The Breakdown - Why Innovation Matters (and How Not to Screw It Up), Feat. Matt Ridley

Episode Date: May 28, 2020

Twenty-one different people can reasonably claim to have invented the light bulb, but Thomas Edison is the one we know about. Was it just good PR? According to Matt Ridley, it was because Edison was the progenitor of an “innovation factory” that didn’t just create things but brought them to market in a way no one else did.  Innovation is one of the most important forces in the economy, and arguably the most important driver of human prosperity over the last century. Yet, for most of its life, it has been viewed as some strange exogenous force, rather than as a discipline that could be understood.  In this conversation with NLW and Ridley discuss: Why it took so long for economists to take the study of innovation seriously  Why invention is different from innovation  Why innovation has tended to concentrate in geographically proximate areas Why free societies produce more innovation than closed societies (including empires) Why China’s innovation production over the last decade may be an exception that proves the rule of innovation thriving in freedom Why government winner picking is a terrible way to inspire innovation Why innovation policy led Matt to support Brexit  The rational, optimistic take on the future

Welcome back to The Breakdown, an everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond. This episode is sponsored by ErisX.com, the Stellar Development Foundation, and Grayscale Digital Large Cap Fund. The Breakdown is produced and distributed by CoinDesk. Here's your host, NLW. Welcome back to The Breakdown. It is Wednesday, May 27th, and quick announcement, guys, right before we dive into a really, really exciting conversation with Matt Ridley, author of the new book, How Innovation Works, I wanted to share that I am experimenting or about to experiment with some interesting additional content, bonus content, VIP content, both written and podcast form that I really want a set of beta testers to help me out with. So if you are interested in beta testing a bunch of unique content around the same themes of

the breakdown as a supplement, as an extension of the breakdown, DM me at NLW on Twitter and let me know, or email me nLW at whittamore.io, and I will get you in this beta test for June. But without any further ado, let's talk about my interview today. Matt Ridley is an extremely interesting thinker. You may know him from his TED talk from 2010 when ideas have sex. You may know him from his book, The Rational Optimist, How Prosperity evolves. You may have read his more recent book, The Evolution of Everything. If you follow British Parliament, you may know him as a member of the House of Lords. But in this context today, I'm having a conversation with him as the author of the new book How Innovation Works and Why It Flourishes in Freedom.

And the conversation is really about the way in which innovation has been treated historically as some emergent phenomenon that just happens, rather than as something that can be understood and cultivated in explicit ways. And Matt spent a huge amount of time in this book digging into figuring out. how innovation actually works and why it is so essential to the evolving prosperity of the human species. We cover a huge amount of ground in this conversation from the idea of this economic history of innovation to how Thomas Edison created the first innovation factory and was not the inventor that we think of, but actually perhaps the first modern innovator. We talk about how governments can

and can't encourage or incentivize innovation and what works and what doesn't. We talk about how innovation actually an innovation policy influence Matt's views on Brexit. And finally, we talk about how, in the context of the COVID-19 crisis, what the state of innovation is and what new opportunities might come up. So I really enjoy this conversation. I hope you do as well. As always, when we do interviews that are long form like this, we edited only very lightly. Let's dive in. All right, I am here with Matt Ridley. Matt, thank you so much for spending some time with us today. Nathaniel, it's great to be talking to you. So I'm really excited for this. I've been following your works for quite some time. I was trying to remember back, I was not actually at TED Global when

you gave the, when ideas have sex presentation. I was at the next TED Global and I had been at Oxford for a different conference a couple months before that. But, you know, that really caught my attention and I read The Rational Optimist and have been enjoying the evolution of these ideas. And so we're here today to talk about innovation and your new book about innovation. But first, by way of getting it started, what made you want to write this book in particular right now? Well, I've been thinking for a long time that innovation is the big theme of humanity for the last few thousand years, that understanding it is important. and I've touched on it in my book, The Rational Optimist, which was about the fruits of innovation in a way,

and I've touched on it in the evolution of everything. But I've never actually sat down and said, what is innovation and how does it work? And the more I think about it, the more I think it's rather amazing that people haven't written more on this topic, because innovation is such an important part of our lives and is so crucial to how we got here, and it's crucial to how we'll get out of here in terms of the pandemic. and things like that. And yet it's a somewhat mysterious subject. Nobody can really tell you why it happens when and where it does,

why it dries up in some sectors and takes off in others, and then does the opposite at a different time. Nobody can really give you a plan for how to make it happen. Sure, we know some of the ingredients. But there's an awful lot of nonsense talked about innovation as well. So I thought it would be fun to tackle it head on as a topic. And then I had the idea of doing it as a series of stories where you tell the story of the steam engine, you tell the story of the search engine, and you draw lessons out of those stories.

