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What is the incentive for innovation?

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A participatory economy does not reward those who succeed in discovering productive innovations with vastly greater consumption rights than others who make equivalent personal sacrifices in work. Instead it emphasises direct social recognition of outstanding achievements for a variety of reasons. First, successful innovation is often the outcome of cumulative human creativity for which a single individual is rarely responsible. Furthermore, an individual’s contribution is often the product of genius and luck as much as personal sacrifice, all of which implies that recognising innovation through social esteem rather than material reward is superior on ethical grounds.

Second, social incentives may very well be as powerful as material ones. No economy has ever paid, or could pay innovators the full social value of their innovations. If it did, there would be little left to pay those who apply them over long periods of time. This means if material compensation is the only reward, innovation will be under stimulated in any case. Moreover, often material reward is merely an imperfect substitute for what is truly desired — social esteem.

Sometimes it is presumed that innovating capitalist enterprises capture the full benefits of their successes, while it is also assumed that innovations spread instantaneously to all enterprises in an industry. When made explicit it is obvious these assumptions are contradictory. Yet only if both assumptions hold can one conclude that capitalism provides maximum material stimulus to innovation and achieves technological efficiency throughout the economy.

In reality innovative capitalist enterprises temporarily capture “super profits” which are competed away more or less rapidly depending on a host of circumstances including patent laws and the efficacy of enforcement of intellectual property rights. Which means that in reality there is a trade-off in capitalist economies between stimulus to innovation and the rapid spread of innovations. In market economies, much of research and development is deemed too risky and long-term for private enterprises, and research and innovation is largely funded by governments instead. Therefore the risks are socialised by taxpayers while the benefits are realised by private corporations. For example, the internet, lasers, computers and many more technologies were developed through the dynamic state sector.

In a participatory economy workers do have a material incentive to implement socially useful innovations. Any change that increases the social benefits of the outputs they produce, or reduces the social costs of the inputs they use will increase the workers council’s social benefit to social cost ratio. This makes it easier for the council to get its proposals accepted in the participatory planning process, can allow workers to reduce their effort, can permit them to improve the quality of their work life, or can raise the average effort rating the council can award its members. As in capitalism, adjustments will render any advantage they achieve temporary. As the innovation spreads to other enterprises and as indicative prices change, the full social benefits of their innovation will be both realised and spread to all workers and consumers.

The faster the adjustments are made, the more efficient and equitable the outcome. On the other hand, the more rapid the adjustments, the less the “material incentive” to innovate and the greater the incentive to “ride for free” on the innovations of others. But a participatory economy enjoys advantages in managing this trade off compared to capitalism. Most importantly, direct recognition of “social serviceability” is a more powerful incentive to innovation in a participatory economy, which reduces the magnitude of the trade off since more innovation will occur in a participatory economy than in capitalism for the same speed of adjustments.

Secondly, a participatory economy is better suited to allocating resources efficiently to research and development because R&D is largely a public good which is predictably under supplied in market economies but would not be in a participatory economy. Third, the only effective mechanism for providing material incentives for innovating enterprises in capitalism is to slow their spread, at the expense of efficiency. This is true because the transaction costs of registering patents and negotiating licenses from patent holders are very high. There are no inappropriate obstacles in a participatory economy to introduce temporary additional material incentives should its members decide they are warranted. For example, the transaction costs of granting extra consumption allowances for a period of time would be negligible in a participatory economy.