Question

The escape from the Malthusian trap, in which technological progress outstripped the effects of population growth, took place following the emergence of capitalism. Consider the three basic institutions of capitalism in turn:

1.   Why is private property important for technological progress to occur?

2.   Explain how markets can provide both carrots and sticks to encourage innovation.

3.   How can production in firms, rather than families, contribute to the growth of living standards?

Answer 1

1.
Private property and its ownership, creates incentives for those who wants to innovates and find technological breakthroughs. It makes individuals and firms to invest today so that they can reap the reward by tomorrow when a technological advancement is achieved. Such initiatives by the private parties are only possible when private property is promoted. So, it is very important and it is the reason that there are numerous application for the patent of technology, innovative ideas and new inventions are filed in the USA.
2.
Market provides carrot by creating the demand for the outcome of the innovation that will lead to the wealth maximization. It will make innovators to be the sole owner of the innovation and a new and parallel market without competition will be developed. Though, the market can bring stick also as innovation should be marketable, as per the prescribed standards & guidelines of the regulatory bodies and able to cater the existing demand or create new demand. Beside, lack of care in the innovation process, will also lead to failure and loss of investment.
3.
Families only provide labor as a factor of production to the firms. But, firms employ new technologies, economy of scale and waste management techniques to improve the productivity of the labor. It will create more profitability and higher wages can be issued to the workers. It will help the labors to spend more and raise their livelihood. Higher spending will create more demand and it will be catered by higher supply, a contributory factor to the higher wages paid to the workers. So, firms can contribute more towards the growth in living standards.