Fifty Inventions That Shaped the Modern Economy

by Tim Harford

McKinsey’s breakthrough was a book published in 1922, with the not-entirely-thrilling title Budgetary Control.

Book

Duff McDonald wrote a history of The Firm, arguing that its advocacy of scientific approaches to management transformed the business world.

Book

The Banking Act of 1933, known as Glass-Steagall, was a far-reaching piece of American financial legislation. Among many provisions, this legislation made it compulsory for investment banks to commission independent financial research into the deals they were brokering; fearing conflicts of interest, Glass-Steagall forbade law firms, accounting firms, and the banks themselves from conducting this work. In effect, the Glass-Steagall Act made it a legal requirement for banks to hire management consultants.

in 1956 the Justice Department banned the emerging computer giant IBM from providing advice about how to install or use computers.

Minimizing conflicts of interest was a noble aim, but it hasn’t worked out well. McKinsey’s long-serving boss in the 1990s, Rajat Gupta, managed to get himself convicted and imprisoned in 2012 for insider trading.12 McKinsey also employed Enron’s Jeff Skilling, and then was paid well for advising him, before quietly fading into the background while Enron collapsed and Skilling went to jail.

In January 1842, Charles Dickens arrived on American shores for the first time. He was greeted like a rock star in Boston, Massachusetts, but the great novelist was a man with a cause: he wanted to put an end to the cheap, sloppy pirated copies of his work in the United States.

The United States finally began to respect international copyright in 1891,

China didn’t have a system of copyright at all until 1991.3

Boulton and Watt used it to extract licensing fees and crush rivals—among them Jonathan Hornblower, who made a superior steam engine yet found himself ruined and imprisoned.

The economists Michele Boldrin and David Levine argue that what truly unleashed steam-powered industry was the expiration of the patent, in 1800, as rival inventors revealed the ideas they had been sitting on for years. And what happened to Boulton and Watt, once they could no longer sue those rivals? They flourished anyway. They redirected their attention from litigation toward the challenge of producing the best steam engines in the world.

The economists Boldrin and Levine have a radical response to this problem: scrap intellectual property altogether. There are, after all, other rewards for inventing things—getting a “first mover” advantage over your competitors, establishing a strong brand,

In 2014, the electric car company Tesla opened up access to its patent archive in an effort to expand the industry as a whole, calculating that Tesla would benefit from that.

Charles Dickens himself eventually discovered that there’s a financial upside to weak copyright protection. A quarter of a century after his initial visit to the United States, Dickens made another visit. Maintaining his family was ruinously expensive and he needed to make some money. And he reckoned that so many people had read cheap knock-offs of his stories that he could cash in on his fame with a lecture tour. He was absolutely right: off the backs of pirated copies of his work, Charles Dickens made a fortune as a public speaker, many millions of dollars in today’s terms.9 Perhaps the intellectual property was worth more when given away.

One impressed customer was an engineer, Carl Hammer, who used it to attack an equation his colleagues had struggled with for months; Hammer wrote twenty lines of code and solved it in a day.

impecunious

In fact, there’s no such thing as “the correct time.” Like the value of money, it’s a convention that derives its usefulness from the widespread acceptance of others.

By observing the angle of the sun, sailors could figure out their latitude: where you are from north to south. But their longitude—where you are from east to west—had to be guessed.

Some financiers recently calculated it was worth spending $300 million on drilling through mountains between Chicago and New York to lay fiber-optic cables in a slightly straighter line. That sped up communication between the two cities’ exchanges by three milliseconds. One may reasonably wonder whether that’s the most socially useful infrastructure the money could have bought, but the incentives for this kind of innovation are perfectly clear, and we can hardly be surprised if people respond to them.9

The Haber-Bosch process is perhaps the most significant example of what economists call “technological substitution”:

the Haber-Bosch process today consumes more than 1 percent of all the world’s energy.5

products are produced efficiently, and they’re consumed by the people who value them most.

sometimes we need the visible hand of government, too.

Some of the most important inventions that shaped the modern economy weren’t just helped along the way by government, but were entirely the creation of the state—for example, the limited liability company, intellectual property, and, most obvious, the welfare state itself.

But the two-part pricing model pioneered by Gillette is highly inefficient, and economists have puzzled over why consumers stand for it.

Leaded gasoline is banned now, almost everywhere. It’s among the many regulations that shape the modern economy. And yet “regulation” has become a dirty word: politicians often promise to sweep them away; you rarely hear calls for more. It’s a trade-off between protecting people and imposing costs on business. And the invention of leaded gasoline marked one of the first times that trade-off sparked a fierce public controversy.

