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Innovation: The Forgotten Factor

Western innovation is the most effective foreign aid programme ever discovered.

· 7 min read
Male mechanical engineer develops sustainable agricultural robotics
Unsplash.

Utilitarianism is currently en vogue. Two of its important contentions are that all lives have equal value and that decisions should be evaluated on how much they raise average well-being (so-called utility). This philosophy underpins many left-wing economic policies because the same amount of money has more value to a poor person than to a rich one. For example, if you take $100 from Jeff Bezos and give it to a starving artist, Bezos won’t even notice but the artist will have ramen for weeks, and average utility will therefore increase. This is probably the rationale behind Bernie Sanders’ claim that the “obscene level of income and wealth inequality in America is a profoundly moral issue that we cannot continue to ignore.” Implicit in this is the assumption that the redistribution of wealth would provide much more benefit to the poor than it would harm the rich.

The problem is that this is only true if we restrict our view to the domestic arena. When inequality is measured on a global scale, most people in the developed world can be considered affluent. If we include foreigners into our utility calculus, we should recommend very different policies: in particular, we should loosen regulations on biotech; we should oppose excessive unionisation; and we should increase the number of highly skilled immigrants we accept.

All these policies promote the most effective foreign aid programme ever discovered: innovation. Figuring out how to do things is expensive, but once we develop that knowledge, it is relatively cheap to distribute. For example, US research institutions and venture capitalists have poured billions into AI research and, as a result, ChatGPT has given every kid with access to the Internet a personal tutor that is an expert in every subject. There is well documented research to show that this effect, known as “catch-up growth,” partially explains why emerging markets grow faster than developed ones. They can just copy what has already worked for us.

Biotech

Developing countries are generally unable to invest large amounts into the research and development of new drugs. But, thanks to innovation in the US, Japan, and Europe, this has not stopped them from accessing vaccines against polio, malaria, smallpox, and COVID-19.

Pharmaceutical companies get lots of bad press for their high profit margins on successful drugs (think of Martin Shkreli). But these criticisms fail to consider the underlying pharmaceutical business model: successful drugs have to pay for all the drugs that never made it to market. Every research project has a chance of failure, and the more pharma companies can charge for their successful drugs, the more failures they can afford. The United States has by far the highest drug prices in the world, and expected profits from the US market provide most of the incentive for the development of new drugs. This has an enormous humanitarian impact: research suggests that new drugs account for 73 percent of the longevity gains we’ve seen since 1990 (1.27 years per person).

How Innovation Works—A Review
Ridley presents an inspiring view of history, because we are not merely the passive recipients of thousands of years of innovations. We can contribute to this endless chain of progress, if we so choose.

Many of the drugs developed in the US are given to developing countries for free or sold at deep discounts there. Rather than thinking of the high prices paid by Americans for drugs as evidence of corruption by Big Pharma, it is therefore reasonable to think of drug innovation as a wealth transfer from the American middle class to the developing world.

Unions

Innovation may be a rising tide, but it will usually sink a few ships. The negative impacts of any new technology will usually be intensely felt by certain workers: prices may go down slightly for a large population, but wages will drop sharply for those who performed the (now obsolete) task. This creates a special interest problem, since the issue is so much more salient for the smaller group that they can often successfully push through legislation that runs counter to the interests of society in general. Unions are the main mechanism for pushing through legislation that defends against the collateral damage innovation may cause their members. Unfortunately, they often achieve this by defending us against technological progress.

Unions may serve an important function in protecting workers against corporate abuses. But throughout history—from the Luddite protests against the mechanical loom to the taxi drivers’ protests against Uber and the Hollywood writers’ protests against AI—workers’ groups have often attempted to stymie innovation.

A century ago, for example, goods were transported by “breakbulk” shipping—meaning that they were manually handled at every point of contact in their journey from manufacturer to customer via boat, truck, train, etc. The advent of containerization meant that a small crew could unload a massive ship, and shipping costs dropped by a factor of fifty (deregulation was also a contributing factor). This change not only meant that buyers and sellers had more surplus on the trade they were already doing, it also meant they traded a lot more. The rise in trade was in turn a catalyst for Asian industrialization, a historic accomplishment that has pulled billions out of poverty.

