The Nobel prize committee for economics has focused most helpfully on the causes of economic growth. In making its 2025 award it made the following observation.
Over the last two centuries, for the first time in history, the world has seen sustained economic growth. This has lifted vast numbers of people out of poverty and laid the foundation of our prosperity. This year’s laureates in economic sciences, Joel Mokyr, Philippe Aghion and Peter Howitt, explain how innovation provides the impetus for further progress.
Technology advances rapidly and affects us all, with new products and production methods replacing old ones in a never-ending cycle. This is the basis for sustained economic growth, which results in a better standard of living, health and quality of life for people around the globe.
However, this was not always the case. Quite the opposite – stagnation was the norm throughout most of human history. Despite important discoveries now and again, which sometimes led to improved living conditions and higher incomes, growth always eventually levelled off.
The conditions for economic success in which innovation – changes in economic practice that makes humans more productive – should not be mysterious – given many past failures and some notable and recent successes all well documented including by our most recent laureates.
The recipe for success is for society to recognise and depend upon the essential nature of homo economicus- that is the powerful desire of individuals to improve their own economic circumstances, and to nurture their opportunities to do so without fear or favour. Too encourage the inventors, the innovators, the creative types more generally, those who challenge the economic status quo which is valuable to those who benefit from it. A highly competitive process long described as “creative destruction” must be tolerated if an economy is to grow. An acceptance that jobs lost or threatened by change are exchanged for better jobs gained. As the Competition Authorities in SA seem are unable to recognise. Protecting jobs – protecting businesses and the valued status quo -is a path to stagnation.
Free competition in all its forms through innovations and improved application of science and knowledge- technology can promote widely improved standards of living in all its guises, including improved hygiene and medical treatments. More capital, more and better plant and equipment, combined with improved technical knowledge – makes labour more productive, hence relatively scarcer and capable of earning more. As the hirers of labour compete for their services that become more valuable over time. There is no other known way to eliminate the scourge of poverty. Other than to rely on market forces in which all are welcome and encouraged to compete in, on their merits, as judged by the final arbiter of success, the spending decisions of households.
Important for society is to protect the wealth created through successfully challenging orthodoxy against expropriation or violent seizure or penal taxes and regulations. For society to be willing to vigorously protect rights to wealth (property) accumulated over time. Including protecting intellectual property that is such an important source of incomes and savings. And therefore, to accept degrees of income inequality as the inevitable consequence of economic progress. Recognising that unequal rewards for unequal efforts are necessary to the purpose of an improved standard of living for all.
Innovation can be a costly, exercise planned by a business. Spending by firms on Research and Development and in training the workforce will be designed, as will be all spending on plant and equipment (capex) to enhance production and profit for its owners and managers. Helpful changes in practice may be forced on a firm in response to the initiatives taken by their competition. Or profitable changes in methods of production and distribution may best be initiated by the workers and managers of the firm itself. Innovations that gain sales and profits and the attention of the free to spend (after taxes) household. Continuous adaptation to change driven by the competition for economic gain by individuals is essential for the survival of any business in a free to compete economy.
The importance of best practice has become highly obvious given the revolutionary scale of recent developments in IT. Developments that are highly threatening to the established order of doing business. These developments now represent the most important form of the competition to anticipate how households will come to spend in the future. Wisdom would be to allow unfettered competition to determine these outcomes in the usual evolutionary way.
Creativity is vital for the survival of the fittest and not only when delivered in heroic proportions by rare start-up success. Careers in well-established businesses should be advanced by the successful application of good ideas that originate with valued, well trained motivated and appropriately rewarded employees. Innovation in human resource management is very important. The largest risk any potential business manager takes is the risk of undertaking a lifetime of work under the wrong leadership that fails to adapt to competition -the life blood of economic progress.