Book Notes: ‘How Innovation Works’

How Innovation Works: And Why it Flourishes in Freedom
By Matt Ridley
Harper, 2020

‘Innovation’ is one of those words that gets bandied about in business contexts without much thought about what it means. And yet, we must understand what innovation is and how it works. We owe much of our relative health, wealth, peace, and safety to innovation.

Over the centuries, things have gotten better for humanity (if not always for our planet — although that is changing) through “improbable arrangements of the world, crystallized consequences of energy generation.” How Innovation Works traces how many of the most influential of those ‘improbably arrangements’ came about.

Innovation changes our lives by allowing us to specialize, i.e., to focus on producing goods others need so we can exchange them for goods we need. Specialization improves these goods and services, which leads to greater specialization and exchange. A virtuous cycle ensues.

How Innovation Works proposes that innovation happens in cultures that afford latitude for ideas to “have sex” (Ridley’s memorable phrase from a previous book) and where entrepreneurs can try their ideas in the market.

The main ingredient in the secret sauce that leads to innovation is freedom. Freedom to exchange, experiment, imagine, invest and fail; freedom from expropriation or restriction by chiefs, priests and thieves; freedom on the part of consumers to reward the innovations they like and reject the ones they do not. Liberals have argued since at least the eighteenth century that freedom leads to prosperity, but I would argue that they have never persuasively found the mechanism, the drive chain, by which one causes the other. Innovation, the infinite improbability drive, is that drive chain, that missing link.

The book is divided in two parts. The first (chapters 1-7) offers case studies of innovations in areas we associate with high tech (energy, public health, transport, food, communication and computing) and two in areas that we don’t but which we benefit from anyway. The book shifts after chapter 7 to consider factors that enable societies to innovate — or, in some cases, stagnate.

How Innovation Works debunks several myths and misunderstandings about what innovation is and how it happens. For example, we attribute too much importance to the contributions of a few lone ‘geniuses’. The record points to a messier process during which entrepreneurs build on each other’s work — sometimes unethically.

There’s a lot of trial and error involved. As Ridley puts it, “Innovation is not an individual phenomenon, but a collective, incremental and messy network phenomenon.” A useful analog is the evolutionary process. (The subject of one of Ridley’s previous books, The Evolution of Everything.)

Innovation, like evolution, is a process of constantly discovering ways of rearranging the world into forms that are unlikely to arise by chance – and that happen to be useful. The resulting entities are the opposite of entropy: they are more ordered, less random, than their ingredients were before.

This isn’t random evolution, though: it’s directed by (among other things) social and market forces. In this, there are parallels to the design process.

Still, we shouldn’t overestimate the degree to which top-down approaches succeed. Experts are often terrible at predicting outcomes. Top-down initiatives that are saddled with official stamps of approval (and funding) often lose to nimbler bottom-up competitors. (E.g., Langley vs. the Wright brothers.)

Innovation is a lot less directed and planned, even today, than we tend to think. Most innovation consists of the non-random retention of variations in design.

The book clarifies an important (and common) distinction: that between innovation and invention. It’s one thing to bring forth a new idea into the world, but operationalizing the idea is where impact really happens.

As an example, Ridley cites the electric lightbulb: Edison’s success wasn’t due to being the first to come up with the idea (he wasn’t), but to considering electric lighting as a system. (I.e., not just the bulbs, but power generators, transmission infrastructure, and the commercial means to reliably get the invention to users at scale.)

Most people also misunderstand the relationship between scientific advances and innovation. While in some cases scientific breakthroughs may lay the groundwork for innovation, that isn’t always the case. As Ridley puts it, “use often precedes understanding.” An example is the practice of vaccination, which was discovered before people understood its underlying scientific principles.

The book also questions the impression that innovation is happening faster today than ever before. While it’s true that some technologies have improved quickly in recent years (e.g., computing and telecommunications), others haven’t made as much progress (e.g., transportation).

If cars had improved as fast as computers since 1982, they would get nearly four million miles per gallon, so they could go to the moon and back a hundred times on a single tank of fuel.

The primary culprit for stagnation is regulation. Ridley makes a compelling argument that there’s a balance to be struck between protecting the public and allowing for experimentation and the exchange of ideas. Europe is an example of what happens when a society gets the mix wrong:

Of Europe’s 100 most valuable companies, none – not one – was formed in the past forty years. In Germany’s Dax 30 index, just two companies were founded after 1970; in France’s CAC 40 index, one; in Sweden’s top fifty, none at all. Europe has spawned not a single digital giant to challenge Google, Facebook or Amazon.

Other obstacles to innovation include

  • prejudice and ignorance (e.g., knee-jerk reactions against the use of genetically modified crops),
  • the power of incumbents to mold regulations (e.g., delaying the rollout of cellular phone technologies to protect monopolies),
  • incompatibility with existing infrastructure (e.g., the rollout (ahem) of wheeled suitcases in a world that included airport porters),
  • fraudsters and hucksters (e.g., the Theranos debacle), and
  • lack of timely access to ideas (i.e., through unfairly over-restrictive patents).

Directed innovation often doesn’t work, and you can’t simply invest your way there. The process is more bottom-up, driven by visionaries (often in lowly positions) working with peers and predecessors — sometimes surreptitiously. Innovating involves much rule-breaking and shortcut-taking that doesn’t jibe with ‘official’ ways.

As such, the book’s heroes are entrepreneurs who pursue a vision for change with determination, grit, and hard work — often despite official resistance, unfavorable conditions, and limited resources. But we shouldn’t attribute too much importance to individuals: the environment they’re working within matters more.

There’s no doubt that we live better than our distant ancestors. We owe much of our comforts to innovations and the societies that enable them. Although we can’t synthesize innovation, we can create conditions that enable innovation to happen. We owe it to ourselves to understand these conditions and work toward enabling them. How Innovation Works is a good starting point.

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