Sunday, November 09, 2008

The limits of the Market in Innovation …

Markets are a fantastic tool for coordination and for providing incentives to actors participating in it. However sometimes markets have their limitations.

Think about the challenge John F. Kennedy put the American nation: “I believe that this nation should commit itself to achieving the goal before this decade is out of landing a man in the moon and returning him safely to the Earth”. Can this be achieved by exclusively by Market mechanisms?

Markets are driven by the diversity of resources and information and the expectation of profit. Therefore, agents in the market will attempt endeavors that could bring profit in a reasonable scale of time and with the resources and information that they already have or that they could reasonably have. Little incentive is there to pull together for new infrastructures or for large coordination.

But the big problem is the word “reasonable”. Markets are not going to attempt unreasonable things – no they don’t do that. However, many of the innovations that count are unreasonable.

The engineers that put a man in the moon were 18 at the time that Kennedy set up its goal.

About 6.500 days have passed since Tim Berners-Lee implemented the first successful communication through http (December 25, 1990).

Both things are unreasonable. The first one was state funded, the second one benefited from the network effects of the internet.

Internet has been in many ways (not all of them) market oriented. It worked because of the small granularity of the task and the capacity to provide incentives to them. A web page, ajax, web 2.0, …  are not such and effort, you can market it and is within the reach of what your company can learn. However, we cannot expect that all challenges can be solved that way, sometimes we have commons’ problems with low granularity and low incentives: science is the typical example – but now climate change or the infrastructures needed for energy, etc… are new ones.

Markets are incredible mechanisms but powerful as they are, they cannot solve everything. Political action and societal will need to commit themselves on solving some problems … because markets won’t.


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