State of Innovation

Patents and Innovation Economics

The Greatest Mistake in Economics: We Are Wealthier Because Profit Margins Are Small

Economists often argue that the West is wealthier because profit margins are driven down by competition.  For instance, here is a quote from an article in Forbes by a researcher at the Adam Smith Institute

What this means is that prices to us, the consumers, keep coming down as a result of that competition. And yes, if the prices we have to pay for things decline then we are becoming richer. Our real incomes are rising as a result.[1]

Economists have two scientific sounding theories for this idea, perfect and pure competition or the zero profit tendency.

Pure and Perfect Competition

According to Investopedia under perfect “Companies earn just enough profit to stay in business and no more, because if they were to earn excess profits, other companies would enter the market and drive profits back down to the bare minimum.”[2]  Economist hold up perfect completion up as the ideal market situation and any other situation result is “excess profits”.  In fact, perfect competition is the theoretical underpinning of anti-trust law.

There are a number of problems with this theory of perfect competition and I discuss them in depth in my book Source of Economic Growth, so this will just be a brief overview.  First of all we do not create wealth by consuming, we create wealth by producing and we can only produce more efficiently by inventing.  Our standard of living is defined by our technology.  Second the wealthiest countries are those that have producers (companies and workers) whose profit margins have not been squeezed to the bare minimum.  How wealthy are the owners of a company making the bare minimum of profits?  How much can they pay their employees, when their margins are at the bare minimum?

We get wealthier by inventing new technologies that provide large profit margins.  Railroads had (have) much larger profit margins than human mules (Sherpa’s), or canal owners, or wagon drivers.  They still deliver goods for much less cost despite their higher profit margins.  In the future railroads may be obsolete as UAVs take over the job of transporting goods as Amazon is experimenting with.

 

Zero Total Profit Tendency

                Austrian Economics supposedly rejects the perfect competition theory, however they replace it with their own version, the tendency that total profits will be zero when an economy is in equilibrium.[3]  Like perfect competition they assume that competition will drive profits down or toward zero.

 

Conclusion

Competition is not the source of wealth.  In fact in a perfect world economically, we would all produce unique items of extremely high value.  This is not to say that government inhibition of competition is good or makes us wealthier either.  However, every property right (that is enforced) results in less competition and we would not be wealthier without property rights.  Competition is a result of capitalism, it is not the definition of capitalism or what makes us wealthy.  It is this sort of confusion about cause and effect that has so-called free market economists either arguing for anti-trust laws or arguing for anarchy (the absence of property rights).

The source of all real per capita increases in wealth is due to increasing levels of technology, not competition.  The only way we increase our level of technology is by inventing.  Property rights for inventors are the most important property right economically and the fundamental basis of all property rights.

[1] Tim Worstall, Amazon Vs Walmart On Free Shipping – It’s Not Capitalism That Makes Us Rich But Market Competition, https://www.forbes.com/sites/timworstall/2017/05/09/amazon-vs-walmart-on-free-shipping-its-not-capitalism-that-makes-us-rich-but-market-competition/#6dc7b5593c8e accessed June 7, 2017.

[2] Perfect Competition http://www.investopedia.com/terms/p/perfectcompetition.asp#ixzz4jLsXzRQ accessed June 7, 2017.

 

[3]Driving the Market Process: “Alertness” Versus Innovation and “Creative Destruction” https://mises.org/library/driving-market-process-alertness-versus-innovation-and-creative-destruction accessed June 7, 2017

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June 8, 2017 Posted by | -Economics, Innovation, Patents, philosophy, Regulation | , , , | 2 Comments

Intellectual Property, Innovation and Economic Growth

This article, Intellectual Property, Innovation and Economic Growth: Mercatus Gets it Wrong, by Mark Schultz & Adam Mossoff is a follow up to their other article Intellectual property and economic prosperity: Friends or foes?  This article is more hard hitting and the ask the questions of who has the burden of proof on whether patents promote economic growth?  Anti-patent proponents consistently fail to provide any empirical data to support their positions, although they are great at coming up with anecdotal stories.  Despite this they assume that the burden of proof is on people who support property rights in inventions.

 

The reason anti-patent advocates don’t think they have the burden of proof is that they have been taught the economic concept call pure and perfect competition as the goal of capitalism.  Some of these people even think that perfect competition is the definition of capitalism.  Perfect competition is inconsistent with the condition necessary for real per capita economic growth, is inconsistent with all property rights, has nothing to do with capitalism, is anti-mind, anti-invention, anti-patent.

PERFECT COMPETITION IS THE ECONOMIC IDEALIZATION OF SLAVERY.

 

 

August 29, 2014 Posted by | News | , , , , , | Leave a comment