The Idea Equation

Course Outline

The Idea Equation

Alex Tabarrok’s TED talk showed you that ideas can trump nearly every crisis. Now, since ideas are so important, we have to ask: is the future of ideas a bright one?

To answer that, we’ll look at something we call the Idea Equation.

It goes like this: Ideas = Population x Incentives x Ideas/per hour.

This equation is a useful way to lay out the factors affecting idea production. When we understand the factors behind production, then we can better predict how the future will go.

Now, the first factor in the equation, is population.

Population determines how many possible idea creators we can have. The good news is, not only is world population growing, but a larger percentage of that population is becoming part of the researcher pool. For instance, China now has 1 researcher per thousand people. This seems low, until you remember they had about half a researcher per thousand in the year 2000. This means they’ve doubled their researcher pool, in just about 10 years.

So, on the population front, we’re seeing progress.

But how about the incentives that encourage idea creation? What’s the state of those?

That’s factor 2 in the equation, and again, we have good news here.

See, for the most part, countries are now choosing better institutions. On balance, the world now has more dependable legal systems, and more honest governments. Previously closed-off nations are now opening their markets to competition and trade. Aside from that, the world is generally becoming more politically stable, and property rights are strengthening as well.

As a result of these better institutions, there are now more incentives to produce ideas. Not to mention, we’re still continuing to globalize world markets. Remember what the TED talk said? Larger markets incentivize more R&D, and we’re certainly seeing higher activity in this area.

For example, in 1990, only seven nations accounted for 92% of world research spending. Today, those same 7 countries only account for 56%. Countries like China, Korea, and Brazil have already joined the fray, sharing the burden of idea creation, which benefits us all.

That said, we do still have the third part of the Idea Equation. This is where things get hairy.

You see, the factor “ideas/per hour” is the most mysterious one. Yes, it measures the productivity of idea creators, but we’re still unsure how productive the future will be. For one, there’s evidence that idea creation is becoming more expensive in certain fields. But on the other hand, we’re also seeing new technology that makes idea creation easier—things like the Internet, AI, and online education.

As long as we continue to globalize markets, provide better incentives for idea production, and keep developing technology that makes idea creation easier, then there’s no reason to think that the future can’t be bright. The brightness may not be guaranteed, but at least there’s hope, which is what matters.


In our final video on growth and the economics of ideas, we're going to look deep into our crystal ball. Given that ideas are the key to long-term economic growth, what are the prospects for future growth? Is the future bright or dim? To help answer, let's summarize the economics of ideas in a simple formula. Ideas are equal to Population times Incentives, times Ideas per hour. Now this isn't a precise formula, but it's more of a tool to help us think about the key factors in idea creation.

We're going to start with what economist Julian Simon called "The Ultimate Resource" -- people. World population is increasing. But even more importantly, the population of idea creators is rapidly increasing. As I pointed out in my TED Talk, as China, India, and other parts of the world become rich, they contribute more and more to the production of new ideas, ideas which benefit everyone.

Here's some data showing the population of researchers in a sample of countries around the world. In the United States today, about 4 people in every thousand are involved directly in idea creation. Not that many people really, especially when you think that a large fraction of economic growth comes from new ideas. The number of idea creators per thousand -- it's a little bit higher in a few other countries like Finland and Japan, and about the same in other developed countries, such as Canada, Germany, and Australia.

Now take a look at China. In China, only 1 in every 1,000 people is a researcher. Still, combined with China's total population, that makes China a research leader. But what's even more remarkable is how quickly the number of researchers in China is increasing. In 2000, China only had about half a researcher per 1,000. So, China has doubled the number of idea creators in just about 10 years. As China and other countries become increasingly well-educated and wealthy, the number of idea creators in these countries is increasing to the benefit of everyone. Remember, ideas are built to be shared.

Next up in our equation is a measure of institutions and incentives. How well are countries incentivizing idea creation? The news here -- it's also pretty good. As I discuss in my TED Talk, we're globalizing markets, making markets larger, and that increases the profit from R&D. In addition, institutions across the world -- they're getting better. There's positive movements towards better property rights, honest government, political stability, and a dependable legal system. All of this helps to incentivize the production of good ideas.

We can see the effect of better institutions in a remarkable fact. As late as 1990, just seven nations accounted for 92% of the world's spending on Research & Development. Just seven nations! But today, those same nations account for only 56% of R&D. Overall, the world is investing much more in Research & Development than ever before, because the original seven -- they've now been joined by other R&D powerhouses, like China, Korea, and Brazil.

The last factor in the equation is the number of ideas per hour. Assuming that we've got lots of idea creators and the right incentives, how productive can those idea creators be in producing new ideas? Now, this variable is the most mysterious and uncertain. Is it possible that idea production could run into diminishing returns? Diminishing returns in idea production would mean that we need more researchers and better incentives just to keep up. And it does seem that today we rely less on lone geniuses and more on big teams to make new discoveries. There's some evidence that it's becoming more expensive to produce new ideas, at least in some fields.


But it's also possible that we'll see the opposite, Increasing Returns. We now have lots of technologies that make idea production easier. Take the internet, for example. It makes it easier to find and build upon old ideas. And how about online education? That makes education much faster and better. The internet has also opened up the world to more idea creators. Today, someone in Zambia can get access to a large fraction of the world's knowledge using just their cell phone. That's incredible! And a new technology may soon revolutionize the production of ideas. Artificial intelligence could speed up the production of new ideas dramatically.

So, nothing is guaranteed, but there are good reasons to be optimistic about the future of economic growth, especially if we continue to educate the world, globalize markets, and produce new technologies that make idea production even easier.


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