How We Overcame the Law of Diminishing Returns

by Pejman Yousefzadeh on July 12, 2010


Innovation, and the spread of knowledge certainly helped matters:

Just as the bush fire breaks out in different parts of the world at different times, so it leaps from technology to technology. Today, as during the printing revolution of 500 years ago, communication is aflame with increasing returns, but transport is spluttering with diminishing returns. A greater and greater amount of effort is needed to squeeze the next few miles per gallon out of vehicles of any kind, whereas each additional tranche of megabits comes more cheaply.

But the greatest impact of an increasing-return wave comes long after the technology is invented. It comes when the technology is democratized. Gutenberg’s printing press took decades to generate the Reformation. Today’s container ships go not much faster than a 19th-century steamship, and today’s Internet sends each pulse little quicker than a 19th-century telegraph—but everybody is using them, not just the rich. Jets travel at the same speeds they did in the 1970s, but budget airlines are new.

So what is the flywheel of the perpetual innovation machine that drives the modern world? Why has innovation become routine? How was it that, in Alfred North Whitehead’s words, “The greatest invention of the 19th century was the invention of the method of invention?”

Of course, if you want your place of residence to be and remain a hotbed of innovation, it helps to have economic incentives with which to attract smart, hardworking people:

The flowering of innovation in 18th-century Britain and late-20th-century California was powered by immigrants attracted to vast accumulations of wealth and efficient capital markets. The financing of innovation gradually moved inside firms as the 20th century progressed, baked into the budgets of companies haunted by the Schumpeterian fear that innovation could pull their whole market from them and dazzled by dreams that they could pull the whole market from under their rivals. But companies are perpetually discovering that their R&D budgets get captured by defensive and complacent corporate bureaucrats. The history of the computer industry is littered with examples of big opportunities missed by dominant players, which thereby find themselves challenged by fast-growing new rivals. IBM and Digital Equipment suffered this fate, and so will Apple, Microsoft, and Google. The great innovators are still usually outsiders.

But here is the biggest reason by far why we have been able–thus far–to escape a Malthusian fate:

It is the ever-increasing exchange of ideas that causes the ever-increasing rate of innovation in the modern world.

Innovators are in the business of sharing. It is the most important thing they do, for unless they share their innovation it can have no benefit for them or for anybody else. And the one activity that got much easier to do after about 1800, and has gotten dramatically easier recently, is sharing. Travel and communication disseminated information much faster and further. Newspapers, technical journals, and telegraphs spread ideas as fast as they spread gossip. In a recent survey by the economists Rajshree Agarwal and Michael Gort of 46 major inventions, the time it took for the first competing copy to appear fell steadily from 33 years in 1895 to three years in 1975. And the speed has increased ever since.

When Hero of Alexandria invented a steam engine in the first century A.D. and employed it in opening temple doors, news of his invention spread so slowly and to so few people that it may never have reached the ears of cart designers. Ptolemaic astronomy was ingenious and precise, if not quite accurate, but it was never used for navigation because astronomers and sailors did not meet. The secret of the modern world is its gigantic interconnectedness. Ideas are having sex with other ideas from all over the planet with ever-increasing promiscuity. The telephone had sex with the computer and spawned the Internet.

Technologies emerge from the coming together of existing technologies into wholes that are greater than the sum of their parts. Henry Ford once candidly admitted that he had invented nothing new: He had “simply assembled into a car the discoveries of other men behind whom were centuries of work.” Inventors like to deny their ancestors, exaggerating the unfathered nature of their breakthroughs, the better to claim the full glory (and sometimes the patents) for themselves. Thus Americans learn that Edison invented the incandescent light bulb out of thin air, when his less commercially slick forerunners, Joseph Swan in Britain and Alexander Lodygin in Russia, deserve at least to share the credit.

End users, too, have joined in the mating frenzy. Adam Smith recounted the tale of a boy whose job was to open and close the valve on a steam engine and who, to save time, rigged up a device to do it for him. He no doubt went to his grave without imparting the idea to others, or would have had it not been immortalized by the Scottish sage. Today he would have shared his “patch” with like-minded others on a chat site and eventually gotten credit for the innovation in his own Wikipedia entry.

Of course, the exchange of ideas is hampered when there is a lack of exchange of products. And there is a lack of exchange of products when protectionists prevent the implementation and operation of trade liberalization policies. Bear that in mind when you hear the next protectionist politician bloviate; whether he/she means to, he/she is trying to make you poor.

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