Tag Archives: reducing costs

Innovation is first and foremost about reducing costs

It is often assumed that innovation is about bringing new offerings or methods to the market. In business, there would be a noble side, that of innovation, and a less noble one, that of managing operations. Nothing could be further from the truth. One of the most fundamental aspects of the free market system lies in its ability to reduce costs, and therefore prices.

In his monumental piece "Capitalism, Socialism and Democracy", still an essential read sixty years later, Schumpeter explains that innovation is not the capitalist system's distinguishing feature: other civilizations or political systems have been innovative in sime areas as well (think of space technologies in the former USSR or Law in ancient Rome). The real distinguishing feature of the system is its inherent ability to democratize innovation by making available new products to the masses. This is achieved both through its ability to organize efficiently but also and more importantly through the ability to decrease costs. In other words, the symbol of capitalism and innovation is not so much the start-up as Wal-Mart, the low-cost supermarket that saves Americans' mostly low-income customers about $50 billion a year. For these customers who struggle to make ends meet, it's something.

Schumpeter thus summarized the argument:"The capitalist engine is first and last an engine of mass production which unavoidably also means production for the masses… It is the cheap cloth, the cheap cotton and rayon fabric, boots, motorcars and so on that are the typical achievements of capitalist production, and not as a rule improvements that would mean much to the rich man. Queen Elizabeth owned silk stockings. The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort. . . . the capitalist process, not by coincidence but by virtue of its mechanism, progressively raises the standard of life of the masses." (source)

Unlike what The Economist explains in their must-read article "The Silence of the Mammon", I don't think defending this system in the name of this formidable wealth creation and affordability is defensive or smacks appeasement. On the contrary, it's a perfectly valid argument as it does not pretend to bestow other responsibilities to this system than it is supposed to have.