So I've had a lot of fun doing that over the last couple of years. Yeah, it's really fascinating to me. I do feel like we have these moments where we realize that it's almost a fish trying to explain what water is type of thing, where something is so ever present in our lives that we haven't actually studied it as a discipline, right? And, you know, one of the things that was fascinating for me reading the book, I come from a history background. Did you ever kind of piece together why it was that this innovation has been missing in economic theory throughout history? Yes, I mean, there is interesting thinking on this that if you look at economic history, starting with our history, Adam Smith. Adam Smith talks about two somewhat contradictory ideas. One is the idea that if we,

if we all exchange and specialize, we will eventually get more and more efficient at everything. And we will drive out the inefficiencies in the world until we reach equilibrium, where we're all, we've found the perfect solution as to how to work for each other. And that implies that growth disappears. Growth, growth dries up, as it were, you know, that we reach a sort of perfect equilibrium. It implies diminishing returns. But the other Adam Smith story is that there's a pin factory in which because people are specialising, they get better at the tasks they're doing and they invent new devices to make them even better at the tasks they're doing. So there are increasing returns. And for most of economic history, economists were obsessed with decreasing

returns, diminishing returns. They assumed that, you know, this burst of growth would come to an end, that we would run out of new ideas, new technologies. And that just kept not happening. I mean, right up until the 1930s, Keynes is still saying, well, we might have hit, you know, the end of innovation. Some people are saying that again today. But in fact, we've had ever increasing returns because of ever increasing innovation. And economists suddenly realized, as late as the 1950s, really, we don't actually have a theory about innovation. We just assume it's an exogenous external thing that happens to the economy and we have the fruits of it. Paul Roma then got the Nobel Prize for trying to turn that round and saying, no, innovation is itself a product.

It is the result of what we do as well as the input to what we do. And so, you know, economists have begun to get innovation into their equations, but they haven't really succeeded yet. Yeah, and it seems so fundamental. I mean, how hard, how impossible is it to model out or predict economic outcomes when you don't have a way to take expected innovation into account, right? I mean, especially when so many of, so many issues in the economy are going to be based largely on changes in productivity and what different types of innovations do as it relates to, you know, needs for inputs and quality and quantity and types of outputs. Yeah, I mean, I like to give the example of the price of light. I mentioned this first in the rational optimist, but, you know, there have been calculations done as to how many hours you had to work in. in order to afford a given quantity of light.

And today you would have to work about a third of a second to get an hour of light from a normal lap. But in 1800, with the then cost of candles and the then average wage, you'd have had to work about six hours to get an hour of light of the same quantity. That's a beautiful example of how something has gone from being an unaffordable luxury available only to the few to something that is a routine necessity

that we all take for granted. And that's because of innovation. That's because we've replaced the candle with the kerosene lamp, which has been replaced with the light bulb, which has been replaced with the compact fluorescent bulb, which has now been replaced with the light emitting diode. So, and yet, you know, your labor, what you're spending your labor on has changed in that time. In the past, if you wanted light, you had to spend a good percentage of your day working to get light. Now you have to spend a third of a second working to get light. So you can spend the time working for something else. So this is a, you know, this is economic growth, a reduction in the amount of time you have to spend fulfilling a certain need.

And that you can't leave the story of innovation out of that process. It seems extraordinary that you would think you could. You know, that hasn't come about because we've got more land or more labor. It's come and go out because we're at new technologies. You know, it's really interesting. I think that the light example has a lot of parts to play in this story, which I feel like we'll come back to throughout. this conversation. I want to start maybe with the Thomas Edison example and this question of how

innovation differs from invention and these kind of inflection points in the history of innovation, because I think that's such a phenomenal example. But I also, and I'm mostly reminding myself, I want to come back to this idea of how much less work it takes to get light now compared to how much more time it takes, how much more work it takes to own, you know, one index share of the S&P 500, because there's an interesting conversation starting around the competition between technology deflation through inflation or sorry, through innovation and the sort of inflationary economic policies that keep asset prices, some would say artificially large. But I want to come back to that because it's a little ahead. A little ahead. But so let's talk about this idea of light.

