Unbinding Regulations

The steady growth in imposed regulations, often defended on the basis of the precautionary principle (which forbids innovations until there is proof that they will cause no harm), increases the risks and costs of innovation for the entrepreneur. Many important innovations of the last century would not have occurred if the precautionary principle had been in operation. Organic regulation of the marketplace (including tort actions and private ratings firms) can counter injuries due to irresponsible firm behavior, without stifling innovation. OSHA regulations did not reduce workplace deaths; financial regulations did not stop the Crisis of 2008, and may have made it worse. Occupational licensing regulations protect incumbents, and reduce opportunity for the least well-off. By slowing new life-saving drugs, FDA regulations cause more deaths than they prevent. The Vodnoy paradox suggests that we favor regulations in areas where we are ignorant and oppose them in areas where we are knowledgeable.

The Benefits: Process Innovations

Process innovations mainly benefit consumers by reducing prices of services and of new and old goods, which benefits aspiring ordinary citizens more than the privileged rich. The interchangeable parts of the American system of manufacturing (famously demonstrated at Britain’s Crystal Palace in Victorian England) reduced the costs of many goods, bringing them within the reach of the working class. Process innovations are often financed by rich venturesome consumers who buy expensive early versions of new goods. Besides lowering costs, process innovations also increase the variety, convenience, and quality of goods. Important process innovations include Fritz Haber’s inventing a way to create fertilizer from air; Henry Ford’s adaptation of the assembly line to reduce the costs of manufacturing cars; Sam Walton’s logistical, information technology and managerial innovations to reduce the costs of retailing; and Jeff Bezos’s Internet process innovations to increase the variety, convenience, and speed of delivery of retail goods.

The Innovative Entrepreneur

Cognitively diverse project entrepreneurs are the ones most likely to succeed at making a ding in the universe. Project entrepreneurs are more effective because they are more likely to persevere at achieving their project and at undertaking new breakthrough innovations. Cyrus Field, Marconi, Walt Disney, Sam Walton, and Steve Jobs were project entrepreneurs. Innovative entrepreneurs are likely to either know less theory, or to take theory less seriously, which allows them to try what theory says is impossible. For instance, the physics of Marconi’s day said that his radio waves should go straight into space rather than curve with the earth to cross the Atlantic. Conversely, innovative entrepreneurs often have more tacit knowledge. Innovative entrepreneurs pursue serendipitous observations or slow hunches, often through trial-and-error experiments, and may benefit from cognitive diversity, such as dyslexia and Asperger’s syndrome. What inventors and entrepreneurs know is the subject matter of the epistemology of innovation.

Funding Inventors

Since breakthrough inventions are costly, hard, and precarious, patents can be fair rewards for invention and can provide funding to enable future inventions. The funding widens the opportunity to invent, as illustrated by the tinkering working-class inventors who developed and applied steam power in Britain in the Industrial Revolution, and who later invented many of the agricultural and manufacturing tools and processes in the United States in the 1800s. Working-class inventors could hire patent agents, for modest fees, to help with the legal paperwork. Later, important breakthrough inventors such as Thomas Edison and Dean Kamen depended on patents of earlier inventions to fund their later inventions. Patent reforms can counter flaws (such as costly frivolous litigation) in the current patent system. Invention can also be encouraged by private institutional innovations, following the examples of micropayments for web content, and patent pools by firms such as Intellectual Ventures.

Easing the Pains of Labor

The worst labor-market fears about innovative dynamism are either unjustified or can be allayed by better policies. Except during the depths of recessions, more jobs are created than destroyed. Job loss is usually gradually and often can be foreseen. The pains of labor can be reduced through policies that avoid repeating the Great Depression or the Crisis of 2008. The pains can be further reduced by fostering more robustly redundant job markets, such as in Silicon Valley, where most workers can quickly and easily find new jobs. Some innovative entrepreneurs succeed at turning their startups into the fast-growing gazelles that create most of the new jobs in the economy. Redundant job markets can be fostered by minimizing regulations on the gazelles, and by reducing the credentialism exemplified by occupational licensing. Robots and artificial intelligence are not to be feared because they are more complements than substitute for human labor.

