Much of the innovation in the economy comes from another group, individual inventors and entrepreneurs, who have created many of the breakthrough inventions of recent centuries. In fact, the R&D activities of many large corporations are primarily focused on building on the breakthroughs already achieved by these independent inventors and entrepreneurs, who often lease their inventions** or lease them to larger firms.
This begs another important question: can we continue to be optimistic that the "supply" of inventors and entrepreneurs will continue in the future? In early human societies, there were a large number of inventions. For example, the ancient Romans probably invented the water mill long before the age of steam (water power is the main inanimate power**) As early as the 1st century AD, the ancient Romans invented a steam engine that could work.
In the Middle Ages, the Chinese not only invented gunpowder and the compass (which are often attributed to the Chinese, but there are also different opinions), but also paper, printing, spinning wheels, playing cards, elaborate clocks, and so on. However, these inventions have largely not been widely used productively, largely because the entrepreneurs of ancient Rome and ancient China were busy with other work, even though they could have brought them to market.
In ancient Rome, those with a sense of entrepreneurship focused their energies on supporting and carrying out military activities, while in medieval China, even the most entrepreneurial people seemed to concentrate their energies primarily on passing the imperial examinations and obtaining a half-official position in the ** or law enforcement department in order to accumulate wealth by accepting bribes.
Therefore, there are good reasons to conclude that entrepreneurship plays a crucial role in innovation. It is also for this reason that it is particularly important to examine what determines the long-term supply of productive entrepreneurial activity, rather than being unproductive or even destructive, even if there was "entrepreneurial activity" as in ancient Rome and medieval China. At the end of the day, private mercenaries and drug cartels also need to be founded by "entrepreneurs", and the activities of these organizations are certainly rewarding, although they are more likely to harm than increase economic output.
In the economic literature, many economists assert that a sufficient supply of entrepreneurs can stimulate economic growth, and that the weakening of the backbone of entrepreneurs can become a major obstacle to economic growth. However, how exactly entrepreneurs appeared and how they disappeared has become a mystery. It has been suggested that this may be related to cultural changes or other psychological and social factors.
However, historical evidence has long provided a completely unmagical explanation: entrepreneurs do not suddenly appear out of nowhere, nor do they inexplicably disappear without a trace. On the contrary, potential entrepreneurs, i.e. talented and ambitious people, have been around us all the time, and they want to build a business that promises to bring them good profits, whether legal or illegal, except that as the structure of returns that the economy can provide, they will change their activities, i.e., they will be attracted to those areas with the most promising returns.
In doing so, it is entirely possible for them to switch between two types of activities of a different nature: productive activities that are generally considered to embody entrepreneurship and require entrepreneurial talent, and non-productive activities that require a large number of "entrepreneurial" talents but may not promote the production of goods and services and may even hinder production.
One example is that, just as technological change has caused a large number of workers and engineers to move from canal-building sites to railroad construction sites and then to other, more modern enterprises, entrepreneurs will re-choose their activities in response to changes in the returns of different occupations, and the group of productive entrepreneurs will expand or shrink as they choose.
Thus, innovation and entrepreneurship are resources that can be reallocated between productive and unproductive activities, and are influenced by incentives that determine the relative benefits of these two types of activities. In a free-market economy, these incentives include protection of private property from expropriation, contract enforcement, a patent system, and bankruptcy protection that encourages risk-taking. With these systems in place, independent inventors and innovative entrepreneurs can earn income and fame once they "take risks" and succeed. This gives reason to be optimistic about the continued supply of independent inventors and productive entrepreneurs.
If we expect people's productive innovation to continue, the most pressing problem caused by the cost disease is nothing more than the rise in the relative cost of individual services and the resulting illusion that such services will no longer be affordable. However, the fact is that both progressive and stagnant sectors can bring us greater benefits, even though the products of stagnant sectors will become relatively expensive over time. But even this consensual outcome can bring difficulties and dangers.
Be wary of unwise ** interventions will put.
The cost disease becomes a more serious problem.
It is a mistake to interpret cost disease as a manifestation of failed pricing behavior in the market. As standard economic analysis tells us, market pricing behavior ensures that the supply of each good is close to the quantity demanded by consumers. In this case, the market does give the appropriate cost signal, accurately informing market participants that the amount of labor required to provide services affected by this disease is declining at a much slower-than-average rate, and perhaps not at all.
As a result, the cost of these services continues to rise compared to manufactured goods, inducing consumers to switch to goods that are easier to produce and cost less. A service that has come to a standstill for this purpose, like a runner who never stops but always runs much slower than others, will never win the productivity race. However, despite this, as we have already seen in this chapter, rising purchasing power ensures that the public as a whole can afford the service, even if the cost of the service is constantly rising**. But this may be misunderstood by the public and **.
After all, the numbers involved are quite staggering. In the case of the United States, if current trends persist in the 21st century, spending on health care and education alone will be well over half of GDP. This is likely to give rise to the perception that there is an urgent need to come up with a fundamental solution.
The alarming figures, as well as the skyrocketing budget demands, are likely to lead to certain decisions that do not advance the public interest. For example, since the rate of growth in health care costs is higher than the inflation rate, it is clear that it is certainly not enough for the health care budget to increase at a rate equivalent to the inflation rate of the entire economy if we want to maintain the quality of health care in public hospitals. Budgets in this area must be increased at an accelerated pace, otherwise they will either increase the financial burden on private individuals in order to access these services or reduce the quality of their services.
