The dignity of innovation

It’s been said that Shakespeare’s audiences had only marginally better lives than Sophocles’.  That changed around 1800 when prosperity and development climbed sharply and suddenly, first in the North Sea region and then diffusing throughout “the West.”

Last Fall we ran a 4-part series (I, II, III, IV) based on this book which skipped the question of Why the Industrial Revolution happened and focused on How and Where it spread:  those countries with the most friendly environments for entrepreneurs innovated and prospered.  On that score “the West” did better than “the Rest.”

In Bourgeois Dignity: Why Economics Can’t Explain the Modern World, Deirdre McCloskey tries to answer the Why.  While scientific, political, and economic advances laid the groundwork, it was the idea that entrepreneurship had dignity that made the difference.

(O)ne doesn’t see a change in the psychology of businesspeople… What changed was the sociology. That is, what changed was the attitude of the rest of the society toward businesspeople, and with that new attitude came a change in government policy. It was suddenly all right to get rich and to innovate.

From Amazon’s description:

During this time, talk of private property, commerce, and even the bourgeoisie itself radically altered, becoming far more approving and flying in the face of prejudices several millennia old. The wealth of nations, then, didn’t grow so dramatically because of economic factors: it grew because rhetoric about markets and free enterprise finally became enthusiastic and encouraging of their inherent dignity.

In subsequent interviews she has said that “It was not inevitable [but] by 1900 everyone not blinded by some millennial fantasy, Left or Right, could feel it.”

It is neither inevitable nor consistently applied, so it’s good to be reminded, as Jonah Goldberg does in Innovation vs. Regulation:

Despite a century of anti-corporate rhetoric about the power of corporations, they actually come and go with amazing rapidity (only 13 percent of firms on the Fortune 500 list in 1955 were there in 2011).

But government is forever. The state has the unique ability to protect existing “stakeholders” from the threats posed by innovation and competition, whether those stakeholders are businesses or unions, fat cats or philanthropies. That’s where the votes are and where the checks come from.

But progress — material, medical, economic — comes from innovation. Economist Deirdre McCloskey notes that until the 19th century, innovation was a negative word because innovators upset the established order and the powers that be…  (F)or all of human history, humans lived on about $3 a day, using today’s dollars. For 200,000 years, the line was essentially flat, until around 1800, when a culture that valued innovation spread from England to Europe and the New World. Since then, wealth has skyrocketed, all thanks to a culture willing to let innovators pull up the stakes of the existing stakeholders.

In Silicon Valley, where government’s touch is light, we can see the rapidity of innovation at work. In health care, education, and other areas where the government’s hand is heavy, we see stakeholders holding on for dear life.

It seems paradoxical, but failure is what makes us rich.  Well over half of the companies on the 2009 Fortune 500 list began during a recession or bear market.  The patents for the Television, Jukebox, and Nylon were granted during The Great Depression.  Also born at that time:  the chocolate chip cookie, Scrabble and Fender Guitars (kinda).  The decline of U.S. Steel was bad for the company’s shareholders and its employees, but it was good for people who use steel — meaning everybody else in the world.  Without the pressure and opportunity created by the possibility of failure the entire U.S. economy would be (at best) stuck in the early 19th century.

National prosperity is generated by the start-ups who innovate and challenge entrenched incumbents.  Anyone who’s worked for a large corporation – especially in an R&D department – would not rely primarily on that model for innovation.  Anyone who’s worked for a large corporation – especially in a dying industry – would not rely primarily on that model for job growth.  Yes, start-ups lack the economies of scale and R&D budgets of larger firms; but that’s the support venture capital provides.  Those start-ups that do gain traction are able to raise capital, and, with hard work and a little luck, become large companies…  and then face the next generation of innovators.