So one of the more, I think it's a resonant example for folks because we have the mythology of Thomas Edison as the kind of inventor of the light bulb in some ways. But it really wasn't invention per se. Could you share just a little bit about that example and maybe this idea of an innovation factory and what that did for innovation kind of writ large? Yeah, well, Thomas Edison wasn't the only person to invent the light bulb. In some ways, he wasn't the person to invent the light bulb. There are 21 other different people with the, no, there are 20 other different people with the, with a good claim to have invented the light bulb independently. There was Lodigan in Russia, there was Swan in Britain, and many others. And the point was the technology was ripe.

It was ready to go. The technologies you needed to combine to make a light bulb would reach the point where it was inevitable. Someone would do it. You can't stop the light bulb being invented in the 1870s, basically, in that sense. So Edison, perhaps therefore, in a sense, doesn't deserve the credit he gets. But in another sense, he jolly well does deserve the credit, because what Edison did was take the basic prototype and turn it into something reliable, affordable, and long-lasting,

which his rivals didn't do. So he produced the first light bulbs that would last a long time and that you could genuinely rely upon. They didn't just blow up after a few hours. And the way he did that was by what I would call innovation not invention, and that is to say a huge amount of trial and error. And he emphasized this very, very clearly. He did over 5,000 different experiments before he settled on the plant material to use for the filament of his light bulbs, which was Japanese bamboo. So he famously said invention is 1% inspiration and 99% perspiration. So, you know, I would say that innovation is the perspiration, as it were, and he understood that.

And he then, you know, he didn't, it wasn't just him, it was a whole team of people. And in fact, what he had done was he'd set up a factory, a huge plant, the product of which was innovations. The job of the people working in his factory was to produce changes in technologies that could then be made into products that other people could buy and sell. He was the first person, therefore, I think, to see innovation as a product rather than as an input. And actually, there's not enough people who do that today.

Yeah, you had this great line. The Industrial Revolution, therefore, was in. effect the emergence of a new kind of economic system that generated endogenous innovation as a product in itself, which I thought was just a really great way to put that idea. Yeah, I do think that is key. And of course, it depended on abundant energy because I have this sort of thermodynamic view of civilization in my book, which is that we as living beings and our technologies are improbable structures and the way we make improbable structures, you know, we're far too ordered.

You know, we're not random enough for the universe. And the way you make something non-random is by putting energy into it. That's essentially what the second law of thermodynamics says. So it's the more energy you made available to civilization, the more innovative improbabilities you could produce. Yeah, it's fascinating. As an aside, I think that concept would find a lot of resonance with many in the Bitcoin community who see the proof of work system that Bitcoin relies on as a way of converting energy into effectively truth, right, and a source of shared common knowledge.

It's kind of the predicating basis of it. But I want to... But that's a really interesting point. And I mean, it's often seen as one of the flaws that. coin is the huge amount of energy it requires. But in a sense, it's just spelling out what is inevitable, is that if there's going to be something that valuable, then it must have a lot of energy input. Yeah, exactly. And I think that a lot of the, there's a number of different counter arguments to the kind of strict energy interpretation, which is, I think, classically, maybe the most

common critiques you hear are, one, it's used for crime. Two, it's, it's. the amount of energy. And three, just it's, you know, it's unstable or it's a bubble or something like that. And I think on the energy argument, you know, there's a lot of interesting things happening in terms of capturing lost energy. There's new companies being set up now to capture energy that would otherwise have to be vented off, you know, a natural gas because it can't go anywhere fast enough and inputting that into Bitcoin mining. But I think that the other argument is a little bit more basic, which is, you know, people and individuals and societies get to choose to what they deploy their energy for.

