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- [Alex] In our previous videos, we've[br]covered how capital accumulation can spur

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catch-up growth, but capital accumulation[br]becomes less potent as countries grow

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wealthier. Countries on the cutting edge[br]grow by developing more and better ideas,

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but how? How do we get more and better[br]ideas? Individually, a good idea - it might

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seem sort of random. Maybe it pops into[br]your head while you're in the shower or

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just before you go to sleep at night. But[br]when we step back and look at the creation

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of new ideas at a macro level, it's[br]definitely not random. There are key

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ingredients that spur more ideas. Ideas[br]don't fall from the sky like manna from

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heaven. They grow in the soil of good[br]institutions. Let me give you a story to

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help illustrate this point. You might[br]never have heard of the flying shuttle,

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but it was one of the most important[br]inventions in the industrial revolution.

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The flying shuttle improved looms,[br]making it easier to make fabric

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quickly and cheaply, and that made it[br]possible for people around the world to

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have new clean clothes. For the very first[br]time, fashion became something that wasn't

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just for the very, very rich. The flying[br]shuttle was invented by John Kay. And what

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did Kay get for his efforts? Weavers who[br]thought that Kay's invention would put

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them out of work, they smashed the new[br]looms, and they burned Kay's house to the

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ground. Despite creating one of the most[br]important inventions to launch the

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Industrial Revolution and improve the[br]world, Kay, in fear for his life, fled to

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France, where he ultimately died a poor[br]man. I don't know about you, but if I saw

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what happened to John Kay, I might not be[br]too eager to pursue my invention. Let's

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contrast Kay’s story with a great innovator[br]from recent times, Steve Jobs. For his

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Innovations, not only did he earn lots of[br]money, but also cultural awards. Jobs

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became an icon that people want to[br]emulate. This goes back to institutions

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and incentives. The institutions today in[br]the United States have enabled an amazing

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environment for entrepreneurs to thrive[br]and create new ideas. If you have a great

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idea in the United States, in America,[br]American institutions create good

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incentives to pursue that idea. You'll[br]find incubators and venture capitalists

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who can help you start your business, laws[br]to protect your idea, a culture that

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idolizes innovators, and markets who will[br]reward you handsomely should your idea be

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attractive to consumers. John Kay could[br]only dream of the sort of world where he

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could profit from his work. In the United[br]States and in most of the world today,

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ideas are produced for profit. Seventy[br]percent of the research and development

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expenditures in the United States are[br]funded by the private sector, and an even

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higher percentage are funded privately in[br]places like Japan. So while an individual

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idea might seem sort of just like good[br]luck, we see that ideas spring from places

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that have the right institutions in place[br]to create new ideas and pursue those

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ideas. In the next video, we're gonna look[br]at one particular institution which is

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important for the production of ideas,[br]patents. We'll also discuss the trade-offs

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of protection versus the sharing of ideas,[br]and what role can governments play in the

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production of new ideas?

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- [Narrator] If you want to test yourself[br]click "Practice Questions." Or, if you're

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ready to move on, you can click "Go to[br]the Next Video." You can also visit

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MRUniversity.com to see our entire library[br]of videos and resources.