Consequences 6.70 Innovation is compromised

Innovation is America’s golden goose, and our wealth transfer money system compromises this key to our prosperity. Too much money is a benefit as well as a burden.

Benefit

When there is more money than the economy needs to do ordinary business, extraordinary business is more likely to happen. This is the benefit. Excess money means more is available for research, development, and bringing a new idea to market.

The path to successful innovation is paved with costly mistakes and experiments. An inflated money supply has more to blow on the necessary false steps that lead to innovation. Artists flourish. Exploration and experimentation abound. Creativity and entrepreneurship flourish. In the latter half of the 19th century, the California gold rush, unregulated fractional reserve money- creation, and the wealth of new-to-exploit natural resources in the west stimulated economic expansion and development. In the 20th century, a steady increase in the money supply stimulated innovation and prosperity. But, there is a downside.

Restricted pool of deciders

Our wealth transfer system is supported by the story that as wealthy people acquire more wealth they will invest in starting new businesses and we will all benefit because more jobs will be available. There is truth in this story, but it is only a partial truth. Our money system’s steady transfer of wealth to a tiny few reduces the pool of innovators, startup funders, and potential creativity.

Some of the one percent who now take home the income gains in our economy do use some of this wealth to invest in new technologies. That is good. But exploration and innovation is limited to what this tiny portion of our population choose. We have lost the breadth and depth of investment that comes when many people are free to unleash their creativity and to invest in future technologies.

Jared Hecht, Co-founder and CEO of Fundera explains why small business are the backbone of our economy.

Since 1995, small businesses have been responsible for creating two out of every three – or 64 percent of net new jobs…(and) Small businesses also lead the way in terms of tech and new product innovation…the Small business Administration found that small businesses produced 16 times more patents per employee compared to larger patenting firms.187

Most start-up small businesses get first funding from family and friends, who are generally not in the top one percent. Our wealth transfer system reduces the number of people who can invest in startups. A shrinking number of people decide what innovations get the support needed to bring an idea to market. Group-think of a tiny elite pushes out the wildly improbable ideas that are often the next transformational innovation.

Diminished creativity

For the flatter part of the money supply growth curve over the last century, prosperity went to many and we had an increasingly robust middle class. A strong middle class increased the pool of potential entrepreneurs and innovators. As money creation headed up and off the chart, the benefits of a prosperous economy went to fewer and fewer people. The middle class dwindled and poverty increased. A shrinking number of people have the energy and resources to innovate.

Both prosperity and hardship can stimulate creativity and innovation. But life provides enough hardship and challenges without deliberately creating more. For most people, too much stress hampers creativity. As more people drop into the stress of poverty and subsistence living, the resources and energy for creativity and innovation diminish. Fewer people have the time and emotional energy to be creative and take the risks that entrepreneurship requires. Some people rise out of the ashes of their lives to create wonderful new things. But in general, we do our best problem-solving and are most creative when we are not struggling to meet basic survival needs. Our money system reduces our potential to innovate.

We can have innovation and entrepreneurship without continuously increasing our money supply as we do today.