Assuming that the current inflation rate is 4 and hospital costs are increasing at a rate of 6 per year, the political establishment that decides to increase the hospital budget by 5 per year will certainly still feel that something is wrong, because although the budget is steadily increasing faster than the inflation rate, the quality of services provided by hospitals is still declining. If legislators fail to realize that the problem is caused by a cost disease, they will look for other explanations, such as the corruption or incompetence of hospital administrators. This realization, in turn, could lead legislators to create more unreasonable rules that would unduly impede the freedom of action of hospitals and physicians, or squeeze hospital budgets below levels determined by market forces.
Legislators often recommend greater cost control in those sectors of the economy affected by cost disease, such as health services and insurance services, but cost control often creates more serious problems than cost disease itself. Many economies, such as Canada, the United Kingdom, Germany, and others, have tried many ways to control health care costs, but they have not been more successful than the United States in controlling cost increases.
In some countries, although their health care systems and the measures used to control costs were once touted as exemplary, we have identified many problems with cost control. For example, non-emergency surgeries can be delayed for a long time and sometimes even canceled altogether. Many Canadians have reportedly had to cross the border to the U.S. to seek** simply to avoid delays in their home countries. In the UK, as of 2003, at least 10 people had purchased expensive private health insurance in order to bypass the health care system run by **, which has a prevalent problem of "long queues".
The point here is that because politicians do not understand the mechanism and nature of the disease, and because they face political pressure from equally uninformed voters, they fail to realize that we can afford these services at all, without having to force society to unnecessary cuts, restrictions, and other forms of dispossession.
Similarly, members of the public may feel that they cannot afford to pay for constantly** medical bills. Although per capita income growth has long enabled people to afford to pay for health care, they may all be reluctant to revise their household budgets, and of course, we can't argue with this preference, as anyone has the right to decide what to do with their income. But if the decline in the quality or quantity of health care stems from a misunderstanding of the public's true ability to pay, then it is certainly important to educate the public about this misconception, which leads us to our next caveat.
It is not easy to be vigilant and educate the public.
An important issue to understand first is that helping the public recognize the difference between reality and illusion is a daunting task in itself. For example, it is certainly difficult to convince non-specialists (even if they are smart) that although the cost of personal services seems to be out of control, their costs are actually declining in terms of earning enough labor time to pay for those services.
To the uninitiated, this statement looks like a statistical gimmick, or a theoretical gibberish. And even more so if the quality of the products is also improving, for example, through more effective medical services to make people healthier and live longer. Because improved quality obviously means that the money we spend on a particular service makes us get more, and most likely much.
When explaining this to the public, it should not be more difficult than skilled journalists and others who specialize in effective communication can understand. This is a task that must be accomplished, because in any democratic society, any attempt to realign the budget to deal effectively with the cost ill will be politically defeated if the above points are not made aware of these points by the public.
Be wary of the public sector as a share of GDP
will increase significantly.
The extrapolation results suggest that if health care, education, and other services with similar cost characteristics are provided primarily by **, then by 2105, more than 60 percent of U.S. GDP will be "flowing" through the public sector, making it unconstrained by the market. The experience of the planned economy shows that this is not a really promising institutional arrangement. Removing such a large volume of economic activity from the private sector would certainly hinder efficiency and economic growth to a large extent.
Our sector also faces a particularly difficult task, which is to raise revenues, which is essential to prevent the complete collapse of municipal services (which are now practically largely broken). In the case of cities, a large portion of the budget is made up of spending on health care, education, police protection, libraries, and other services that are inevitably cost-induced.
In the 21st century, if the quantity and quality of these services are to be kept from lagging behind those of agriculture and manufacturing, spending on these services will have to increase substantially. And, even with the daunting political task of increasing incomes, such a huge increase in GDP share through ** rather than private channels is almost certainly not a very attractive prospect.
Be wary of privatization.
The impact of unwise cost control.
Calls for a significant expansion of public sector projects are often met with calls for greater reliance on privatization. However, privatization alone will not solve the cost problem. There are many good reasons to oppose the idea of privatizing public schools, police protection and national defense. For example, relying on private armies poses a serious threat to freedom, and this has been confirmed by many historical examples.
Moreover, any private enterprise that suffers from the disease of privatization of public services will certainly be subject to suspicion of malfeasance and malfeasance. At the same time, in such enterprises, which have come out of privatizing public services, calls for cost control are politically irresistible. However, if the increase in costs is inevitably slowed down by increases in the productivity of individual and manual services, then cost control can only lead to a decline in the quality of these services, or even worse, to the partial or total disappearance of these services.
It is important to emphasize here that, in addition to health care and education, cost sickness affects many other services that are essential for a good quality of life, such as live performing arts, libraries, police protection, restaurants (the most labor-intensive dishes in many restaurants today have almost all disappeared), and welfare support for the poor. If we fail to conceive of thoughtful and appropriate measures to address the problems caused by this disease, our society will increasingly fall into what John Kenneth Galbraith called "private abundance and public abject poverty."
This article is excerpted from.
Growing Troubles: Baumol's Disease and Coping with It