There would be no “social” in Europe’s “social market economy” without the strictly market-friendly rules essential for economic efficiency.
There are many sources of our recent decades of discontent, but one is low economic growth rates. When an economy is booming, people feel better about their lives and a larger pie becomes available to fund legitimate public projects, such as care for the sick and needy. Peter Thiel’s lament that “we wanted flying cars, but instead we got 140 characters” is something of an exaggeration, but it is true that innovation in the analogue world now lags the digital one. And that dichotomy has unfortunate class implications as well. Possessing the entire library of the world at one’s fingertips soothes a professor like me, but many outside the chattering classes would delight in more tangible improvements.
Thus, we need policies for broad-based innovation that will return us to high growth rates and greater public contentment. It is the great merit of Matt Ridley’s new book, How Innovation Works and Why it Flourishes in Freedom, that he recalls and celebrates the culture of innovation that delivered consistent dividends over centuries. For instance, as recently as the middle part of the 19th century, it took the average worker four minutes of work to earn enough money to purchase four minutes of light from a smelly, kerosene lamp. Today it takes him one minute to purchase 120 hours of light from a clean incandescent lightbulb.
Ridley begins by defining innovation broadly. Innovation consists of “discovering ways of rearranging the world into forms that are unlikely to occur by chance”—forms that then permanently improve our lives. The first part of the book considers scores of instances of such innovation, from the steam engine to the electric light bulb to fracking. This historical survey allows him to assess the factors that drive innovations.
Ridley distinguishes innovation sharply from invention. To be sure, invention is important, as it makes an abstract idea incarnate. But an invention generally is quite impractical at first. Innovation then permits the development of an invention so that “it is sufficiently practical, affordable, reliable and ubiquitous to be worth using.” Innovation arranges the world more efficiently than it previously was, permanently boosting our well-being.
As a result, while invention often represents the “eureka” moment of a single individual, innovation generally requires the collaboration of many over time, as entrepreneurs try to reduce the cost of the invention and make it practical for everyday use. Ridley shows that many actors in the innovation chain never get much monetary reward or even recognition for the achievement. We now remember James Watt as responsible for the steam engine, but his input into this dynamo of progress was not even the most important of his many forbearers and contemporaries.
Because successful innovation generally requires many attempts, the ability to fail is also crucial. Many of the most innovative companies in Silicon Valley are run by people who bungled their previous attempts. But corporate bureaucracy and comfortable middle management positions are the enemies of innovation. They deter risk-taking and outside-the-box thinking. Indeed, corporate bureaucrats may dislike innovation within their companies because it will create new centers of profit that will undermine their power. Kodak went bankrupt despite having developed digital photography, because its key managers decided to keep pushing the celluloid version.
Clear property rights are essential to the promotion of innovation. They explain, for instance, why fracking began in the United States and not elsewhere. “Because of mineral rights belonging to local landowners rather than the state, and because oil companies had never been nationalized, as they were in many other countries . . . America had a competitive, pluralist, and entrepreneurial oil-drilling mindset” that led directly to the most important innovation in the energy industry in decades.
Fragmented government helps. One of the reasons Renaissance Italy was so innovative was that it was easy for business and artistic innovators to leave an inhospitable city-state for a more welcoming one. In contrast today, most European states are quite centralized, and that centralization has been exacerbated by the overlay of the European Union’s bureaucracy. It is shocking, but thus not surprising, that of Europe’s 100 most valuable companies, not one was created in the last 40 years.
Ridley is also very perceptive about how vested interests in society prize the status quo and thwart innovation. Farmers who did not want to compete with innovative ways of growing things combined with the Left to prevent the introduction of genetically modified crops in Europe, despite the fact they are as safe as traditional crops, which of course themselves have been genetically modified by human selection over centuries.
One obstacle to the introduction of GMOs in Europe was the “precautionary principle”—the notion that the innovation should be precluded unless it is overwhelmingly certain that it creates no new risks. Environmentalists like the principle and it is responsible for slowing down innovation in fields like energy (see nuclear power) and transportation (see drones). Permissionless innovation, in contrast, has been the norm for the digital economy and that different stance explains why it is an ever-blooming garden of recombination and variety.
But the precautionary principle can also harm the very values it is supposed to protect. GMOs are good for the environment because they need fewer pesticides and less fertilizer than traditional varieties. The latter fact underscores one of the great virtues of modern innovation: it increasingly means using fewer resources rather than more. Arranging the world more efficiently can require less energy to get the same results. As Ridley notes, “we can now get “more food from less land, more miles for less fuel, more communication for less steel, more transistors for less silicon.” One of Ridley’s most fundamental points is that there are no limits to growth. Innovation can go on indefinitely and yet create a more environmentally friendly world.
How Innovation Works makes for optimistic reading at a time when social events incline toward pessimism. But perhaps Ridley is too optimistic because he does not sufficiently factor in political trends. The United States is moving in the direction of Europe rather than the other way around. Much heavier taxes have become a possibility given our significant transfer payments. But, as Ridley implies, low tax rates are needed to sustain innovation, because the chance of a big payoff for any individual is low even if he gets to keep the gains from selling his improvements. Curbing permissionless innovation in the digital arena now seems a real possibility as much of the Left clamors for such restrictions through, for instance, changes in competition law. Even as voices on the Right are better for innovation on the regulatory front, their refusal to consider entitlement reform portends tax increases.
But beyond these political vicissitudes, our culture today celebrates the risk-taking individual less, as our educational institutions focus ever more on “social justice.” But, as Ridley superbly recounts, history shows that property rights and the neutral rule of law have done far more to sustain innovation and thus raise the living standards of the poorest than any government social program.