The phrase diminishing returns is such a cliché that few people give it much thought. Picking out the pecans from a bowl of salted nuts gives diminishing returns: The pieces of pecan in the bowl get rarer and smaller. The fingers keep finding almonds, hazelnuts, cashews, or even—God forbid—Brazil nuts. Gradually the bowl, like a moribund gold mine, ceases to yield decent returns of pecan.
Now imagine a bowl of nuts that has the opposite character. The more pecans you take, the larger and more numerous they grow. That is the human experience for the last 100,000 years. The global nut bowl has yielded ever more pecans.
Nobody predicted this. The pioneers of political economy expected eventual stagnation. Adam Smith, David Ricardo, and Robert Malthus all predicted that diminishing returns would eventually set in, that the improvement in living standards they were seeing would peter out. “The discovery, and useful application of machinery, always leads to the increase of the net produce of the country, although it may not, and will not, after an inconsiderable interval, increase the value of that net produce,” said Ricardo, who perceived an inexorable tendency toward what he called a “stationary state.” John Stuart Mill, conceding that returns were showing no signs of diminishing in the 1840s, put it down to luck. Innovation, he said, was an external factor, a cause but not an effect of economic growth.
Even Mill’s modest optimism was not shared by his successors. They feared that as discovery began to slow, competition would drive profits out of the increasingly perfect market until all that was left was rent and monopoly. With Smith’s invisible hand guiding myriad market participants possessing perfect information to profitless equilibria and vanishing returns, neoclassical economics gloomily forecast the end of growth.
To explain the modern global economy’s bottomless nut bowl, you must explain where the perpetual innovation machine and its increasing returns came from. They were not planned, directed, or ordered. They emerged, evolved, bottom up, from specialization and exchange. The accelerated exchange of ideas and people made possible by technology fueled the accelerating growth of wealth that has characterized the last century. Politicians, capitalists, and officials are flotsam bobbing upriver on the tide of invention.
Even so, the generation of new useful knowledge is far from uniform, steady, or continuous. Innovation is like a bush fire that burns brightly for a short time, then dies down before flaring up somewhere else. Fifty thousand years ago, the hottest hot spot was west Asia (ovens, bows and arrows); 10,000 years ago, the Fertile Crescent (farming, pottery); 5,000 years ago, Mesopotamia (metal, cities); 2,000 years ago, India (textiles, zero); 1,000 years ago, China (porcelain, printing); 500 years ago, Italy (double-entry bookkeeping, Leonardo); 400 years ago, the Low Countries (the Amsterdam Exchange Bank); 300 years ago, France (Canal du Midi); 200 years ago, England (steam); 100 years ago, Germany (fertilizer); 75 years ago, America (mass production); 50 years ago, California (credit card); 25 years ago, Japan (Walkman). No place remains for long the leader in knowledge creation.
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?”
Francis Bacon was the first to make the case that inventors are applying the work of discoverers and that science is the father of invention. Modern politicians agree. The recipe for making new ideas is easy, they say: Pour public money into science, which is a public good because nobody will pay for the generation of ideas if the taxpayer does not, then watch new technologies emerge from the downstream end of the pipe.
It used to be popular to argue that the European scientific revolution of the 17th century unleashed the rational curiosity of the educated classes, whose theories were then applied in the form of new technologies, which in turn allowed standards of living to rise. But history shows this account is backward. Few of the inventions that made the industrial revolution owed anything to theory.
It is true that England had a scientific revolution in the late 1600s, but the influence of scientists like Isaac Newton and Robert Hooke on what happened in England’s manufacturing industry in the following century was negligible. The industry that was transformed first and most, cotton spinning and weaving, was of little interest to scientists. The jennies, gins, frames, mules, and looms that revolutionized the working of cotton were invented by tinkering businessmen, not thinking boffins. It has been said that nothing in their designs would have puzzled Archimedes.
Even the later stages of the industrial revolution are replete with examples of technologies that were developed in remarkable ignorance of why they worked. This was especially true in the biological world. Aspirin was curing headaches for more than a century before anybody had the faintest idea of how. Penicillin’s ability to kill bacteria was finally understood around the time bacteria learned to defeat it.
Most technological change comes from attempts to improve existing technology. It happens on the shop floor among apprentices and mechanics or in the workplace among the users of computer programs, and only rarely as a result of the application and transfer of knowledge from the ivory tower.