These efficiencies were not free: they came at the cost of the livelihoods of many dockworkers (also known as longshoremen). The longshoremen’s unions took various steps to prevent containerization, from striking and lobbying to inserting artificial inefficiencies into the supply chain. One such practice, “stripping and stuffing,” consisted of unloading and reloading containers on the dock—a pointless exercise that generated labour for its own sake. While they ultimately proved ineffective, these tactics temporarily delayed job losses and ensured that at least some of the gains from automation were shared with workers. But they may also have prolonged the extreme poverty of hundreds of millions in Asia on behalf of hundreds of thousands in Europe and America. Had the decision been left to an omniscient utilitarian, containerisation would have been adopted and scaled much earlier.

Why Innovation Requires Economic Freedom
Because of its emphasis on the heritability of acquired characteristics, Lysenkoism found itself at home and became an official dogma of Communist ideology.

Today’s labour disputes involving coal miners and auto workers also come at a cost—this time in their impacts on climate change. In the case of the coal industry, the stakes are easy to understand: they are defending a dirty and uncompetitive technology through lobbying.

The case of the car industry is more complex. The United Auto Workers (UAW) are fighting an intra-industry war. In America, most petroleum-fuelled cars are made by union workers and most electric vehicles (EVs) are not. The most labour-intensive component of an EV to manufacture is its battery. Firms therefore have an incentive to locate new battery plants in locations that are less friendly to unions, in order to save on labour costs. This has given rise to a situation in which the UAW perceives the EV as a threat to their members’ interests, and incumbent car makers perceive the UAW as a threat to their competitiveness against Tesla and foreign manufacturers. As a result of some recent strikes (including over battery manufacturing), the UAW has won a few concessions, but many issues remain unresolved.

At best, the unionisation of EV manufacturing will act like a tax on electric cars. This will guarantee that a higher slice of the economic surplus goes to workers, which will in turn increase prices and delay the transition to a cleaner technology. At worst, if the workers are unable to win key unionization battles, the UAW will have a strong incentive to lobby for EVs to be regulated out of existence.

The Maldives is an island nation; its landmass is only 1.5 metres above sea level and its per capita GDP is one seventh that of the US. Many climate scientists think that, if current emissions trends continue, it could be an aquarium by 2100. It perfectly fits the model of a developing country that stands to benefit from technological progress in the developed world (in this case, via green energy). However, when incumbent labour interests in the US defend against the green revolution, the Maldives will not have a seat at the negotiations.

Immigration

Highly skilled immigrants are disproportionately likely to contribute to innovation. They also tend to be more productive in their adoptive country than in their country of origin (often due to persecution in their native country or the agglomeration of education and talent in the new country). Notable examples of immigrant contributions to the US include Tesla, SpaceX, the telephone, blue jeans, relativity, nuclear energy, and Google. Immigrants often facilitate innovation even when they are not inventors themselves: Google, Microsoft, Adobe, IBM, and Starbucks all have CEOs from India.

This is a difficult reality for politicians to acknowledge if they have allied themselves with domestic labour interests. Once again, Bernie Sanders has made this explicit: “The last thing we need is to bring, over a period of years, millions of people into this country who are prepared to lower wages for American workers.” One could easily extrapolate from this that Satya Nadella and Sundar Pichai unfairly harmed the next-best qualified Americans who would have otherwise been the CEOs of Microsoft and Google. But without the leadership of Nadella and Pichai, we might not have made the progress we have on self-driving cars, AI, and cloud computing. Our “personalised tutors” (large language models) might never have been scaled to their current form.

Global Wealth Redistribution

Utilitarians on the far left may argue that aggressive global wealth redistribution obviates the need to prioritise innovation. Innovation investments are generally more efficient than cash transfers or direct aid to poor countries because the kind of innovation that can bring high returns often requires the infrastructure and talent agglomeration only found in developed markets. For example, Elon Musk’s satellite Wi-Fi technology Starlink has greatly enhanced the connectivity of the developing world, but it is unlikely that it could have been built outside the US, even with equivalent funding. For this reason, countries may prefer Starlink’s satellites to the cash equivalent of Starlink’s invested capital.

Meaningful global wealth redistribution is too far outside the Overton window to be relevant, and that is unlikely to change. A politician who campaigned to send his voters’ treasure offshore without asking anything in return would never be voted into office. Innovation, then, should be a policy priority for global humanitarians and is a prominent example of the fact that the idea of “domestic economic policy” is an oxymoron. Yet very few policymakers or voters ever consider the way our policies affect the rest of the globe.

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