And if we decide that Christmas lights are okay, why not decide that this kind of true system, this money system might be okay as well. But I don't want to drive us too far down that tangent. Just some red meat from my Bitcoin friends. But I want to go back to a point that I think was really, you almost breezed over, but it's so important. You said something to the effect of just a minute ago.

In the 1870s, the light bulb was getting invented. did no matter what. You said it more eloquently than that. And it gets to this idea that you posit in the book that innovation is inexorable. Can you describe just a little bit about what that means? Yeah. Well, it obviously can't be the case that everything is inevitable because otherwise it would have all happened a long time sooner, if you like. But nonetheless, when you look at the history of technologies, you find that almost every technology comes into being in two rival forms or more. Three, four, five different people rushing to the patent office saying, I've invented that. No, I've invented that. And this phenomenon of simultaneous invention is so striking that

actually as long as the 1920s, people were writing our lists of all the people who had rival claims to the thermometer or whatever it might be. And there are always lots of them. And why is this? I mean, it's almost as if there's something in the air. The light bulb is a very extreme. example. As I said, there are 21 different people who have a good claim to having thought this idea up independently. But if you bring it forward to today and to a more recent example, you can see what's happening, I think. And that example is the search engine. The search engine was invented in the 1990s to help us all navigate the internet. And it was, we think of it as being born out of Google, but of course Google wasn't the first. There were lots of other search engines around

when Google came along, it just was one of the best. And none of the people who built those early search engines, most of them, didn't think they were building search engines. They thought they were cataloging the internet or something like that. That's what the Google founders thought they were doing. So they didn't see what they were doing. In retrospect, it looks so inevitable. You know, it doesn't matter whether Sergey Brin meets Larry Page or not.

we still get search engines in the 1990s. You know, you can't stop it. You can't prevent it happening. And so it must surely have been predictable. But it's not, actually. If you go back to the late 1980s and search for evidence that people were foreseeing the arrival of search engines,

they didn't any more than they foresaw the arrival of lightbulbs in the 1870s. So there's something strangely, asymmetric about the history of technology. It's fantastically obvious in retrospect and fantastically non-obvious in prospect, which I find completely fascinating. I think the way I would put it is that once a particular combination of technologies come together, then the next step of combining them is inevitable and inexorable. But that doesn't mean that every step in the history of technology is inexorable and inevitable.

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Stellar is easy to learn and fast to implement. Start your journey today at Stellar.org slash coin desk. Our final sponsor is Grayscale Digital Large Cap Fund. In times like these, diversification is key. Consider Grayscale Digital Large Cap Fund, ticker symbol GDLC. It's the only publicly traded investment product that offers diversified exposure to large cap digital currencies, all from your brokerage account. For more information, visit Grayscale. scale.co slash coin desk. That's g-r-a-y-scale.cow slash coin desk. This is another great point from the book is we, in addition to not having kind of cogent theories for the economics of innovation or really how it works, we also speak kind of monolithically about it, right? We talk about innovation as though, you know, whether you think it's on the upswing or the down swing, we speak about it as an entire category when it's, it's sort of important to pierce out

where are people innovating at any given time and why? And I mean, I guess when I say where, I mean both, you know, in terms of what context, what industries, what technologies, but also there is a geographic where, historically speaking, as well. What did you notice about the patterns of innovation across, you know, the 20th century and just kind of where bringing us up to the state of innovation today? Yeah, well, I think that innovation is. is a surprisingly localized phenomenon.

I mean, when you think how much civilization there was in the world, how many different countries with cities and trade and ships and all this kind of thing, nonetheless, I can take you back to any point in history in the last thousand years and say, this is the innovative part of the world, much more than everywhere else. In the 1980s, it would be California. in the 1890s it would be London.

In the 1700s, it would be the Netherlands. In the 1500s it would be Italy. In the 1000s, it would be Fujian in China and so on. And why is this? Why is this bushfire burning so brightly in one place at any one time? And it must be something to do with the conference. influence of trade and immigration and freedom, the freedom of people to do what they want, to do experiments, to invest, to make mistakes, to change course, all these kinds of freedom

that come together in one place at one time and create the ecosystem in which innovation flourishes. And obviously we look at California and say, yeah, and of course once this was happening in Silicon Valley, everyone went there if they were that kind of person. So it did attract people from elsewhere. And there must be a degree of that too. It doesn't seem to last very long either. You know, these places burnt very brightly for a while, but no longer do so in most cases. And it looks like the bushfire has shifted in recent decades from California to China. China is doing innovation in certain areas, digital AI, biotech, at a faster rate now than California is, I would guess. If you look at the way Chinese consumers, you know, pay for meals and taxi cabs and things like that, they're sort of way ahead of Americans now.

