Socialized Response to Capitalism

However, an entrepreneur may have an innovative idea for a good that is not currently supported by the market, but might potentially be once it is introduced. He might have invented a new gadget to fill a need that he perceived. However, in order to begin producing it, capital is necessary. Whether he already has this capital saved up, or he has to take out a loan, the initial investment is the riskiest one. If he produces his gadget, but for whatever reason nobody wants to buy it, or not enough people buy it, then he cannot keep his production running.

In other words, if the market price due to demand falls below the marginal cost of supply, then profit is impossible, and the entrepreneur will stop producing the product. This in itself is good for society, because it ensures that only products that people are willing to pay for will be produced. This single risky investment is for the best, because if it fails, that is less of a detriment to the economy than sustained overproduction of unwanted products. If it suceeds, however, then because the entrepreneur holds the rights to the profits he makes, this is lso good for society because it encourages other aspiring entrepreneurs to try out their ideas. If another entrepreneur improves upon the features of the product, or finds a way to reduce production costs, then the market may favor his product instead. The result of this is increased innovation of products, and lower prices for consumers. If high profits can be made, then the initial personal risk of losing an investment is not enough to deter innovation in the market. Therefore, the profit motive is seen as necessary.

However, if one risks the loss of the capital invested alone, and may go bankrupt if the product fails, then there has to be a way to ensure that any profits made belong to the entrepreneur, the owner of the production process. A competitor, seeing the success of a new product, may begin to produce the same thing and profit from it as well, without taking the same risk of losing his investment, because he already knows there is a demand for this product. The way to ensure that profits benefit the one who took the initial risk is the patent system.

Before producing a new type of product, the entrepreneur can patent his idea to make sure that his risk is rewarded if his product is successful. The basic idea of the patent is to encourage innovation by lessening the additional risk of losing potential profits. Without a patent, some profit may be made, but with one, the profit is much greater. Patents, however, are a double-edged sword. The potential for future profits for any patented idea provides motivation to patent everything possible, which may prevent another entrepreneur from profiting from similar ideas in a way that the patent holder did not think of.

This harms society not only by creating extravagant lawsuits against innocent people, but also because it discourages innovation when patents are taken too far. Furthermore, patents can be bought from entrepreneurs by wealthier institutions for less than the amount of profit the patent enables. If one of these wealthier institutions is a competitor who produces something that would become obsolete because of the new product, then the institution has a motivation to buy the patent and then never produce what it is for, in order to keep their existing business running.

This is obviously harmful to innovation. (2) Much more could be said about the negative effects on innovation that patents can have, but without a legal right to benefit from one’s own financial risk, the profit motive is less promising. If production is owned by an entrepreneur, then there is no other way to incentivize the kind of risk it takes to innovate in a fickle market. The profit motive, then, is not an inherent characteristic of innovation, since profit for successful products can only be enforced by the state.

What I will further demonstrate is that not only is the profit motive nonessential to innovation, but so is the great personal financial risk that entrepreneurs take. Without these, there is also less need for the patent system, with its many problems for innovation. The risk-taking entrepreneur model makes sense in system in which the relation between producer and consumer is clearly defined and separated. It is the job of producers to figure out what consumers want, and consumers decide whether the producers got it right or not, but not until after the product has already been produced and distributed.

The system also makes sense when there is a clear distinction between boss and worker. The boss has the rights to the profit created by the worker because the boss took a significant financial risk, while the worker is merely working under a contract for fixed pay. However, new business models are emerging that allow for much less individual risk and greater reliability in knowing the demands of the market, simply because the investment in the product is shared by the market itself.

This is called crowdfunding, and when one person has an innovative idea that needs investment of capital to realize, that person can present that idea to a group of consumers. If the consumers want that product on the market, then they contribute money to the startup fund. Crowdfunding is more productive and innovate for three reasons. The first is that it is easier for creative individuals to become entrepreneurs because they do not have to come up with the capital themselves, nor do they have to pay it back as in a loan. This lowers the barrier of entry into the producers in society, and allows for a wider range of ideas.

The second reason is that this model is more reliable than guessing what the market will buy. By presenting a future idea to the market ahead of time, the creator can ask for feedback and if the idea is unpopular, then it either be reworked or discarded, with no loss of initial capital. This not only saves time by preventing numerous failures, but also gives the market more say in what the final product will be, making it more likely that the product will be successful. This also has the effect of blurring the lines between producers and consumers, and bosses and workers.

Finally, this model is also more innovative because there is less incentive to patent the final product. Indeed, many products produced through such a system are open source, meaning that anyone with expertise is free to improve upon the product once it has been produced and distributed. With less financial risk involved, there is less reason to enforce profit when the product is successful. That is not to say that there is no profit, however. Extremely popular ideas sometimes receive more funding than necessary, and the creator of one successful product is more likely to get enough funding for his or her next idea.

This kind of moderate but useful profit encourages further innovative ideas, and smaller, more frequent improvements. If a creator received a huge profit on a single brilliant idea, as traditional entrepreneurs aim to do, that person is able to sit back and live off their fortune. While that is good for the individual who became wealthy, it slows down innovation. In conclusion, it seems that as soon as supporters of the older model of capitalist innovation are convinced that more social models of production are unfeasible, models such as crowdsourcing emerge and fund increasingly bigger projects. 3) While crowdsourcing is not socialism per se, as it works within a capitalist economy, it more closely resembles the changes in the relations of production that Karl Marx predicted than, for example, the bureaucratic jungle of the Soviet Union. Therefore, I believe that the idea of socialism is far from exhausted, and may even prove useful in understanding the changes in society that we are undergoing today. Works Cited 1. Litan, Bob, Ph. D.