The Rational Optimist (P.S.)

by Matt Ridley

The proportion of GDP spent by firms on research and development in America has more than doubled, to nearly 3 per cent, over the past half-century. Little wonder that there has been a corresponding increase in invention and application.

Innocentive and yet2.com

intellectual property is very different from real property, because it is useless if you keep it to yourself. The abstract concept can be infinitely shared. This creates an apparent dilemma for those who would encourage inventors. People get rich by selling each other things (and services), not ideas. Manufacture the best bicycles and you profit handsomely; come up with the idea of the bicycle and you get nothing because it is soon copied. If innovators are people who make ideas, rather than things, how can they profit from them? Does society need to invent a special mechanism to surround new ideas with fences, to make them more like houses and fields? If so, how are ideas to spread?

There are several ways to turn ideas into property. You can keep the recipe secret, as John Pemberton did for Coca-Cola in 1886. This works well where it is hard for rivals to ‘reverse-engineer’ your secrets by dismantling your products. Machinery, by contrast, betrays its secrets too easily.

second, you can capture the first-mover advantage, as Sam Walton, the founder of Wal-Mart, did throughout his career. Even as his retailing rivals were catching up, he was forging ahead with new cost-cutting tactics. Intel’s dominance of the microchip industry, and 3M’s of the diversified technology industry, were based not on protecting their inventions so much as on improving them faster than everyone else. Packet switching was the invention that made the internet possible, yet nobody made any royalties out of it. The way to keep your customers, if you are Michael Dell, Steve Jobs or Bill Gates, is to keep making your own products obsolete. The third way to profit from invention is a patent, a copyright or a trademark. The various mechanisms of intellectual property are eerily echoed in the apparently lawless and highly competitive world of real recipes, recipes devised by French chefs for their restaurants.

Yet there is little evidence that patents are really what drive inventors to invent.

‘patent trolls’ –

Michael Heller’s analogy for the patent trolls is to the state of the river Rhine between the decay of Holy Roman imperial power and the emergence of modern states.

Intellectual property is an important ingredient of innovation, when innovation is happening, but it does very little to explain why some times and places are more innovative than others.

A large study by the Organisation for Economic Co-operation and Development concluded that government spending on R&D has no observable effect on economic growth, despite what governments fondly believe. Indeed it ‘crowds out resources that could be alternatively used by the private sector, including private R&D’. This rather astonishing conclusion has been almost completely ignored by governments. Exchange!

The perpetual innovation machine that drives the modern economy owes its existence not mainly to science (which is its beneficiary more than its benefactor); nor to money (which is not always a limiting factor); nor to patents (which often get in the way); nor to government (which is bad at innovation). It is not a top-down process at all. Instead, I am going to try now to persuade you that one word will suffice to explain this conundrum: exchange. It is the ever-increasing exchange of ideas that causes the ever-increasing rate of innovation in the modern world.

As the economist Paul Romer has argued, human progress consists largely in accumulating recipes for rearranging atoms in ways that raise living standards.

As soon as two races of animals have diverged substantially, they find themselves able to produce only sterile offspring – like mules – or none at all. That is the very definition of a species. Technologies emerge from the coming together of existing technologies into wholes that are greater than the sum of their parts.

Michael Faraday’s

Hans Christian Oersted.

It follows that spillover – the fact that others pinch your ideas – is not an accidental and tiresome drawback for the inventor. It is the whole point of the exercise. By spilling over, an innovation meets other innovations and mates with them. The history of the modern world is a history of ideas meeting, mixing, mating and mutating. And the reason that economic growth has accelerated so in the past two centuries is down to the fact that ideas have been mixing more than ever before.

In other words, we may soon be living in a post-capitalist, post-corporate world, where individuals are free to come together in temporary aggregations to share, collaborate and innovate, where websites enable people to find employers, employees, customers and clients anywhere in the world. This is also, as Geoffrey Miller reminds us, a world that will put ‘infinite production ability in the service of infinite human lust, gluttony, sloth, wrath, greed, envy and pride’. But that is roughly what the elite said about cars, cotton factories, and – I’m guessing now – wheat and hand axes too. The world is turning bottom-up again; the top-down years are coming to an end.

And it seems that pessimism genes might quite literally be commoner than optimism genes: only about 20 per cent of people are homozygous for the long version of the serotonin transporter gene, which possibly endows them with a genetic tendency to look on the bright side.

Some African leaders are so disenchanted with government aid that they even embraced the recommendations of the Zambian economist Dambisa Moyo who concludes, bleakly, ‘aid doesn’t work, hasn’t worked, and won’t work ... no longer part of the potential solution, it’s part of the problem – in fact, aid is the problem.’

African countries have lost many of their informal social traditions and institutions, so property rights and justice have become arbitrary and insecure. Their most promising industry – agriculture – is usually stifled by price controls and bureaucratic marketing agencies imposed by urban elites, and stymied by trade barriers and subsidies in Europe and America, not to mention devastated by a proliferation of over-grazing goats. Ethnic strife between the biggest tribe, which maintains one-party rule, and its hated rival usually poisons politics. Paradoxically, African countries are often also cursed by sudden windfalls of rich mineral wealth, such as oil or diamonds, which serve only to corrupt democratic politicians, strengthen the power of dictators, distract entrepreneurs, spoil the terms of trade of exporters and encourage reckless state borrowing.

Take, therefore, one such typical African country. It is landlocked, drought-prone and has a very high population growth rate. Its people belong to eight different tribes speaking different tongues. When freed from colonial rule in 1966 it had eight miles of paved road (for an area the size of Texas), twenty-two black university graduates, and only 100 secondary school graduates. It was later cursed by a huge diamond mine, crippled by AIDS, devastated by cattle disease, and ruled by one party with little effective opposition. Government spending has remained high; so has wealth inequality. This country, the fourth poorest in the entire world in 1950, has every one of Africa’s curses. Its failure was inevitable and predictable. But Botswana did not fail. It succeeded not just moderately well, but spectacularly. In the thirty years after independence it grew its per capita GDP faster on average (nearly 8 per cent) than any other country in the entire world – faster than Japan, China, South Korea and America during that period. It multiplied its per capita income thirteen times so that its average citizens are now richer than Thais, Bulgarians or Peruvians. It has had no coups, civil wars or dictators. It has experienced no hyperinflation or debt default. It did not wipe out its elephants. It is consistently the most successful economy in the world in recent decades.

It is true that Botswana has a small and ethnically somewhat homogeneous population, unlike many other countries. But its biggest advantage is one that the rest of Afric...

Botswana turns out to have secure, enforceable property rights that are fairly widely distributed and fairly well respected. When Daron Acemoglu and his colleagues compared property rights with economic growth throughout the world, they found that the first explained an astonishing three quarters of the variation in the second and that Botswana was no outlier: the reason it had flourished was because its people owned property without fear of confiscation by chiefs or thieves to a much greater exten...