Are we, or are we not, in the midst of a technological revolution akin to that of the steam engine age? We probably are, but no one knows how it will play out and when all the gains can be harnessed: There are many steps in this story.
In the first step, new knowledge is “created” by the inventor. However this is seldom just one step—just ask Edison, who reportedly said that he had found 10,000 ways that would not work when creating the light bulb.
Secondly, if unlike Edison, the inventor does not have proper facilities and cannot put many of her excellent ideas into practice, she needs to find someone who can. This can be frustrating: Leonardo da Vinci invented the concepts of the helicopter, the parachute, scuba gear, and an armored car in the late 1400s to early 1500s. Yet the first functional parachute was built in 1783 and the first helicopter in the 1940s. Leonardo also invented movable dykes intended to protect Venice from invasion; these were not economically feasible to produce or commercially viable.
Many historians point to the important roles of factory workers and owners in the industrial revolution. Which brings me to the third point. Who will build not just a prototype, but a commercially viable product, at scale, for the market at hand? A product that will sell and create a return for the investor? That falls to the entrepreneur, who will organize a business to capture profits from the market.
Fourthly, someone needs to finance all this building and invest for the longer term; for Edison, this was JP Morgan, one of the richest bankers of the time, who had sufficient capital to undertake this expensive and high-risk venture.
Often, studies of innovation will stop here, but there is still a long process ahead. Anything new in the market needs to be bought and sold, used and adapted over time —and this involves educating individuals, business and the government, a continuous process of smaller innovations, and a —usually—slow process of cultural and behavioral change. When all this happens,.
What about the market context? At each stage, innovators will be concerned with their property rights: how much of the profits they can keep and how secure it all is. Policies and institutions affect the risk-reward calculation for all involved: entrepreneurs, financiers and engineers. They will facilitate or hinder innovation, depending on how good they are. Liberty, or the freedom to innovate, matters too.
The fact that all these diverse elements need to come together for inventions to become society-transforming innovations explains why the true effects of an invention or innovation are hard to determine ex ante. Nor is it possible to know how long each invention will take to reach its potential in the places they are developed, and whether, and how fast they will be adopted in the places to which they are transferred. Where does this leave developing countries, where many, arguably simpler, innovations that have been around for decades, have not taken root?
Leaving aside the policy and institutional framework and role of the state for now, let us consider complementary “capitals”: human, and financial. One possibility is that intellectual capital or human capital has been a main constraint to invention and innovation. However, the data to prove this are missing. Even if we measure human capital correctly, including creativity and entrepreneurial ability, it is impossible to measure all inventions and incremental innovations. Anecdotal evidence, and media, regularly report on Inventors (and innovators) who have little or no education/ learning in the traditional sense. Neither of the Wright brothers had the technical education required to build airplanes. Human capital, as we define it and measure it, cannot (yet) capture the elements critically constraining invention, innovation, or entrepreneurship. Entrepreneurship cannot be considered a binding constraint either, though its link with economic liberty has been discussed. But there may be an added twist..
What economic history does reveal however, is that in countries where innovations took off, financial capital had to accompany them—finance became the binding constraint to building profitable businesses. Financing is equally important when it comes to importing technology from others—not just for indigenous innovation. Yet, financing innovations is a risky business; innovations where the physical assets or tangible capital can be used as collateral will be more likely to be financed. Intangible or intellectual capital/ ideas cannot be captured easily by the financier. Capital—or funds—are also needed by users/consumers.
Learning from the past, one may predict that the digital revolution and its sister, the AI revolution will truly transform societies, but only over many years. Sadly, there are people in the world today that have not yet seen the gains from the steam engine or the light bulb in their daily lives. The light bulb was invented in 1879. Fancy that.