An Economy of Innovative Dynamism

Economies have grown where innovative dynamism has flourished, especially in the United States from roughly 1830 to 1930. Innovations are not inevitable, but occur when inventors can invent and entrepreneurs can innovate. Individual inventors matter and are scarce. Thomas Edison was not the only one to invent a light bulb but was the first to invent a bulb that would stay lit at a price that ordinary people could afford. Leapfrog competition occurs when an innovation improves on, and at least partly replaces, an older technology. The best size for a firm varies with technology, industry, and business model. With John D. Rockefeller’s process innovations, Standard Oil succeeded as a big firm. But horizontal mergers failed in many other industries during the same period. Big incumbent firms can implement innovations, but are disadvantaged at starting breakthrough innovations. Baldwin Locomotive and Netscape illustrate that firms can contribute and then exit with honor.

The Benefits: Morality, Equality, Mobility, Culture, and the Environment

The wealth received by some innovative entrepreneurs is fair because of the large benefits of their innovations. Widespread flourishing under innovative dynamism encourages tolerance of diversity, respect for the rights of others, more effective sympathy, and cultural diversity. The equality that matters most is that everyone has roughly an equal chance to improve their lives. The quantity of resources expands, because inventors and entrepreneurs create new uses for old materials. For example, process innovations in agriculture, such as the Haber-Bosch process for creating fertilizer from nitrogen in the air, mean that an abundance of food can be grown with less land, encouraging the greening of the planet. Innovations can allow us to adapt to modest and slow global warming. If global warming becomes greater and faster, other innovations can produce energy with less carbon, can increase the sequestration of carbon, and can counter the increase in temperature through geoengineering.

The Great Fact and the Good Life

Deirdre McCloskey’s Great Fact of economic history is the enrichment in the West that started during the Industrial Revolution, following millennia of life being, as Hobbes says, “poor, nasty, brutish, and short.” Hunter-gatherers lived violent, uncertain, often repetitive lives, far from the Golden Age that some imagine. Goods can be good if they provide John Rawls’s primary goods that are needed for achieving almost any life plan. They can be even better if they help us to achieve the higher goods related to the creativity, challenge, and fulfillment that Abraham Maslow discussed in his hierarchy of needs. Many who seem to oppose new goods are accidental Luddites, only opposing the particular new goods that they fear will harm them. After digesting its brain and backbone, a sea squirt spends the rest of its life vegetating. A human retains her brain and backbone, and so must act to thrive.

Hope for a Better Future

Pessimists predict the end of technological progress, but secular (long-term) stagnation is due to bad policies, not to having picked the low-hanging fruit, as illustrated by innovative medical entrepreneurs who have been constrained from bringing us quicker and better cures for cancer. Funded researchers must stick to their original protocols even in the face of promising serendipitous discoveries. Medical incumbents protect their turf by mandating costly double-blind studies for innovations, and then refusing to enroll their patients in the studies. Trial-and-error experimental tinkering allowed Emil Freireich and his Society of Jabbering Idiots to develop the chemotherapy cocktail that allowed many to be cured of childhood leukemia, and allowed Vincent DeVita to develop the chemotherapy cocktail that allowed many to be cured of Hodgkin’s lymphoma. Yet FDA protocols restrict trial-and-error experimentation, resulting in many needless deaths. In medicine, as elsewhere, our future will be better if we unbind the innovative entrepreneur.

Innovation Bound or Unbound by Culture and Institutions

The right culture, institutions, and policies all can encourage innovative dynamism. Heroes inspire cultural values of courage, perseverance, hard work, and tolerance. Religion enables innovative dynamism when it reduces violence and encourages respect for property. Religion constrains innovative dynamism when it limits questioning, as often occurs in hierarchical religions that emphasize faith. The Founding Fathers owed more to the tolerance of the Dutch of New Amsterdam, and to the trial-and-error experimentation of Galilean science, than they did to the religious fervor of the Pilgrims. Innovative dynamism often flourishes where institutions such as the rule of law, property rights, and the city enable diversity, collaboration, and a robustly redundant labor market. North and South Korea shared a culture, but through different institutions and policies, have diverged in innovation. Because policies matter, and we know best how to change them, policy reforms should be the focus of efforts to enhance innovative dynamism.