Saturday, November 27, 2010

Bill Gates strikes at Ridley (and Easterly)

Bill Gates reviews The Rational Optimist: How Prosperity Evolves by Matt Ridley and gives strong response to the leave-all-to-markets-and-chill out approach to innovation and development.

In discussing Africa, Mr. Ridley relies on critics who say, essentially, "Aid doesn't work, hasn't worked and won't work." He cites studies, for instance, that show a lack of short-term economic benefit from aid, but he ignores the fact that health improvements, driven by aid, have been a major factor in slowing population growth, which has proven, in turn, to be critical to long-term economic growth. I may be biased toward aid because I spend my money on it and meet with lots of people who are alive because of it, but even if that were not the case, I would not be persuaded by such incomplete analysis.

Development in Africa is difficult to achieve, but I am optimistic that it will accelerate. Science will come up with vaccines for AIDS and malaria, and the "top-down" approach to aid criticized by Mr. Ridley (and by the economist William Easterly) will fund the delivery of these life-saving drugs. What Mr. Ridley fails to see is that worrying about the worst case—being pessimistic, to a degree—can actually help to drive a solution.

[…] Mr. Ridley devotes his attention to just two present-day problems, development in Africa and climate change, and seems to conclude, "Don't worry, be happy." My prescription would be, "Worry about fewer things while understanding the lessons of the past, including lessons about the importance of innovation." This might qualify me as a rational optimist, depending on how stringent the criteria are. But there can be no doubt that excessive pessimism may cause problems with how society plans for the future. Mr. Ridley's book should trigger in-depth discussions on this important subject.

Like many other authors who write about innovation, Mr. Ridley suggests that all innovation comes from new companies, with no contribution from established companies. As you might expect, I disagree with this view. He also seems to think that innovation involves simply coming up with a new idea, when in fact the execution of the idea is critical. He quotes the early venture capitalist Georges Doriot as saying that as soon as a company succeeds, it stops innovating. A great counterexample is Intel, which developed over 99% of its breakthroughs after its first success.

Mr. Ridley describes the economy of the future as "post-corporatist and post-capitalist," a silly throwaway phrase. He never explains what will replace all the companies that figure out how to make microchips or fertilizer or engines or drugs. Of course, many companies will come and go—that is a key element of capitalism—but corporations will continue to drive most innovation. It is a dangerous and widespread problem to underestimate the ongoing innovation that takes place within mature corporations.

In his quest to highlight exchange as the key mechanism in the success of our species, Mr. Ridley underplays the role of other institutions, including education, government, patents and science, all of which, especially since the 19th century, have played a central role in the improvements that humanity has experienced. Too often, when Mr. Ridley finds an example that minimizes the contributions of these institutions, he seems to think that he has validated the idea that exchange deserves all of the credit.