situation? I would rather my own choices than have some govt lackies telling me what to do with my revenues (sharing around).


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: