Quotes from this post on Forbes.com by Timothy Lee:
1. The Schumpeter View:
The Schumpeterian view of innovation focuses on the importance of incentives. On this view, the larger the rewards to innovation, the greater incentives firms have to innovate, the more money they’ll spend on innovation, and the more innovation we’ll get. In other words, “where there’s a will there’s a way.” Schumpeterians favor policies to help firms capture as large a share as possible of the positive externalities generated by their innovations, in order to increase the incentive for future innovators. And they tend to be unconcerned about competition, believing that an unregulated, rational monopolist has as much incentive to maximize output as firms operating in a competitive market do.
2. The Hayek View:
The Hayekian view of innovation focuses on the limited knowledge and capabilities of economic actors. They view innovation as a matter of trial and error and seek to maximize the number of firms that have the opportunity to try to solve any given problem. Hayekians emphasize that mature firms tend to be extremely good at a few things and bad at everything else—Google isgood at designing network services and bad at designing devices; the opposite is true at Apple. A problem that’s trivial for one firm to solve can excruciatingly difficult for most others. This means that incentives often don’t matter very much, because the firm that’s best-positioned to solve a particular problem won’t need a very large reward to solve it.
Which is right?:
I’m in the Hayekian camp because I see overwhelming evidence that firms are much less versatile and rational than the Schumpeterian worldview assumes. Take, for example, (that) many companies have tried and failed to produce commercially viable alternatives to the iPad… Building an iPad didn’t just require millions of dollars, it required that those millions be spent by the right company. And the only way to figure out which company is the right one is to let a bunch of them try and fail.
Case study: Monopolies. Schumpter says they aren’t a big deal, Hayek says they are. The author takes Hayek’s side, and I totally agree with him.
This is why monopolies are so harmful. Theoretically, a monopolist has as much incentive to produce innovative products as a bunch of smaller, competing firms do. But the incentive to innovate and the ability to do so are very different things. Giving the incumbent a monopoly in order to increase its incentive to innovate likely means locking out other firms that are willing and able to produce superior innovations for much less money.
I think you can expand the line “the only way to figure out which company is the right one is to let a bunch of them try and fail” to a broader spectrum of organizations beyond just companies. Take, for example, charter schools vs. public schools. In the case of public schools, you could say that a mix of federal and state laws and regulations allow them to create a monopoly on the product of primary and secondary school education. Competing models, be they Montessori, magnet, IB, private, etc. in some ways act as competitors to the governments monopoly, though, in some cases, regulations constrain the amount of freedom these organizations may have to innovate.
It’s in this light that I think people should be viewing the charter school movement - as a critical step in the evolution of the “market” for education services, one that contributes to the breaking of the government’s “monopoly” on the industry. Similarly, its seems quite obvious that the monopoly that the American college and university system has on post-secondary education is coming to an end, because clearly they haven’t been able to innovate in a way that has kept prices affordable or the product relevant to employers or macroeconomic needs (i.e. STEM degrees). The solution then, in the spirit of Hayek and contrary to the spirit of Schumpeter, is to bring more competition into this industry.