No, that might be misleading. It might be that it's not as innovative as I think, but that's my guess. and that feels weird because China doesn't feel free enough to be the sort of place where this should be happening. And I think what's happened is that for a brief while, China, although it had a Communist Party regime, which allowed absolutely no freedom in democratic terms, it nonetheless allowed the entrepreneur a considerable degree of freedom down at the bottom of society, where he wasn't being bothered by petty rules and regulations about whether or not he could put up a factory or design a new widget. And that period may be coming to an end, given how extraordinarily authoritarian the regime now is compared with 10 or 20 years ago in China. So I think, you know, the moment may be already passing.

Well, this is a really interesting point, I think, and the China example being almost potentially an exception that proves the rule in some ways, where, you know, effectively, it feels like a lot of a lot of the positing of the book as it relates to freedom is that, If innovation is the byproduct of tinkering, experimentation, people and ideas coming into contact one another, those are hallmarks of free societies, right? Where government more or less gets out of the way of people and lets them do things. And certainly you have an ongoing tension and balance as it relates to kind of freedom and regulation that is always competing, right? In the U.S., that's one of the interesting things about the software movement is that it had comparatively less regulation, so it was allowed to do a lot of things. That seems to be

closing now as we see just how powerfully influential in society these social media platforms are. But the interesting thing about China is that the strange version, I mean, it is a different type of authoritarian than we've seen, because basically they made a bargain, right, with their people that said economic growth and improvement in your life for your freedoms, right? effectively. I mean, it's obviously more complicated than that, but that is more or less the base case. And so in that context, you have to incentivize innovation to get the economic growth that you want. In fact, you have to incentivize innovation when you can't get traditional economic growth because, you know, maybe you don't have traditional economic growth, but at least you have the convenience

of new mobile apps. And we see this played out even now in the blockchain industry where China is investing a huge amount of money to be perceived as the leader in that, to attract business that wants to be interested in that space, regardless of whether it will be a thing. It might be a bridge to nowhere. But it's interesting, I think, in that it shows, you know, there's such an intentional bargain for the economic growth that innovation brings contra freedom. But, you know, if that declines, I think in some ways it might reinforce the point even more. Yeah, that's a really interesting point. I didn't know that they were pushing into blockchain to the extent that you described. Of course, blockchain has the potential to enable the innovative ecosystem to cast loose from planet Earth and

float up into the cloud and conduct a process of innovation that doesn't have to be anywhere, that doesn't have to be subject to the intellectual property regulations of California or the democratic constrictions of China. That sounds very very. hand-wavy and idealistic and I suspect it is too much so and by the way one of the things I talk about in the book is the way technologies disappoint in their first decade after being invented only to flourish later on this is called Amara's law Roy Amara said every new technology we underestimate the impact of a new technology in the long run but we overestimate it in the short run and we've seen this with everything from you know railways which were invented in the

the 1820s, but in the 1830s, they kind of didn't achieve much, but it's in the 1840s when suddenly there is railway mania and everybody builds thousands of lines and it becomes a routine thing. And we saw it with the internet. You know, we had e-commerce in the 1990s, and we had all the dot-coms. And then by the end of the 1990s, everyone is saying, is that all there is? You know, I'm not sure this is all it's cracked up to be. And then, of course, 10 years later, Jollywell is all that it's cracked up to be. So I think the same will happen to blockchain that we will have a period when quite a lot of your critics will say, where's the beef?