When countries are poor, they might decide that pollution is a price worth paying for progress. Later, as their incomes grow, they decide they can afford to bring in laws that clean up the environment. Economists have a name for this pattern of increasing and then decreasing pollution: it’s called the “environmental Kuznets curve.”

But

poverty. In the village of Xiaogang in 1978, a group of farmers secretly met and agreed to abandon collective farming, divide up the land, and each keep whatever surplus they produced after meeting collective quotas. It was a treasonous agreement in Communist eyes, so the secret contract was hidden from officials. But the farmers were eventually found out: the giveaway was that their farms had produced more in one year than in the previous five years combined.

Around the globe, the World Bank has found, after controlling for income and economic growth, the countries with simpler, quicker property registries also had less corruption, less gray-market activity, more credit, and more private investment.10

macerated,

In 1884, a financial journalist named Charles Dow had the bright idea that he could take the price of some famous company stocks and average them, then publish the average going up and down. He ended up founding not only the Dow Jones company, but also The Wall Street Journal.2

Paul Samuelson.

Economics

Samuelson laid out his thinking in an article titled “Challenge to Judgment,” which said that most professional investors should quit and do something useful instead, like plumbing.

and goods that have positive externalities tend to be bought at a slower pace than society, as a whole, would prefer.

although the S-bend has been around for ten times as long as the mobile phone, many more people currently own a mobile phone than a flushing toilet.9

Because of the externality problem, such a project might not appeal to private investors: it tends to require determined politicians, willing taxpayers, and well-functioning municipal governments to accomplish. And those are in short supply.

Other countries have since suffered much worse. Weimar Germany and Zimbabwe are famous examples of economies collapsing into chaos as excessive money-printing rendered prices meaningless. In Hungary in 1946, prices trebled every day. Walk into a Budapest café back then, and it was better to pay for your coffee when you arrived, not when you left.

mainstream economists generally now believe that pegging the money supply to gold is a terrible idea.

The Romans were serious about concrete. Using a naturally occurring cement from volcanic ash deposits at Puteoli, near Pompeii and Mount Vesuvius, they built their aqueducts and their bathhouses. Walk into the Pantheon in Rome, a building that will soon celebrate its 1,900th birthday. Gaze up at what was, for centuries, the largest dome on the planet.5 You’re looking at concrete. It’s shockingly modern.

Reinforced concrete is much stronger and more practical than the unreinforced stuff. It can span larger gaps, allowing concrete to soar in the form of bridges and skyscrapers. But here’s the problem: if cheaply made, it will rot from the inside as water gradually seeps in through tiny cracks in the concrete and rusts the steel. This process is currently destroying infrastructure across the United States;*

A decade ago—as a stunt for a radio program—I phoned one of the UK’s leading betting shops and tried to take a bet that I was going to die within a year. The woman on the end of the phone refused: it was against company policy. That was an unprofitable decision, since I am, after all, still alive. But a betting shop won’t gamble on life and death. A life insurance company, by contrast, does little else.

Legally and culturally, there’s a clear distinction between gambling and insurance. Economically, the difference is not so easy to see. Both the gambler and the insurer are agreeing that money will change hands depending on what transpires in some unknowable future.

Risk-sharing mutual aid societies are now among the largest and best-funded organizations on the planet: we call them “governments.”

Much of the welfare state, as we’ve seen, is really just a form of insurance.

Today, the biggest insurance market of all blurs the line between insuring and gambling: the market in financial derivatives. Derivatives are financial contracts that let two parties bet on something else—perhaps exchange rate fluctuations, or whether a debt will be repaid or not.

calamities

there’s an apparently inexorable trend toward making intellectual property rights even longer and broader despite a widespread view among economists that they are already so overreaching that they’re strangling innovation.

The technologies that enabled globalization have helped lift millions out of poverty in countries like China—one of the poorest places on earth fifty years ago, and now a solidly middle-income economy—but left whole communities in postindustrial regions of Western countries struggling to find new sources of stable, well-paid employment.

How, then, do we measure changes in inflation when what we’re able to buy changes so radically over time? This question isn’t simply a technical curiosity. How we answer it underpins our view of human progress over the centuries. The economist Timothy Taylor begins his introductory economics lectures by asking his students: Would you rather be making $70,000 a year now or $70,000 a year in 1900?