Capitalism and Innovation: How Competition Stifles Ideas

This article is an excerpt from the Shortform book guide to "Where Good Ideas Come From" by Steven Johnson. Shortform has the world's best summaries and analyses of books you should be reading.

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How does capitalism impact innovation? What does history tell us about the drivers of innovation?

In Where Good Ideas Come From, Steven Johnson contends that good ideas and novel innovations are largely the result of social collaboration. He argues that capitalist competition can get in the way of this productive cooperation.

Continue reading to understand Johnson’s view of the connection between capitalism and innovation.

Capitalism’s Effect on Innovation

According to Johnson, good ideas come largely from social interaction and the sharing of knowledge through networks. He points out that, especially in the modern world, there are limits to information sharing, particularly when there is a financial incentive to keep information secret through things like copyright, patents, and intellectual property laws. When it comes to the interplay between capitalism and innovation, Johnson argues that the competitive nature of capitalism encourages companies to keep their innovations under wraps so that other companies can’t take those same innovations and use them for their own benefit. Johnson suggests that this tendency may limit our innovative ability as a society.

Johnson looks at innovations throughout history and categorizes them based on whether they were market-driven or non-market-driven, and also whether they were created by an individual or by a network of people. Based on his assessment of hundreds of major inventions and innovations throughout history, he sees a shift over time: during the Renaissance, most innovations were non-market-driven and developed by an individual. This trend gradually shifted and today, most ideas are still non-market-driven but are developed by networks. He suggests that this contradicts the capitalist principle that competition and profit motive are the primary drivers of innovation.

He doesn’t use these conclusions to call for a different economic system but instead suggests that we should shift our society toward a more open system of sharing ideas and information, one similar to the way universities and research institutions work—as opposed to corporate R&D labs.

Do We Need a New Business Model for Innovation?

Some companies, such as Nathan Myhrvold’s company Intellectual Ventures, are working to incentivize innovation by turning it into its own profession—the reverse of Johnson’s suggestion to direct innovation away from the market. They argue that if we turn invention into a kind of capital that private-sector investors fund, it will allow inventors to create things based on what would be useful and economically valuable rather than basing innovation on what government or research organizations are willing to fund.

They also suggest that such a model would eliminate the competition between individual patent-holders and corporations and instead would turn them into collaborators. Furthermore, private investors would compete with each other to fund the most useful and valuable ideas that would provide the highest return on their investments.

However, Myhrvold has met with criticism over his ideas, as some suggest his business is now just buying up patents and withholding them from other companies. Critics also question how individuals could afford to devote their time and energy to developing new innovations prior to receiving private sector investment.

The historical trends Johnson notes may be attributable to the increase in user-led innovation, which is when consumers notice a need or deficit in products and create their own solutions to fix that problem. User-led innovation is becoming more and more accessible thanks to advancing technology. Experts note that user-led innovation is often responsible for the most successful ideas, and some are calling for a switch to a holistic approach to innovation that involves interaction between users, companies, and institutions to facilitate the production of the best ideas and inventions.

Capitalism and Innovation: How Competition Stifles Ideas