IN his latest contribution to our understanding of how firms work in capitalist economies, Princeton economist William Baumol argues that innovation is the force behind the wealth of nations or, as he puts it, “the growth miracle of capitalism.” He proudly points out that this claim puts him in agreement with Karl Marx and Friedrich Engels, who argued in 1847 that capitalism “cannot exist without constantly revolutionizing the instruments of production,” and with Joseph Schumpeter who, one hundred years later, argued that competition from “new technology” is much more effective than price competition in producing economic growth. Yet if Baumol’s The Free-Market Innovation Machine † is well worth reading for its sage observations about how firms operate in the real world and its solid technical analysis, the book’s policy implications should earn it the label “handle with care.”