You know, why aren't you writing contracts in space and launching currencies to compete with sovereign ones and so on? But then there will come a moment when that will happen. And I as a citizen will say, look, I don't care what taxes and rules and regs and money you're trying to impose on me in the UK, I'm not a citizen of the UK anymore, I'm a citizen of the cloud, or something like that. Again, I've gone a little far-fetched there, but you get it. Yeah, no, and I think that what you're actually getting at, too, is that one of the reasons that I think blockchain, as a concept, as an industry, has attracted a lot of people, is that there's a

a larger sense, an imperative towards decentralization, towards trying to uncouple or decouple from systems of power that exist and try to do things in a way that isn't command and control, that isn't organized. And I think blockchain, it fits easy from a narrative perspective with that, but I think that the impulse might be something a little bit larger than the technology category, if that makes sense. Yeah. Now, I think you're dead right. I think there is a philosophical point here. And it's there in the manifestos of the cyphabunks that preceded blockchain. It's very clear that these are radical libertarians. And it's the same mentality behind the launch of the Internet, actually, which, I mean, I've just been reading up on this.

I don't really have this in the book, but I hadn't really twig the extent to which there was a rival command and control government-directed. version of the internet called the OSI, which was being negotiated at a high level in more and more sort of United Nations sort of way, with people arguing over commas in rules and regulations, and which just kept getting more and more unwieldy, and instead a sort of bottom-up anarchic free-for-all developed around the T-CIP protocols which launched the internet. So I do think that the spontaneous order aspect of innovation is terribly important and is what blockchain is all about. So this actually gets to another really key point about, you know, obviously governments are in some ways, not just governments, or not just countrywide governments, national governments,

but any sort of regulatory block, be it cities, be it states, be it governments, be it, you know, regions like the Eurozone, they're all competing in some ways for innovation. And there's different ways they go about it. And I think that this is something that's really important to you. It's if we understand and respect innovation as something important, as a public good in some ways, or a public-private hybrid good, what are the right ways and what are the wrong ways for people to sort of incentivize innovation? Yeah. Well, I run through some of the things that innovation.

needs if it's to flourish and one of the things it likes is fragmented government governance it doesn't do well in empires there isn't that much innovation in most empires it does well in city states it particularly likes small fragmented continents where you can move from one regime to another America is a good example of that today Elon Musk was threatening to leave California for Texas the other day because he didn't like the rules and regs in California. That's exactly what Gutenberg did 500 years ago in Central Europe. So that's quite an important feature, I think, of innovation. I'm also very skeptical about intellectual property. I think the patent and copyright

systems that we have erected are far too restrictive, far too easily turned into barriers to entry against competitors, which actually slowed down innovation rather than speed it up. And I think the evidence for that is getting clearer by the day. And where you've got strengthened intellectual property systems, you don't get more innovation, and where you've got weakened ones, like, for example, in the development of streaming music, Napster and so on, you don't get less innovation. So I think the way we've gone about making intellectual property so restrictive has actually become a problem. And we see when a patent expires, we get a burst of innovation.

So there are quite a few things that are being done by governments today that don't help. The other thing, of course, is subsidies, grants and winner picking. You know, governments love saying this is. the innovation we would like to champion. We're going to give it a grant. We're going to open its headquarters with a fanfare, and we're going to subsidise its products. And often governments are terrible at picking the right technologies, and they end up subsidizing dead ends again and again and again, and they don't keep an open mind about which of different rival technologies will reach a goal. So I'd like to see governments dangling prizes in front of innovators more than either patents or research grants or subsidies.

Because if you hang a prize out and say, look, the first person to get a vaccine for COVID-19 will get a prize. It needn't be a lump sum. It can be in the form of a market commitment or something like that. So you're actually agreeing to subsidize the price at which it's supplied in the market. the market so that the company has actually got to go and deliver it to the market. The Gates Foundation has done this with a pneumococcus vaccine, a good example of that. So I do think that innovation policy is at the moment very misguided. It thinks in much too creationist a way, much too top down a way about the way innovation

works. How much did your research on how innovation works shape your views on Brexit, if at all? Well, it's actually the big reason why I'm pro-Brexit was because I could see how the European Union was stifling innovation. It's no accident that Europe has been unable to spawn any digital giants to rival Amazon, Facebook, Google, and so on. It just, can't get a digital industry going to the same extent as both America and China can. It's had exactly the same problem in biotechnology, particularly in agricultural biotechnology, where it's cut itself off from a whole technology by sort of not banning it, but by having regulators that take so long to take a decision that they don't end up doing so.

