The Free Market Innovation Machine

"The Free Market Innovation Machine is by Will Baumol, one of the most fruitful and creative economists of our time. He wrote my textbook when I was an undergraduate – which was a very long time ago. This is a book about how companies do research, put it into practice and develop new products and services. The real insight in it, which hadn’t really been documented so carefully before, is that big companies and small companies do very different types of innovation. The small ones are much more likely to come up with really radical and disruptive innovations, whereas big ones, with their huge corporate R&D departments, are much more likely to make incremental improvements of existing products. It ties in with the literature in business economics and at business schools, such as the innovator’s dilemma, which argues that it’s very difficult for an established company to do something that will really disrupt its existing, profitable business model. It’s much easier for someone small and new to be disruptive. So Will Baumol looks at examples of the kinds of innovations small companies have introduced compared to the improvements that the big ones do. You need them both. You need the completely new product that will overturn things, but you also do need the constant, decade’s worth of steady improvements as well, because the first version of something that comes along usually isn’t very good, and you need the deep pockets and research efforts of a major company to bring along the successive improvements that will make it acceptable and accessible to the great mass of consumers and become a mass-market product. This book launched an entire literature looking at the detail of innovation, and what different companies actually do, in much greater detail than had been brought together before. For all the great virtues of economists, many tend to generalise about business without looking at the detail – and the terrific thing about Will Baumol is that he’s an economist who really is interested in the detail of how companies and markets work. Yes, and since it was published it’s become much more widely studied. People have become much more interested in innovation as a whole, because the impact of the computer and biomedical technologies on overall productivity growth has been quite widely recognised since just after 2000. In the early days of the new economy, there were quite a lot of sceptics about whether it was having any impact on the economy as a whole, and the long-term growth rate. But by 2002, when this book was published, this was coming to be much more widely accepted. It’s something we really need to understand because we have ageing societies. We’ve had a long period of pretty low productivity growth in many Western countries, and if we want to be able to sustain living standards with an ageing and declining population, we have to put much more effort into increasing productivity."