Capitalism innovates?

Capitalism does not innovate, because innovation is risky, whereas rent-seeking and financialization are profitable and mostly guaranteed-safe. Even when it doesn't choose rent-seeking and financialization, capitalism will choose to pander to the obvious gaps in the market that are easy to satisfy, or take existing desires and use advertisement to give them concrete referents in the world of products. And in all these cases, it will aim for the common denominator desires to satisfy, the ones with the widest appeal, because that is what best guarantees profits. I.e. it regresses to the mean.

Who does innovate, then? Only individuals or very small groups of individuals, who are motivated for intrinsic reasons around a common set of goals and values. Only people like that innovate, and that's usually orthogonal to capitalism at best – what those people most often want is a stable income to pay their bills and feed their families while they work toward their passion; they're not interested in "striking it rich" except insofar as it will help that goal. There are a few greedy exceptions, like Steve Jobs, but always behind them is another innovator who does it for intrinsic reasons, like Alan Kay.

Sometimes capitalism can provided the context for this kind of innovation, like with Xerox PARC and Bell Labs. But other times it's the government, like with SRI, SAIL, the MIT AI Lab, and CERN. What's important is a stable means of supporting yourself and your loved ones, and an environment of free intellectual play and experimentation, and a visionary set of common goals or interests. These can be created anywhere.