Creating incentives for more discovery

To maintain a given percentage rate of growth, rate of discovering new products must increase. So if each discovery is worth X and you want to grow from 6 percent from a level of, say, $10,000 per capita, you've got to add $600 worth of value in new things. But if you want to grow at 6 percent when you're starting from $30,000 per capita, you've got to add a lot more new things. What it looks like is, as we learn more it's getting easier to discover new things, so somehow knowledge is building on itself. Newton had this great evocative phrase that he can see farther because he "stood on the shoulders of giants."

And there what it looks like is we've been putting more and more people to work on the discovery process. We've been training those people who do discovery more.
We're getting the combined effects of knowledge building on knowledge that makes it easier to discover, and having more and more people all engaged in the discovery process. And these seem to explain why we've had growth rates which are actually getting faster over time, not slowing down.

About 40 percent in 1900 were involved in agriculture in US. Where are we ever going to find jobs for all of those people if agriculture becomes a much smaller source of employment? Well, what we've done is we've educated the children and grandchildren of those farmers, and many of those people are now engaged in the discovery of better ways to do things. As productivity has grown, we've freed up human resources which really is, in some sense, the scarcest commodity: the power of the human intellect. We've freed up more of that power to engage in this discovery activity. Now how did we get more and more people aiming at discovery? Some of that has come purely from population growth. There are just more people around. But the most important part of it has come from changes in our institutions.

We have things like universities, and we have things like patent laws, and we have things like research grants which have created incentives for those individuals to engage in more discovery. The institutions—again, the rules of the game—create incentives. And we've found ways to create incentives for people to do more discovery. So a meta-idea would be something like the modern research university.

We in the United States did two things that were complementary, that reinforced each other. One of those things was committing to what we were just talking about: education, universal primary education, then universal secondary education, developing the university system, and encouraging research. We committed heavily to institutions of learning and discovery. But we also committed heavily to the market mechanism, to property rights, to free entry, to competition, competition in all its many forms.

The institutions of the market and broadly speaking, the institutions of science—we got both of those right. And it's the combination of those two which has been so powerful. Many nations of the world have tried to push the institutions of science alone and are learning but have been slower to adopt the full institutions of the market.

Everybody's in favour of growth but nobody wants change. It'll be interesting to see how Europe copes if we're right, and I think we are, that the cost of their desire for security is going to become increasingly apparent.

Why do you think we've grown at a faster rate in America over the last 100 years than other western economies? Technological opportunity in these countries are relatively similar. We don't have access to secret technology that they didn't know to use. What are some of the reasons they might have grown more slowly than we did? And other nations, for that matter, over the same period.

........The question about the U.S. growing faster during the past century compared to other countries is a harder question about not copying things that are already known, as today countries do for economic growth, but developing brand-new things. In the United States, we developed a set of institutions. Institutions are the rules—the rules of the game that structure what everybody does in the nation.

We developed a set of institutions which encouraged more rapid discovery. We discovered and implemented things more rapidly than they did in other industrial countries. And the interesting question that historians and economists are still struggling with is, "What were the precise details of our institutions that made them better, just enough better to get an extra half a percentage point per year compared to other similar economies?"

One of the reasons that we're able to do it is that we import people. You talked about China importing technologies. We imported—because we have relatively open borders, we've imported a lot of smart people from overseas that have helped us.

...........This notion that there's a kind of a rivalry with winners and losers when we think about nations, it's really very misleading about the underlying economics. This, by the way, was one of the advantages the United States had in the early part of the twentieth century. We were already a big free trading block when a lot of the world was still relatively closed.

www.econlib.org