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- [Alex] In our previous videos,
we've covered

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how capital accumulation
can spur catch-up growth,

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but capital accumulation
becomes less potent

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as countries grow wealthier.

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Countries on the cutting edge grow

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by developing more
and better ideas, but how?

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How do we get more
and better ideas?

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Individually, a good idea -
it might seem sort of random.

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Maybe it pops into your head
while you're in the shower

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or just before
you go to sleep at night.

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But when we step back and look
at the creation of new ideas

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at a macro level,
it's definitely not random.

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There are key ingredients
that spur more ideas.

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Ideas don't fall from the sky
like manna from heaven.

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They grow in the soil
of good institutions.

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Let me give you a story
to help illustrate this point.

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You might never have heard
of the flying shuttle,

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but it was one of
the most important inventions

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in the industrial revolution.

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The flying shuttle improved looms,

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making it easier to make fabric
quickly and cheaply,

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and that made it possible

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for people around the world
to have new clean clothes.

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For the very first time,
fashion became something

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that wasn't just
for the very, very rich.

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The flying shuttle
was invented by John Kay.

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And what did Kay get
for his efforts?

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Weavers who thought
that Kay's invention

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would put them out of work,

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they smashed the new looms,

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and they burned
Kay's house to the ground.

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Despite creating one
of the most important inventions

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to launch the Industrial Revolution
and improve the world,

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Kay, in fear for his life,
fled to France,

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where he ultimately died
a poor man.

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I don't know about you,

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but if I saw
what happened to John Kay,

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I might not be too eager
to pursue my invention.

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Let's contrast Kay’s story
with a great innovator

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from recent times, Steve Jobs.

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For his Innovations, not only
did he earn lots of money,

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but also cultural awards.

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Jobs became an icon
that people want to emulate.

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This goes back to institutions
and incentives.

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The institutions today
in the United States have enabled

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an amazing environment
for entrepreneurs

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to thrive and create new ideas.

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If you have a great idea
in the United States, in America,

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American institutions create good
incentives to pursue that idea.

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You'll find incubators
and venture capitalists

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who can help you
start your business,

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laws to protect your idea,

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a culture that idolizes innovators,

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and markets who will
reward you handsomely

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should your idea be
attractive to consumers.

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John Kay could only dream
of the sort of world

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where he could profit
from his work.

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In the United States
and in most of the world today,

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ideas are produced for profit.

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Seventy percent of the research
and development expenditures

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in the United States are funded
by the private sector,

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and an even higher percentage
are funded privately

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in places like Japan.

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So while an individual idea
might seem

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sort of just like good luck,

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we see that ideas
spring from places

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that have the right institutions
in place to create new ideas

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and pursue those ideas.

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In the next video,

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we're gonna look
at one particular institution

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which is important
for the production of ideas, patents.

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We'll also discuss the trade-offs

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of protection
versus the sharing of ideas,

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and what role can governments play
in the production of new ideas?

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- [Narrator] If you want
to test yourself

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click "Practice Questions."

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Or, if you're ready to move on,

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you can click
"Go to the Next Video."

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You can also visit MRUniversity.com

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to see our entire library
of videos and resources.