The Economics of Ideas

This Week: Learn the key ingredients for fostering innovation and new ideas.

Next Week: A closer look at one institution that affects the growth of new ideas: Patents.

At the end of our last video, we asked, “What spurs the growth of new ideas?”

To answer that, we’ll tell you two stories.

The first is about a man named John Kay.

He created the flying shuttle, one of the key inventions of the Industrial Revolution. His shuttle improved looms, and made it possible to produce clothes quicker and more cheaply. This allowed larger numbers of people to have new, clean clothes, and it made fashion something that was no longer just for the rich. But what did he get for his efforts?

Well, the weavers who were threatened by his invention broke the improved looms and his house was burned down. He eventually fled to France, fearing for his life, and eventually died there, a poor man.

Our second story paints a completely different picture.

It’s about a man almost everyone knows: Steve Jobs.

Like Kay, Steve Jobs was also an innovator, pioneering products like the iPod, iTunes, iPhone, and the iPad. For his efforts, he earned not only money but recognition as well. Unlike John Kay, Steve Jobs became an icon, celebrated for his achievements in the world.

Why such a stark difference between these two men?

When we examine the differences between John Kay and Steve Jobs, we’re also looking at the thing that either dooms an idea or allows it to prosper. This vital factor is institutions, which serve as the soil where ideas are planted.

Depending on the quality of said soil, the ideas either take root, or they shrivel into nothingness.

To understand how this is, think of the institutions in the United States today.

The US has institutions that encourage the germination and growth of ideas. If you’re an entrepreneur, America has incubators and investors, ready to fund your idea if it’s a good one. In the US, you also have recourse to laws that protect your idea, not to mention a culture that celebrates innovators. And, if your idea’s a good one, the market will handsomely reward you.

To tell you the truth, John Kay could only have dreamed of institutions like the ones we have today.

As you can see, good institutions can mean the difference between an idea withering and an idea thriving.

While it may seem like ideas grow at random, the truth is you need a set of key ingredients, or what we call “institutions.”

In the next video, we’ll see how patents affect the growth of ideas, and we’ll examine the trade-offs between protecting and sharing ideas. Last, we’ll also look at the role the government can play, in providing a stable environment where ideas can flourish.

Subscribe for new videos every Tuesday! http://bit.ly/1Rib5V8

Macroeconomics Course: http://bit.ly/1R1PL5x

Ask a question about the video: http://bit.ly/21S9YCa

Next video: http://bit.ly/1rEha8p

♪ [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.