Capitalism oils the wheels of innovation, which solves

Innovation under capitalism follows precisely the same logic it has throughout human history. Capitalism simply oils the wheels of the knowledge machine with features like clear property rights, contract enforcement, competition, and decentralized decision-making.16 In particular, capitalism fosters not only the development of new ideas, but more importantly their diffusion. The latter is the crucial part of the innovation process in which learning, imitation, and feedback effects arise and enhance the original innovation. As odd as this may sound, very often it is not so much about having big ideas, but making it possible to operationalize them. Leonardo da Vinci in the fifteenth century had loads of ideas, envisioning the airplane, the diving suit, the parachute, the submarine, and the helicopter. Most of these were not credibly produced until three hundred years later. Methane was known in antiquity, and allegedly it contributed to the clairvoyant capacities of the Oracle of Delphi in Ancient Greece. Accounts of a Baghdad battery suggest that two thousand years ago the Persians knew electricity existed, although they had little understanding of the phenomenon, and few applications for it. Thus, it remained mainly an item of intellectual curiosity, perhaps applied in medical therapy. Likewise, in 600 BCE, the Ancient Greeks knew that rubbing cat fur on amber (fossilized tree resin) caused an attraction between the two, in what is known today to be static electricity. But it was not until 1830 that electricity became useful for practical uses, when Michael Faraday created an electric dynamo to generate current in a continuous way. Looking to more recent history, early experiments with self-driving cars were conducted in the 1920s, but only now is the technology available for a possibly viable product. As an engineer friend, CEO of a technology venture, tells me, the hardest part of a start-up is not having the good idea for it—there are plenty of those—but creating the business that can deliver the reliable product at scale. Capitalism provides strong incentives, in the form of personal rewards, to shift from the realm of ideas and intellectual curiosity to that of practical production of solutions that respond to needs of the moment and serve large customer bases. As usual, drawing a contrast with the Soviet Union is instructive. The Soviet system featured strong investment in education, brilliant scientists, and well-equipped research labs. As a consequence, it generated major scientific breakthroughs—such as Sputnik, the first battery-powered satellite in 1957, which orbited around the Earth for a few months. In 1961, the Soviets managed to send the first man safely into space: the famous Yuri Gagarin. In the field of nuclear physics, they created the hydrogen bomb, just a few months after the United States. At least for circumscribed, military, or centralized innovation, the socialist Soviet model worked marvels. When it came to spreading innovation and technology through the economy, however, it fell short. Product and process innovation stalled, because there were no incentives for it beyond some fears of being chastised or punished by the party leadership.17 Without diffusion, raw innovation has very limited social and economic impact. The strength of the capitalist system on the innovation front is not that it creates more geniuses, but rather that it is an efficient organizing principle, providing strong incentives for people to develop ideas.18 Even more crucially, it fosters the deployment of these ideas, matching them with sources of capital—firms on the hunt for novelty to maximize returns and eager to win in (Schumpeterian) market competition. In the process, capitalism also nudges acute minds toward what historian Joel Mokyr calls “useful knowledge,” as opposed to, say, astrology, numerology, or other intellectual endeavors with no impact on well-being. Because capitalism bridges the gap between abstract scientific curiosity and practical applications, it is an efficient machinery to produce economic growth. Indeed, historians of the “Great Divergence” that separated industrializing Europe from the old world view some of capitalism’s standard features, such as strong property rights protection and contract enforcement, as instrumental.19 Strong economic growth in turn opens up space to use more resources for the future, encouraging investment in research.20 Innovation generates economic growth, which in turn fuels innovation—a dynamic that has yielded sustained exponential growth since the Industrial Revolution. Recall the high correlation between innovation and GDP per capita (Figure 3.1). This shows up not only in terms of absolute spending by rich countries on research and development (R&D) but, more crucially, in terms of R&D as a share of their GDPs—a good example of how economic growth reduces the need for trade-offs (exemplified in Table 3.1).21 Innovation serves perceived societal needs, whether it is government funded, particularly through a democratic process and public accountability, or privately funded, seeking to address consumer relative needs and capture demand.22 The process of innovation has an exploratory nature, and is by no means perfect, including under capitalism. We often hear of abandoned research programs which, in hindsight, would have produced real bang for the buck, and also see others turn out to have been a waste. These mistakes are bound to happen given that foresight is imperfect. All we can do is align incentives so that those investing in new technologies will try to collect as much information as possible and use it in making decisions. This happens when they can profit from successful R&D. The same applies to government spending in a healthy democracy, assuming that poor investment of taxpayer money by politicians does not go unpunished at the ballot box.23 Pulling all this together, we see that researchers and scientists are but the tip of the innovation iceberg, below which a societal organization supports their work. This might be news to some toiling away in the hard sciences, members of a profession proud of being insulated from politics and business thanks to institutions such as academic tenure. The truth is that the bright people sitting in labs are there, with access to research funds, expensive instruments, and scores of PhDs and post-docs, because society has decided their research topics are worth resources and attention, and expressed that through some combination of government, businesses, and philanthropy. A picture therefore emerges of innovation and inventions happening, in whatever domain, not by chance but rather as a response to societal priorities. In capitalist systems, most resources are privately owned, and indeed, most R&D in rich countries is funded by the private sector.24 The frequent argument, including from the degrowth movement, is that the private sector focuses on the wrong things, led by its desire to maximize private profits rather than solutions to societal needs. This supposedly results in “useless innovation,” rather than innovation in areas that “truly matter.”25 To understand how frontier innovation really works in the private sector, we must look to the central element of the capitalist system—the price mechanism—and we can start with an anecdote. In 2018, Lant Pritchett, known as a maverick in the field of development economics, was invited by Larry Summers to present a guest lecture to his Globalization and Its Critics class at Harvard. Pritchett’s opening words —“Tesla is dumb!”—generated the expected murmur in a room full of digital natives, who immediately sized up Pritchett as a Luddite. The fact is that Tesla (like Google, for that matter) invests many millions of dollars in self-driving cars as it responds to outstanding incentives, including the relatively expensive price of labor in the United States. At a world level, however, human labor is very cheap, and there are millions of people who might take work as chauffeurs, charging a fraction of the price of a self- driving car. The same could be said for cashiers in supermarkets, whose work is being increasingly automated. What makes these investments locally sensible but globally illogical is clearly the existence of national borders. For cultural reasons that one can agree or disagree with, we have created borders which are rather closed, and this distorts national prices, in turn taking innovation in different directions. Pritchett’s provocative statement highlights that companies respond to price incentives but that, because of existing distortions, the result might not be the most efficient allocation of resources. From his development perspective, and relating to globalization, the worst part is that developing countries tend to import and imitate the technology solutions of rich countries. A museum in India, for example, installs automated gates that project an image that it is quite modern, but this is a country with countless workers willing to take tickets for a dollar per day. This speaks to an important insight. We know that, under capitalism, prices are fundamental in causing supply to meet demand, but that regulation defines the parameters. Innovation is no exception. It is possible for government to steer the direction of innovation by changing these parameters. To do that within a democratic process, however, policymakers need majorities of people on board.26 One can blame capitalism because it focuses on “useless innovation,” but it is more a reflection of people’s revealed preferences than anything else. If borders were made more permeable, as Pritchett has suggested on multiple occasions, the focus on labor-shedding innovation would diminish. But politically, or culturally, people do not seem inclined toward such a solution. The green dimension marks no exception to the rule —a subject we turn to next.