♪ [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.