♪ [music] ♪
- [Alex] In our previous videos, we've
covered how capital accumulation can spur
catch-up growth, but capital accumulation
becomes less potent as countries grow
wealthier. Countries on the cutting edge
grow by developing more and better ideas,
but how? How do we get more and better
ideas? Individually, a good idea - it might
seem sort of random. Maybe it pops into
your head while you're in the shower or
just before you go to sleep at night. But
when we step back and look at the creation
of new ideas at a macro level, it's
definitely not random. There are key
ingredients that spur more ideas. Ideas
don't fall from the sky like manna from
heaven. They grow in the soil of good
institutions. Let me give you a story to
help illustrate this point. You might
never have heard of the flying shuttle,
but it was one of the most important
inventions in the industrial revolution.
The flying shuttle improved looms,
making it easier to make fabric
quickly and cheaply, and that made it
possible for people around the world to
have new clean clothes. For the very first
time, fashion became something that wasn't
just for the very, very rich. The flying
shuttle was invented by John Kay. And what
did Kay get for his efforts? Weavers who
thought that Kay's invention would put
them out of work, they smashed the new
looms, and they burned Kay's house to the
ground. Despite creating one of the most
important inventions to launch the
Industrial Revolution and improve the
world, Kay, in fear for his life, fled to
France, where he ultimately died a poor
man. I don't know about you, but if I saw
what happened to John Kay, I might not be
too eager to pursue my invention. Let's
contrast Kay’s story with a great innovator
from recent times, Steve Jobs. For his
Innovations, not only did he earn lots of
money, but also cultural awards. Jobs
became an icon that people want to
emulate. This goes back to institutions
and incentives. The institutions today in
the United States have enabled an amazing
environment for entrepreneurs to thrive
and create new ideas. If you have a great
idea in the United States, in America,
American institutions create good
incentives to pursue that idea. You'll
find incubators and venture capitalists
who can help you start your business, laws
to protect your idea, a culture that
idolizes innovators, and markets who will
reward you handsomely should your idea be
attractive to consumers. John Kay could
only dream of the sort of world where he
could profit from his work. In the United
States and in most of the world today,
ideas are produced for profit. Seventy
percent of the research and development
expenditures in the United States are
funded by the private sector, and an even
higher percentage are funded privately in
places like Japan. So while an individual
idea might seem sort of just like good
luck, we see that ideas spring from places
that have the right institutions in place
to create new ideas and pursue those
ideas. In the next video, we're gonna look
at one particular institution which is
important for the production of ideas,
patents. We'll also discuss the trade-offs
of protection versus the sharing of ideas,
and what role can governments play in the
production of new ideas?
- [Narrator] If you want to test yourself
click "Practice Questions." Or, if you're
ready to move on, you can click "Go to
the Next Video." You can also visit
MRUniversity.com to see our entire library
of videos and resources.