WEBVTT 00:00:00.517 --> 00:00:03.517 ♪ [music] ♪ 00:00:14.000 --> 00:00:17.850 - [Alex] In our previous videos, we've covered how capital accumulation can spur 00:00:17.850 --> 00:00:22.390 catch-up growth, but capital accumulation becomes less potent as countries grow 00:00:22.390 --> 00:00:27.430 wealthier. Countries on the cutting edge grow by developing more and better ideas, 00:00:27.430 --> 00:00:33.640 but how? How do we get more and better ideas? Individually, a good idea - it might 00:00:33.640 --> 00:00:38.120 seem sort of random. Maybe it pops into your head while you're in the shower or 00:00:38.120 --> 00:00:43.960 just before you go to sleep at night. But when we step back and look at the creation 00:00:43.960 --> 00:00:49.380 of new ideas at a macro level, it's definitely not random. There are key 00:00:49.380 --> 00:00:55.180 ingredients that spur more ideas. Ideas don't fall from the sky like manna from 00:00:55.180 --> 00:01:02.070 heaven. They grow in the soil of good institutions. Let me give you a story to 00:01:02.070 --> 00:01:06.250 help illustrate this point. You might never have heard of the flying shuttle, 00:01:06.250 --> 00:01:11.260 but it was one of the most important inventions in the industrial revolution. 00:01:11.260 --> 00:01:15.320 The flying shuttle improved looms, making it easier to make fabric 00:01:15.320 --> 00:01:19.910 quickly and cheaply, and that made it possible for people around the world to 00:01:19.910 --> 00:01:26.310 have new clean clothes. For the very first time, fashion became something that wasn't 00:01:26.310 --> 00:01:33.430 just for the very, very rich. The flying shuttle was invented by John Kay. And what 00:01:33.430 --> 00:01:38.000 did Kay get for his efforts? Weavers who thought that Kay's invention would put 00:01:38.000 --> 00:01:43.550 them out of work, they smashed the new looms, and they burned Kay's house to the 00:01:43.550 --> 00:01:49.180 ground. Despite creating one of the most important inventions to launch the 00:01:49.180 --> 00:01:55.060 Industrial Revolution and improve the world, Kay, in fear for his life, fled to 00:01:55.060 --> 00:02:00.110 France, where he ultimately died a poor man. I don't know about you, but if I saw 00:02:00.110 --> 00:02:05.570 what happened to John Kay, I might not be too eager to pursue my invention. Let's 00:02:05.570 --> 00:02:11.050 contrast Kay’s story with a great innovator from recent times, Steve Jobs. For his 00:02:11.050 --> 00:02:16.880 Innovations, not only did he earn lots of money, but also cultural awards. Jobs 00:02:16.880 --> 00:02:23.030 became an icon that people want to emulate. This goes back to institutions 00:02:23.030 --> 00:02:27.870 and incentives. The institutions today in the United States have enabled an amazing 00:02:27.870 --> 00:02:34.230 environment for entrepreneurs to thrive and create new ideas. If you have a great 00:02:34.230 --> 00:02:38.770 idea in the United States, in America, American institutions create good 00:02:38.770 --> 00:02:43.770 incentives to pursue that idea. You'll find incubators and venture capitalists 00:02:43.770 --> 00:02:48.910 who can help you start your business, laws to protect your idea, a culture that 00:02:48.910 --> 00:02:55.660 idolizes innovators, and markets who will reward you handsomely should your idea be 00:02:55.660 --> 00:03:01.240 attractive to consumers. John Kay could only dream of the sort of world where he 00:03:01.240 --> 00:03:05.760 could profit from his work. In the United States and in most of the world today, 00:03:05.760 --> 00:03:11.160 ideas are produced for profit. Seventy percent of the research and development 00:03:11.160 --> 00:03:15.940 expenditures in the United States are funded by the private sector, and an even 00:03:15.940 --> 00:03:20.930 higher percentage are funded privately in places like Japan. So while an individual 00:03:20.930 --> 00:03:27.250 idea might seem sort of just like good luck, we see that ideas spring from places 00:03:27.250 --> 00:03:32.480 that have the right institutions in place to create new ideas and pursue those 00:03:32.480 --> 00:03:38.710 ideas. In the next video, we're gonna look at one particular institution which is 00:03:38.710 --> 00:03:44.270 important for the production of ideas, patents. We'll also discuss the trade-offs 00:03:44.270 --> 00:03:50.970 of protection versus the sharing of ideas, and what role can governments play in the 00:03:50.970 --> 00:03:53.143 production of new ideas? 00:03:54.000 --> 00:03:58.886 - [Narrator] If you want to test yourself click "Practice Questions." Or, if you're 00:03:58.886 --> 00:04:06.015 ready to move on, you can click "Go to the Next Video." You can also visit 00:04:06.015 --> 00:04:10.682 MRUniversity.com to see our entire library of videos and resources.