and the one-size-fits-all policy of the European Union misunderstands how innovation works. Innovation has to have differences. So that if you say, as we do in trade agreements, what is good enough for you is good enough for me. If you think this product is safe, then we'll agree it's safe too. We like the way you go about doing it. It's not the same way we go about doing it,

but at least you've decided. this product is safe. So you can sell it in our market. That's what trade is all about. European Union takes a completely different approach. It says no, the rules must be exactly the same everywhere. We want to harmonize everything. Now the problem with that is that you can't then do experiments. You can't say, hmm, the Bulgarians are actually doing a better job of satisfying this consumer need more cheaply and more effectively because everybody's doing the same thing everywhere. And so that, the more I looked at it, the more I realized that this was a central flaw in the way the European Union was building its empire. And I used that word empire

advisedly. Giefer Hofstadt, the lead advisor on Brexit in the European Parliament, uses that word. He says, yes, we are trying to build an empire. That's what we're trying to do. And we from Britain had a look at this and said, this doesn't end well. When Napoleon tried it, when Charles V tried it, when the Emperor Augustus tried it, when Hitler tried it, we went along with it for a while and then realized that actually that's not the way the world should work. We want to be an outward-looking trading nation connected with the world. We're much more dependent on trade with the rest of the world than the other European countries, for example. And we said, look, please will you reform in a more innovative direction? They said, no, we don't want to reform.

So we said, right, well, in that case, we'd like to leave if you don't mind. It's interesting to see that, I mean, there's so many numerous examples, but where even policy that one could, if you took off your cynical cap for a moment, could say it was well-intentioned, like GDPR, ends up having this absolutely crushing impact on innovation because of the cost of compliance, right? Cost of regulatory compliance benefits the incumbents more than anyone else, right? Very good example of that, because if you look at who has been able to cope with GDPR, it's the big companies. Yeah, Facebook and Google. Facebook and Google can afford the compliance departments that enforce GDPR. Every now and then I come across a website that won't let me read its stuff because it's not in the EU and it knows I'm from the EU and it says that we just can't afford to deal

with GDPR. That's not true. Big. So there's been a clear move. If you look at website traffic, there's been a clear move within the European Union towards the bigger companies capturing more of the market, particularly if you look at advertising share, for example. So shifting gears just a little bit, because I want to bring this back to what was the state of innovation going into COVID-19?

And if where and how do you see it changing on the other side of this pandemic or economic crisis? I guess there's multiple dimensions to it. Yeah, there's both the pandemic crisis and the economic crisis. I think the pandemic should forcibly have reminded us that we haven't been doing enough innovation. I've seen this most clearly in the case of vaccines. vaccine development is a very slow and laborious process that has hardly changed in decades. Sure, there are new ideas about how to do vaccines, but it still takes many months, many years, to develop a vaccine. It's a somewhat slow process, slower than it should be, and it's not

that much faster than it was 50 years ago. That's extraordinary when you think how much we understand molecular biology, how much we understand digital technologies, etc. It really is very striking. Why is that? Well, the pharmaceutical industry hasn't been that interested in vaccination because vaccines aren't very profitable. And on the whole, I think the World Health Organization and other bodies like that have not paid enough attention to it either. World Health Organization said in 2015, the greatest threat to human health in the 21st century is climate change. Well, that may or may not be the case, but it hardly suggests an organization which is paying attention to its day job, which is to stop us catching pandemics.

And in that respect, it's not just vaccines, it's diagnostic tests as well. A point of care, DNA test to tell you what kind of virus you've got could have been developed 10 years ago. Why hasn't it? Because on the whole, the regulations that you have to go through to get licensed for such a device take many, many years to reach a decision. Now, an entrepreneur can't wait many, many years. So he goes off and invents a new computer game instead because that's easier. You don't need so much permission.

