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.

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♪ [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."

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