How Innovation Works: And Why It Flourishes in Freedom

by Matt Ridley

A symptom of the disease is that companies are sitting on huge cash piles, measured in the trillions, and multinational firms have become net lenders, rather than borrowers, because they cannot see ways to invest their money in innovation.

The dead hand of corporate managerialism then finds that it is easier to control markets than to contest them, to plan rather than experiment.

Globalization, far from challenging this trend, may have entrenched it. Multinationals have absorbed the mentality of planners, rather than entrepreneurs.

If this line of thought is right, the ability of Western economies to generate innovation has become weaker. To the extent that incomes appear to be stagnating and opportunities for social mobility drying up, the cause is not too much innovation, but too little.

There is little doubt that the innovation engine has fired up in China.

This despite the fact that its politics is authoritarian and intolerant, because a lot of that happens at a level above the entrepreneur, who is surprisingly free of petty bureaucratic rules and delays, so long as he or she does not annoy the Communist Party, and free to experiment.

Yet if the world is to rely on China to do its innovation, it will become an uncomfortable place. Chinese citizens are subject to arbitrary and authoritarian restraints that the West long ago shook off. Democracy does not exist and free speech is impossible. I repeat: the stories of innovation that I have documented in this book teach a lesson that it relies heavily on freedom. Innovation happens when ideas can meet and mate, when experiment is encouraged, when people and goods can move freely and when money can flow rapidly towards fresh concepts, when those who invest can be sure their rewards will not be stolen.

In an authoritarian system it will be all too easy for incumbent businesses, even those that started out as plucky outsiders, to raise barriers to entry against innovation.

Innovation is the child of freedom and the parent of prosperity.