– Oscar Rodríguez Carreiro – 

  It is commonly believed that innovation is a key aspect of economic development that needs State support given some of its special characteristics (basically because it is said to be a public good affected by externalities), for instance in the form of subsidies to or direct creation of R+D, skills training or the establishment of a network of research institutions. This idea represents a mechanistic and scientistic view of innovation that requires a clarification of the concept.

  The Merriam-Webster dictionary defines innovation as “the introduction of something new”. An innovation does not necessarily mean an improvement. Any change, no matter how stupid or ludicrous, constitutes an innovation. I would be innovating even if I develop a new model of machine with half the productivity of the previous model or design a new kind of product that nobody wants.

  Finding new ways to cause harm is also an example of innovation. The development of the atomic bomb increased greatly the capacity for massive destruction. The Nazi “Final Solution” with the introduction of modern industrial processes represents an example of innovation in the field of genocide. In fact, the State has been one of the most innovative institutions throughout history, finding or adopting on a large scale new and refined ways of intervention that contributed to an increase in its power and capacity of extraction of resources: the establishment and imposition of a monopoly of fiat money, the use of mathematical tools for the development of census to obtain detailed information about individuals and their resources, the continuous creation of new types of taxes, etc. Economists, political scientists, sociologists and other academics who constitute the “intellectual guard” of the State are constantly innovating in a search for new rhetoric expressions to justify State intervention. It could be argued that one of the elements contributing to academic success is the innovative capacity for finding new ways to express the same old arguments that justify intervention. Thus, for instance, a large number of current authors argues the need for State coordination of industrial investment, stating that economic success depends on the realization of new activities and this requires simultaneous and complementary investments upward and downward in the structure of production that would not occur in a free market system given the lack of coordination of private entrepreneurs. This argument is simply a variant of the Marxist argument of the anarchy of capitalist production that leads to the economic chaos that ultimately justifies the imposition of a system of central planning. However, in a clear example of innovation, certain economists have found a new way to express this argument that allows them to hide its origin and genealogy.

  It could be objected that State support to innovation does not necessarily lead to stupid or harmful innovations, but to the development of new technology that allows an improvement in the standard of living. Unfortunately, this is not true. Economic resources are scarce, its use in a specific activity implies that they cannot be used in any other activity. By intervening the State is altering the pattern of resource allocation of the free market, obtaining resources by means of coercion and directing them to those research activities that are deemed appropriate. In the free market, entrepreneurs try to anticipate which are the most urgent consumers’ needs. The anticipated price of final products imputes value to the factors of production. In this way, entrepreneurs direct resources toward those activities that are expected to meet consumers’ needs more adequately. The success or failure of the entrepreneurial anticipation is demonstrated by the obtention of profits or losses. The entrepreneurs who suffer losses (which means they are wasting resources) are expelled from the market, while those that obtain benefits (which means they are correctly using the resources in the satisfaction of consumer demands) continue or increase their productive activities. In this way, the free market is continuously evaluating if the activities carried out by entrepreneurs lead to an improvement of the living conditions of all individuals. The State, in contrast, cannot carry out this evaluation because the authoritative determination of the use of resources prevents the voluntary choice of consumers and, without knowing the opportunity cost of the resources used, it is impossible to know if the result supposes an improvement in living conditions.

   The free market is the only economic system that can determine in a rational manner what investigations have to be carried out. Since it can to resort to the information contained in prices and to the profit-and-loss test it is possible to determine what research is deemed useful by consumers. Thus, if a company risks its capital by financing research in a given field and the sale of the goods obtained as a result of that investigation produce profits, this demonstrates that the resources used both in research and in the manufacture of the products were employed in a manner that met consumers’ needs. This, in turn, will stimulate further research in this field. Losses would demonstrate that such research was not useful to serve consumers adequately.

  Even though the action of the State led to technological improvements it would not be possible to say that this contributes to the improvement of the standard of living of the majority of the population. The development and implementation of this new technology could be diverting resources from other activities more valued. That is to say, an obsolete technology can be economically more efficient than a more advanced if it needs fewer resources, which allows the use of other resources in activities more highly valued. The efficient introduction of new technology depends on the ratio of time preference, the interest rate and the accumulation of capital. This information, transmitted in a free market through prices, is distorted by State intervention.

  There is only one way to correctly determine what innovations are beneficial: the voluntary choices of individuals. By destroying “consumers’ sovereignty”, the State promotion of innovation is nothing but a forced substitution of the arbitrary valuations of a small group at the expense of the valuations of the majority of the people. The State promotion of innovation is another form of capital consumption that involves the deterioration of the standard of living of the majority of the people.