The Economics of Ideas

Course Outline

The Economics of Ideas

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.


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?



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