Why Matt Ridley Writes on Innovation

First in a #ReadWithMe Series

 

Matt Ridley’s How Innovation Works is a remarkable book. It is the third book in a row that Ridley, better known as a scientific journalist and, indeed, one of those rare people who makes highly complex scientific arguments understandable to the average educated reader, devoted to the _economic_ and _social_ realm. The first was The Rational Optimist, followed by The Evolution of Everything.

The book is masterful in two different ways. It is, of course, insightful. But it is also a pleasure to read. As a good journalist, Ridley knows that the human brain is a “stories processor” and not an “argument processor”. He showers the reader with anecdotes and stories, which make his points more cogent and clearer.

I will highlight some points that Ridley makes very effectively in a series of posts. This is the first.

 

Why did Ridley choose to devote a book to innovation? Because, he maintains, “innovation is the most important fact about the modern world, but one of the least well understood. It 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 freewill fort the first time in history: from 50 per cent of the world population to 9 per cent in my lifetime”.

So, Ridley is perfectly attuned to Deirdre McCloskey’s understanding of innovation as what is a truly peculiar of modern economies: so not “capitalism” (in the sense of the accumulation of capital being the primary force behind betterment) but “innovism” (ideas breeding the modern world).

 

Why is innovation not properly understood? “The surprising truth”, he writes, “is that nobody really knows why innovation happens and how it happens, let alone when and where it will happen next”. This is an unbearable thought and a very hard sell, both for the economist who consults with the government on how to foster innovation in the economy and for the corporate executive who boasts about the future achievements of his company.

One of the problems is that “innovation is nearly always a gradual, not a sudden thing.” Yet Ridley argues that it is seldom understood as such. People like to focus on great breakthroughs and their makers, on their stories. Ridley does his fair share of that, too, but always highlighting how great innovators actually built on what other great innovators did before them. “It is all too easy and all too tempting for whoever makes a breakthrough to magnify its importance, forget about rivals and predecessors, and ignore successors who make the breakthrough into a practical proposition”.

 

So How Innovation Works is also a book on how innovation doesn’t work: through eureka moments (well, sometimes they happen too) irrespective of culture and institutions.

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Rethinking the Great Recession

When I studied history, I was perplexed as to how the US could have done things like the internment of Japanese-Americans in WWII or the Joe McCarthy witch hunts of the early 1950s. Today, as I observe the growing anti-Chinese hysteria, these events are becoming easier to understand.

When I studied economic history, I was perplexed as to why economists of that period were blind to the costs of an extremely tight monetary policy that drove NGDP sharply lower during the early 1930s. Today, having seen a similar blindness in regard to the Great Recession, I’m no longer so perplexed.

The Economist has a very good (but also very depressing) article discussing how the field of macroeconomics has changed during the past decade. I take no pleasure in being right 10 years ago when I warned that misdiagnosis of the Great Recession could lead to the same sort of “dark ages” of economics as developed during the 1930s (and we escaped from in the latter 20th century).

Kevin Erdmann recently wrote a book pushing back against many of the myths regarding the housing bubble and bust, and I have a book coming out next April (University of Chicago Press) on market monetarism and the Great Recession.  Until then, you might be interested in our joint Mercatus working paper, which presents some of the key ideas in both books.

PS.  The Economist article is excellent, but does have one mistake:

Several factors might yet make the economy more hospitable to negative rates, however. Cash is in decline—another trend the pandemic has accelerated.

Actually, use of cash (mostly as a store of value) has increased sharply under Covid-19.  That makes the economy slightly less hospitable to negative rates.  Cash is a substitute for negative rate bank deposits.

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Do beliefs cause the great stagnation to persist?

The Great Recession was a deep downturn with long-lasting effects on credit, employment, and output. While narratives about its causes abound, the persistence of gross domestic product below precrisis trends remains puzzling. We propose a simple persistence mechanism that can be quantified and combined with existing models. Our key premise is that agents do not […]

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