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Business Innovation 'Made Us Human' and Moves Us Forward

In his new book, The Rational Optimist: How Prosperity Evolves, Matt Ridley, a British science journalist (and formerly a director of Northern Rock), argues against the imminent downfall of civilization. He also reaches a surprising conclusion: Innovation and free trade made us human. Ridley talked about why he is bullish on entrepreneurship with Smart Answers columnist Karen E. Klein. Edited excerpts of their conversation follow.

Karen E. Klein: Did entrepreneurship really light the first spark of humanity?

Matt Ridley: My argument in the book is that the key notion for what caused the headlong, tumultuous rush toward things like toothpaste and space shuttles is the invention of exchange.

Academia won't like it one bit, because they don't really approve of commerce. But I think that, because of innovation, life has been getting better much faster than we recognize. It's all going inexorably in the right direction and there's no reason why that can't continue.

You trace the earliest stirrings of entrepreneurship back 120,000 years ago to marine-snail beads being traded 100 miles inland in what's now Algeria. What does that tell us?

I looked at the anthropology. At a certain point, we see a flowering of the human race. But why was it then and there? All the usual explanations, like language, consciousness, imagination, and opposable thumbs, are important, but they come too early. Neanderthals had them and right up until the end they made no cumulative progress.

It suddenly became clear to me the role that trade and exchange play. If two tribes invent two different technologies and then go to war, they've made no real progress. But if they trade those technologies, then the changes become cumulative.

And that accumulation eventually builds up to today?

What is prosperity? It's people working for each other. Louis XIV was rich because he had 498 people waiting to prepare his dinner. We're rich because there are 498 restaurants within an hour's drive. The whole story of economic progress is one of increasingly specialized production and increasingly diversified consumption. Exchange led to specialization and innovation.

Is the human brain hardwired to innovate

No, because up until 100,000 years ago, we didn't innovate. I have an ancient Australian hand ax that is an example of axes that were made to an unvarying design for about 1 million years. It's bizarre to us, today, because we think of things being obsolete almost immediately. But even until 200 years ago, that idea was unusual. The plow didn't change in design during your lifetime if you lived in the Middle Ages.

In fact, aren't most people resistant to change?

Yes. It seems to go almost against human nature rather than in favor of it. Innovation is a sort of inexorable product of exchange. Anthropologists argue that it could be accidental, like trial and error, and that once someone hits upon a good trick, others copy him. So innovation doesn't have to come about because someone is striving to improve something.

In the modern world, obviously we see wonderfully steady improvement. But I'd say that's not a physical law but a strategy, a sense in which innovation is endogenous to the economy. So there's not an inevitability about innovation; it's a proactive process of exchange and commerce.

If entrepreneurs and innovators are so valuable, why aren't they better supported by government and individuals?

It's not surprising that government support and spending goes to those with the loudest megaphone. The size of your vested interest determines how good you are at getting your shovel into the pile. Entrepreneurs are, by definition, a fragmented and diffuse bunch that are never going to be as good at getting corporate welfare.

That said, I'm not sure I want to see entrepreneurs hugely cosseted by government. In a sense, I want entrepreneurs to be left to sink or swim, because 90 percent of new ideas are bad ideas that mustn't be allowed to swim. But I do want the obstacles taken out of their way.

What kinds of obstacles?

In my own locality, the hurdles are in terms of permits, planning permissions, and real estate laws. Suppose you're doing something that's new: There's the threat of someone coming along and banning it. Why does anyone ever bother to become an entrepreneur, I sometimes wonder.

But even though there are risks with new technology, we should be taking into account the potential benefits, too. There's a huge risk in not taking advantage of change.

There's always debate between government regulation and unfettered free markets. Where do you come down on that?

I believe in the necessity for regulation and government. But what does history tell us about what stops entrepreneurship, too much government or too little? It's always too much. After the earthquake, people were saying that Haiti has too little government. But when you listen to expatriate Haitian entrepreneurs, they were saying they couldn't go back and do business there because it takes far too long to satisfy all the government regulations.

Over the course of history, it seems that one society would make progress for a while and then innovation would get squelched and move somewhere else. What happened?

Yes. We see that entrepreneurial flame burst out someplace and then it dies down and starts up somewhere else; it kind of jumps around. My argument is that what stops it is basically a sort of predation. Innovation and free trade generates so much wealth that it becomes too tempting for people to just steal it rather than make it. Chiefs, priests, and thieves kill the goose that lays the golden eggs.

China's Ming emperors are a classic example. There was this fascinating innovative period in China when all the really exciting stuff happened. But the dynasty that follows inherits a very wealthy free-trade area and just shuts it down. They made rules about how you couldn't leave your hometown, you couldn't own a ship, it became illegal to voyage overseas, you had to send an inventory to an imperial bureaucracy every month. Can you think of a more efficient way of shutting down an entrepreneurial economy? Emperors are generally very bad for entrepreneurship.

How does that relate to our recent recession?

Well, the Ming emperors shut down a huge chunk of the human race in 1400, but they couldn't shut the whole world down. Nowadays, we're so globalized, I wonder if we could have a global shutdown of trade.

But even looking at this recession, it may plunge the world into a Japanese or even an Argentinian-style recession for a long time. But when you look back at past recessions and you plot the numbers, they're just pauses in the upward trend of the larger graph. And that's because of innovation.

Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.

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