We at shareholdersunite love capitalism…
Capitalism aligns incentives to improve, change, do better, and thereby summons and activates so many brilliant minds that no other system is able to. It’s improvement by trial and error, and after a few basic rules of the game have been set and observed, this usually works very well.

Mind you, capitalism is not without it’s faults. Markets can malfunction (more especially by information asymmetries, rife in financial markets) and rather than letting sensible regulation deal with these problems so that markets perform well, politics is often (too often in the US) under the spell of special interests, aggravating market problems for the benefits of the few.

However, that doesn’t mean that the process of creative destruction grinds to a halt, and in our view, Gary Shapiro is entirely right to put his hopes on new waves of innovation.

Will Innovative, New Electronics Revive Economy?
Published: Tuesday, 4 Jan 2011 | 2:51 PM ET
By: Peter Suciu
Special to CNBC.com

The third time is bound to be the charm. After predicting in his last two keynote addresses at the Consumer Electronics Show that innovation from the consumer electronics would help the U.S. economy rebound, Gary Shapiro is standing by his message.

The president of the Consumer Electronics Association, and author of the new book “The Comeback: How Innovation Will Restore the American Dream,” believes that America’s love for these products will help bolster the economy.

“The U.S.,” he says, “is in trouble and innovation is the best path towards letting our kids have a better future.”

The question is now whether there is enough innovation to jump-start things for 2011, especially after consumer confidence unexpectedly dipped in December. The Conference Board last Tuesday released a private report that said its index of consumer attitudes slipped in December. Shapiro says we will see improvement in 2011.

“I do believe that consumer electronics has been a savior for the economy,” says Shapiro, noting that sales were down in 2009 but that 2010 actually saw growth. The Consumer Electronics Show, which had also seen declining attendance numbers over the last two years, is also predicted to be way up, according to Shapiro, “in every sector possible. There is phenomenal optimism.” The event begins January 5 in Las Vegas.

Shapiro adds that the message over the past two years has been to “innovate or die,” and companies are clearly getting the message. For 2010, there had been no shortage of innovation, beginning with the introduction of 3D TV a year ago. Since that time there have been other categories, including tablet PCs, smart phones and motion-controlled video games.

Thus, it does not seem like this is the end of the innovation, or even the beginning of the end. In some ways, to paraphrase Winston Churchill, 2011 could be the end of the beginning of the next cycle of innovation.

“We’ll look back on this as a transition time,” says Stephen Baker, vice president of industry analysis for the NPD Group. “This is a business that depends on those innovations. There is way more than enough for 2011.”

More importantly says Baker, the categories that did come out in 2010 haven’t come close to reaching a critical mass, something that will likely start—and only start—to happen in 2011. “The products have barely scratched the surface in 2010, so they still have a long way to go.”

Some of this optimism for 2011 stems from the underperformance of new products for 2010. One in particular that has a ways to go, despite a lot of hype in 2010, is 3D. This technology promised a whole new experience for home movie viewing, but yet, as Baker noted, has barely scratched the surface.

Part of the problem was, no doubt, consumer confusion, lack of content and, not to mention, the fact that you needed to put on a pair of glasses to get the full effect.

“Last year 3D was badly mishandled,” says Stephen Smith, editor-in-chief of TWICE, the trade magazine for the consumer electronics industry, “The sets should have been pushed as higher end TVs that could make your existing content look better. Instead a lot of the advertising made it seem like it only did 3D and couldn’t even play your regular 2D movies. This message will be better for the New Year.”

Experts agree much of this messaging will be better handled in the New Year, noting that 3D will likely move from an “early adopter” technology toward the masses, and even be one that will eventually ditch the dorky glasses. But as with Blu-ray, and DVD before it, it won’t happen in a single year.

In the meantime, 3D is already spawning other sub-sectors, including 3D photography with digital cameras and camcorders.

Smith also says that 2011 will be about not only 3D TV but also IPTV, as in Internet Protocol TV, and that many sets will handle both. Companies such as Sony and Panasonic have already been in this market with Internet-compatible TVs, but Smith predicts this market will only get bigger as consumers continue to move away from traditional cable and satellite services and look at alternatives.

Internet capable TVs allow for greater ability to stream movies and other content directly to the TV in the living room, as well as through the house thanks to other products that will be IP-ready.

“We’re going to see connected everywhere,” says Shapiro. “This will be Internet everywhere and in all sorts of products.” Whether connected everywhere and 3D everywhere will save the economy is still unresolved, however. Innovation alone won’t do it, say some.

“If people don’t have money to buy things, how can consumer electronics save the economy?,” questions Marjorie Costello, Editor of CE Online News. “It is not a job creator. How many jobs can Best Buy create? Consumer electronics are just a monitor of what is going on in the country.”

The economic downturn that began in 2008 hurt the consumer electronics industry, but the recovery say the experts won’t happen just in America, and not just because of innovative products.

“The economy needs to revive, job creation has to revive, and people need to feel good about their jobs,” says Smith.

“Can innovation help the economy? Sure it can. It is an international industry as much as it is an American industry. The CE industry—and by that I include Silicon Valley, as well as Japan and Korea—is a very viable industry. But it isn’t the car business, yet if it does its part and we straighten out the debt issue, and change some regulations, maybe the whole economy can get a bit better.”

Smith agrees with Baker that this is a transition period, and those have tended to happen during eras of booming economies, and often overcoming lack of consumer confidence, as well. While he says that the current transition won’t be as big as the 1998 to 2001 era, when there was a switch from analog devices such as VCRs to DVD, it could result in new categories being created that weren’t even previously considered. A decade ago MP3 and digital music, which eventually spawned the iPod, was a category no one saw coming.

“We’ll see similar up and coming categories again,” says Smith. “This isn’t just hype from the industry either. The established players are looking at major categories. What we’re seeing might not be revolutionary but it is evolutionary at least.”

This of course makes it hard to predict what we’ll actually see next, but given the yearly hype, it might live up to Shaprio’s claim, “2011 will blow people’s socks off.”

Look for CNBC’s in-depth coverage of CES 2011 online and on-air. Julia Boorstin will report from the show beginning Wednesday, January 5 and Maria Bartiromo will anchor “Closing Bell” from CES on Thursday and Friday, January 6 and 7, 3-5pm ET.