Henry Ford once famously quipped if he’d asked his customers what they wanted, they’d have said, “A faster horse.” It’s the holiday season once again, and while I troll stores and the Internet for gifts, I’m reminded of the wisdom in those few words.
While hunting for gifts, you may be inadvertently learning a lesson in the power of supply-side innovation. Did you walk into a store knowing you wanted a pot-holder caddy? Or did you see the thing and think, “Wow. I cannot believe someone actually makes such a goofy thing.” Then, “Holy cow, that would be perfect for Aunt Sally.” Innovation (yes, even for mundane things) triggered demand.
Folks often think it’s universally the reverse. And that can happen—need (or demand) absolutely is a catalyst for innovation. But for the most part, economic vibrancy is driven by innovative producers risking capital to supply consumers with products—new, old or revamped—rather than consumer demand alone.
Think about items you own and/or use regularly. When did you decide you needed (well, wanted) Angry Birds or an e-Book? How about a single-serve coffee machine? When did you decide social media could be a good way to stay connected with friends and family? I don’t know how I lived before I got my tablet computer. Yet I wasn’t exactly sitting around thinking, “If only I could hold the screen of this PC in my hands, have it weigh a few ounces and navigate only with my fingers on the screen.” I’m betting most folks didn’t “demand” eBooks, Angry Birds, smart phones, safer air-bag technology, drier outdoor gear or many of the mundane or profound items we rely on each day—not until they existed.
The beauty of capitalism is it provides financial motivation for humans’ innate creativity—an award, essentially, for successfully innovating. People and/or firms develop new ideas because they think people will enjoy/need/want them, sure. But ultimately, innovators risk something precious (capital and time) developing the new, critical and/or wacky (Snuggie) seeking the reward of profits. When it works, it’s a win-win scenario—new goods and services create revenue and consumers benefit from new products. That’s not to say all new products survive—many fail. But that, too, is all part of capitalism’s virtuous cycle of discovery. Many of the world’s great innovations are rooted in serial failures. If companies aren’t making profits on a certain product, they know those resources would be better utilized elsewhere.
Furthermore, this school of thought has also fostered the beauty of choices. As new products are introduced, creating new markets, consumers gain the ability to choose. They can choose based on quality, price, size, color, speed—zillions of iterations. You can’t account for the sheer power of the Snuggie (which come in pink, leopard print, school mascot logos or even tie dye) unless you believe in profit-motive and supply side economics.
So, the next time you’re out shopping and find the new battery-powered electronic doohicky you didn’t know existed until now—but now have to have—realize you’ve just come face to face not with just a goofy gadget, but the innovation that serves as capitalism’s lifeblood.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.