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 are 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 — the powerful desire of individuals to improve their own economic circumstances and to nurture their opportunities to do so without fear or favour.
We should encourage inventors, innovators and creative types generally — those who challenge the economic status quo, which is valuable to those who benefit from it. The highly competitive process long described as “creative destruction” must be tolerated if an economy is to grow.
There needs to be an acceptance that jobs lost or threatened by change are often exchanged for better jobs gained. This is something the competition authorities in SA seem unable to recognise — that protecting jobs, 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 to technology, can promote widely improved standards of living in all its guises, including improved hygiene and medical treatments.
More capital, as well as more and better plant and equipment, with improved technical knowledge, make labour more productive and hence relatively more scarce and capable of earning more. There is no other known way to eliminate the scourge of poverty than to rely on market forces in which all are welcome and encouraged to compete on their merits, as judged by the final arbiter of success — the spending decisions of households.
It is important for society to protect the wealth created by successfully challenging orthodoxy against expropriation or violent seizure, or penal taxes and regulations. Society must be willing to vigorously protect rights to wealth (property) accumulated over time, including protecting intellectual property, such an important source of income and savings.
That requires accepting a degree of income inequality as the inevitable consequence of economic progress, recognising that unequal rewards for unequal efforts are necessary to achieve an improved standard of living for all.
Innovation can be a costly exercise planned by a business. Spending by firms on research & development, training the workforce, and on plant and equipment (capex) is designed to enhance production and profit for its owners and managers.
Helpful changes in practice may be forced on a firm in response to initiatives taken by its competition. Profitable changes in methods of production and distribution may also be initiated by the workers and managers of the firm itself with innovations that gain sales and profits and the attention of households that are free to spend (after taxes). 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 obvious given the revolutionary scale of recent developments in IT that are a threat to the established order of doing business. These developments now represent the most important form of competition to anticipate how households will come to spend in future. It would be wise to allow unfettered competition to determine these outcomes in the usual evolutionary way.
Creativity is vital for the survival of the fittest, 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 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 lifeblood of economic progress.
• Kantor is head of the research institute at Investec Wealth & Investment. He writes in his personal capacity.
