Analyse and critically assess Baumol's model of innovationbased of growth - Essay Example

For this reason he states that competition and the free market economy has played a major role in encouraging innovation by enterprises in the economy which has resulted into economic growth. According to Baumol (2002) capitalism is unique in its innovation characteristic and that the product of the capitalist society is economic growth. he notes that past economies such as medieval China were characterized by innovative and invention ideas but due to the economic system and characteristics innovation did not result in economic growth, the difference between these economies is that the modern economy is characterized by free competition and also that innovation is used as a competition tool in the market.

Firms in the modern world have two competitive weapons and they include prices and innovation, innovation in the modern world is the prime weapon and has become mandatory in the modern firms. The firm that do not undertake innovation face closure in the modern world, therefore they compete to outperform their competitor in innovative ideas in the market other than the use of price, this form of competition results into new and better products and processes that benefits consumers. Firms result in frequent innovation as a competitive strategy and this innovation results into further innovation, innovation therefore becomes a routinised process. . He also notes that the Capitalist economy is driven by profit motives, these motives makes firms to perform tasks efficiently and effectively, and that the invisible hand controls firms in the market from deriving abnormal profits forcing a firms to provide better products in the market than its rivals.

Baumol (2002) however states that economic growth does not solve other problems the society may face such as inequality and this is because economic growth only solves problems that depend on it.On large and small entrepreneurs he noted that small and independent innovators provide a significantly startling result, he notes that a recent study by the small business association the frequency of citation of small firm patents is more likely to be among the first top one percent, Some of the products by independent and small firm innovation include the airplane, pace maker and the helicopter.

This trend is expected to exist in future and that independent inventors over the years open up large firms that perform routine innovation. Large firms on the other hand also contribute to innovation. Large firms specialize in product improvement, provision of user friendly products and finding new consumers for their products. These large firms are characterized by bureaucratic controls that ensure that innovation processes are incremental and predictable, for this reason these control restrict imaginative ideas which may result into disaster and that may also result to revolutionize into a new world.

Conclusion:From the above analysis it is evident that Baumol analysis of economic growth advocates for the free market economy, the capitalist society promotes growth whereby it is