And when you think about it, that is what has slowed down the development of these technologies, the length of time it takes, because look around you now. We're suddenly finding that it's possible to give these new devices a license in a matter of days or weeks when we need. to, so why couldn't we have done that before? So I think we should come out of this crisis saying we must do a better job of encouraging innovation and not taking the technologies we have for granted and not taking the risks we're running for granted. But more generally, and back to the economic crisis we face, crises like this, though they are terrible for the world economy, and although they crash investment in new technologies, nonetheless do open up new opportunities. I mean, if you were thinking of starting an airline, it wouldn't be a great moment right now, but it might be a great

moment in a year's time when the economy is getting back to normal and suddenly there are a lot of gaps in the market. Suddenly there are landing slots available and there are new ways of running an airline that haven't been thought and that wouldn't have been able to get a look in against the existing incumbents but might now do so and of course you and i are doing this interview remotely on a technology that i've only just learned how to use and as you found out at the beginning haven't learned very well how to you yet and so the opportunities there are surely huge that we will there is now a critical mass of people interested in telemedicine, teleloyering, tele accounting, telemeetings of all different kinds, and that will result in opportunities for innovation, surely.

All right. So we are now living through this very troubling time, and you talk about a little bit about the opportunities that you saw. But, you know, what is the rational, optimistic point of view coming off the other side this crisis? And is it about innovation? The rational, optimistic point of view coming off this crisis is that bad as this crisis is, it won't be nearly as bad as previous pandemics in the past, and it looks like it will pale in comparison with the improvements that poor people in the world in particular have seen in the last decade, where the rate of decline of extreme poverty has been truly extreme. So even if that goes into reverse for a year or two, we will be much better off than we

were 10 years ago. And there is every prospect that the process that produces prosperity will resume in the next few years and that we will therefore claw our way back to prosperity and progress. It can't be guaranteed, of course. I mean, this might lead to a war. It might lead to a nuclear war. It might come. An asteroid might appear.

A worse pandemic might appear and so on. So I'm not here to say that everything's going to be perfect, and indeed in the rational optimist, I said a lot of things are going to go wrong in the 21st century, including possibly terrible flu pandemics. But nonetheless, the process that inevitably, inexorably grinds human living standards upwards is still there. And an essential part of it is innovation.

Matt, thank you so much for it. for joining us today. Really enjoyed that. Thank you. We had a few technical difficulties, which were really unfortunate towards the end of the interview, and we had to wrap up a little quickly. There are two more questions that I wanted to discuss with Matt, and that hopefully will form the basis for our next conversation on the breakdown. The first has to do with reconciling the need for innovation and incentivizing innovation with something like the issue of stock buybacks that we've seen. In the book, Matt wrote, A symptom of the disease is that companies are sitting on huge cash piles, measured in trillions,

and multinational firms have become net lenders rather than borrowers, because they cannot see ways to invest their money in innovation. Some big pharmaceutical companies may now make more profit from their financial investments than they do from selling drugs. When big companies do spend money, it is often defensively to enforce their patents or protect their market share. Their assets are aging and they are increasingly apt to play safe. This is part of the partly the fault of diffused ownership by pension funds and sovereign wealth funds, and the lack of skin in the game that comes with it, which has a tendency to turn entrepreneurs into rentiers, extracting profits from local monopolies achieved through raving barriers to entry via intellectual

property, occupational licensing and government subsidy. The dead hand of corporate managerialism then finds that is easier to control markets than to contest them to plan rather than experiment. Of course, many companies still pay lip service to innovation, appointing executives to jobs with the word and the title, and adopting slogans that use the term, but this is often meaningless blather, disguising a deep attachment to the status quo. This is Matt talking about innovation famine, which I think is a hugely important topic, especially after what we've just seen, and the unbelievable lack of resilience in corporate markets in the wake of this crisis.

I think this is all part of a really important story. So that'll be part one of our next conversation whenever it's... to happen. Part two, I think, comes to this question of how innovation is about enabling people to work for each other. Matt writes, the chief way in which innovation changes our lives is by enabling people to work for each other. As I have argued before, the main theme of human history is that we become steadily more specialized in what we produced and steadily more diversified in what we consume. We move away from precarious self-sufficiency to safer mutual interdependence. the question becomes to me, what happens if we stop trusting each other, on a local level, on a

national level, whatever the level might be? I think we're in a moment where we're dealing with very contentious issues of globalism and globalization versus localism and localization. And I wonder about Matt's views about how this potentially impacts or threatens innovation. Those are the two questions that we have. It's a great start for a future episode. I know that some of you will be hungry and want Matt to come join again right now to talk about that. But anyways, guys, until then, thank you for listening. I appreciate you hanging out. And so until tomorrow, be safe and take care of each other.

Peace.