How Innovation Works by Matt Ridley

Science & Technology

What is innovation? Why does innovation occur? How does it falter? How can it be accelerated? These are the questions Matt Ridley seeks to answer in How Innovation Works: And Why It Flourishes in Freedom. In doing so, he dispels some of the commonly accepted myths about innovation – while tying it to the themes of optimism over pessimism and evolution over revolution that characterize his previous works, The Rational Optimist and The Evolution of Everything.

Innovation and the Great Enrichment

Innovation, according to Ridley, is the process whereby energy is used to rearrange the atoms of the universe into improbable orderly structures to benefit human flourishing. Innovation differs from mere invention in that innovation turns discoveries into things that are useable, practical, and affordable for humankind. Or, in his words:

“Innovations come in many forms, but one thing they all have in common, and which they share with biological innovations created by evolution, is that they are enhanced forms of improbability.”

Innovation, says Ridley, “like evolution, is a process of constantly discovering ways of rearranging the world into forms that are unlikely to arise by chance – and that happen to be useful.”

Why is this so important?

“[I]nnovation …. is the reason most people today live lives of prosperity and wisdom compared with their ancestors, the overwhelming cause of the great enrichment of the past few centuries, the simple explanation of why the incidence of extreme poverty is in global freefall for the first time in history: from 50 percent of the world population to 9 percent in my lifetime.”

Observation, Play, and Tinkering

In terms of the book’s structure, the first part of How Innovation Works deals with the histories of various innovations, from which he draws lessons. While not retreading familiar ground (he ignores much of the innovations from the Industrial Revolution – the one that occurred in Britain), he still covers a wide variety of innovations. Categories covered include energy (“the root of all innovation … because innovation is change and change requires energy”), public health, transport, food, low-tech, communication and computing, and even pre-historic innovation – including life itself!

In the chapter on energy, he covers the incandescent bulb and artificial light, “one of the greatest gifts of civilization.” Ridley points out this astonishing fact:

“A minute of work on the average wage could earn you four minutes of light from a kerosene lamp; a minute of work in 1950 could earn you more than seven hours of light from an incandescent bulb; in 2000, 120 hours.”

He also points out the disinnovation of the “hazardous to dispose of” government coerced Compact Fluorescent (CF) bulbs, which were eventually replaced by the market created LED bulbs, which did not suffer any of the disadvantages of CF. He discusses the evolution of the turbine that “gave the world electricity, and that powered the navies and liners of the sea and later the jets of the air” and how “the story of nuclear power is a cautionary tale of how innovation falters, and even goes backwards if it cannot evolve.” He sees the nuclear fusion of hydrogen as a safe, reliable power once costs can be brought down through freeing the innovation process. He accounts how regulation halted gas exploration and helped create a gas glut (shortage); and how the shale-fracking revolution has turned America into the world’s biggest producer of gas, and crude oil, thanks to property rights. Writes Ridley, “The Permian basin in Texas alone now produces as much oil as the whole United States did in 2008, and more than any OPEC country except Iran and Saudi Arabia.”

Other stories of innovation covered in the book include jet engines, safety, the airplane, the “productive potato,” vaping, vaccines, antibiotics, mosquito nets, the screw propeller, fertilizer, zero, the computer, fire, genetic engineering and gene editing, container shipping, locomotives and railways, diesel, cars, mobile phones, blockchain, artificial intelligence, and many other innovations, including search engines, farming, corrugated iron, telegraph, radio, social media, wheeled suitcases, chlorinated water, toilets, vacuum cleaners, the sharing economy, and even life itself.

Essentials of Innovation

He then puts these stories of innovation together to formulate the “essentials of innovation.” We learn that it is gradual rather than disruptive. It is evolutionary, rather than revolutionary, “technologies evolve from technologies, not from scratch.” He explores how innovation differs from invention in that it must have some positive human impact, that is, “the people who find ways to drive down the costs and simplify the product who make the biggest difference.” It is serendipitous; that is, innovation is often an “accidental discovery,” such as in the case of the fortuitous discovery of antibiotics.

