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♪ [music] ♪

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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idea in the United States, in America,
American institutions create good

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

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

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

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

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

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

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

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

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

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

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

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

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of protection versus the sharing of ideas,
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
click "Practice Questions." Or, if you're

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

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