Innovation is recombinant, in that it combines earlier innovations to create something new. To what the author issues what I call the Ridley Challenge: “I defy the reader to find a technological (as opposed to a natural) object in his or her pocket or bag that is not a combination of technologies and of ideas.” Ridley also notes that innovation involves trial and error, and “most human innovations evolve through a process that looks awfully like natural selection rather than are created by intelligent design.” He notes it is a collaborative, team sport and “not an individual phenomenon but a collective, incremental and messy one” that “thrives in an ecosystem of innovation” where innovators stand “on the shoulders of others.” He thinks that innovation is exorable and that “simultaneous invention is more the rule than the exception.” I agree though some innovations take a long time to happen. As evidence, John Kay’s innovation the ‘flying-shuttle’ which could have been invented five centuries earlier but wasn’t.

Most importantly, innovation means using fewer resources to accomplish a task. That is, “growth can take place through doing more with less:

“The LED light bulbs of today use only 10% of the energy for the same amount of light as earlier bulbs, making the effective supply of energy increase in proportion. Innovation is the solution to the problem of ‘scarcity’ and ‘diminishing returns’ that plagues the ‘dismal science.”

Economics of Innovation

Chapter 9 deals with topics on the economics of innovation:

  • Innovation has unlimited potential to produce increasing returns.
  • Innovation is a “bottom-up phenomenon” for which academics in ivory towers and central bureaucrats like to take credit.
  • Innovation is “the mother of science as often as it is the daughter” as opposed to the pure top-down “linear” approach.
  • Innovation cannot be forced on consumers. It has to provide a recognizable benefit that is greater than the added cost to the consumer.
  • Innovation increases interdependence, and in a division of labor  society is a good thing.
  • Innovation does not increase unemployment but shifts employment by creating new productive jobs, allowing for more leisure time.
  • Innovation is difficult for large established firms as they are more concerned with maintaining the status quo than with disrupting the present state of things.

Most importantly, Ridley heralds how to set innovation free. Ridley’s example of how the Ottoman and Mughal empires banned printing for centuries — an innovation that Europe got from China — is a perfect example of how the regulatory state can ‘imprison’ innovation.

Enemies of Innovation

Chapter 10 covers “Fakes, Frauds, Fads and Failures” of innovation from fake bomb detectors, to the fraud behind the Theranos debacle, to the failure of innovation due to diminishing returns. The last point illustrated by the examples of Nokia and Blackberry, who were unable to evolve past the diminishing returns from the hardware of mobile phones to reorient themselves behind the software evolution of smartphones like the iPhone and Android. Ridley also highlights why failure in the short run leads to the eventual success of innovation in the long run (how Amazon, like Edison, had to do multiple things, multiple times the wrong way to figure out how to do them the right way – which in hindsight then appears obvious).

Chapter 11 covers the resistance to innovation. He writes, “the most puzzling aspect of innovation is how unpopular it is.” It is seen as subversive and demonized (i.e., biotechnology as a Franken-science). He shows how established firms block innovation from competitive upstarts and how the state stifles innovation by regulation.

In the last chapter, Ridley talks about the future of innovation, why it has slowed down, what this means, and how the world can regain momentum. The operative answer here is freedom. Innovation requires freedom to flourish.

Child of Freedom, Parent of Prosperity

Ridley’s message is a positive one – especially given the release of the COVID-19 “Wuhan” virus upon the world by the Communist dictatorship that occupies China, whose people have benefited from the expansion of economic freedom, as that same dictatorship readies to crack down on the innovation called Hong Kong. What path will the world follow?

Being a Ridley book, there will always be areas of disagreement by both enemies and admirers: from his epic takedown of Mariana Mazzucato’s The Entrepreneurial State as “creationist” economics to his unfortunate opposition to intellectual property rights (curiously given this view his book is copyrighted!).

I’ll end this summary with one of the most beautiful of the book’s passages:

“Innovation is the child of freedom and the parent of prosperity. It is on balance a very good thing. We abandon it at our peril. The peculiar fact that one species above all others has somehow got into the habit of rearranging the atoms and electrons of the world in such a way as to create new and thermodynamically improbable structures and ideas that are of practical use to the wellbeing of that species never ceases to amazes me. That many members of the species show little curiously about how this rearrangement comes about, and why it matters, puzzles me. That there is no practical limit to the ways in which the species could rearrange the atoms and electrons of the world into improbable structures in the centuries and millennia that lie ahead excites me.”

Hopefully, How Innovation Works: And Why It Flourishes in Freedom will inspire others to champion the planting of the seeds of innovation while protecting the soil of freedom that this precious and most delicate of flowers – that “child of freedom and parent of prosperity” — thrives on.

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