Growth Takes Off When Smart People Are Neighbors
The Industrial Revolution was probably the most important thing that has ever happened in human history. In the space of a few centuries, much of the human race, which had long hovered on the brink of starvation, was suddenly lifted into relative security through the power of new technology. But why did this amazing explosion happen? There are many theories, and we’ll probably never have a definitive answer.
But there’s a strong argument to be made that communities of smart individuals, exchanging information and ideas, were key. Galileo, Kepler, Newton, Boyle and many other giants of the early scientific revolution are now household names, but they didn’t operate in isolation. They corresponded with each other, wrote letters, read each other’s work. Ideas were in the air. Economists William Maloney and Felipe Caicedo have found evidence that countries with the highest densities of engineers were the ones that contributed most to the Industrial Revolution, and hence were quicker to benefit.
Robert Lucas, the famous macroeconomist, put it thus:
The benefits of colleagues from whom we hope to learn are tangible enough to lead us to spend a considerable fraction of our time fighting over who they shall be, and another fraction travelling to talk with those we wish we could have as colleagues but cannot...[This] is common to all the arts and sciences - the 'creative professions'. All of intellectual history is the history of such effects.
Many other economists have praised the value of smart communities. Richard Florida speaks of the “creative class,” and Garett Jones of the “hive mind.” Get a bunch of smart people together, the theory goes, and good things happen. Enrico Moretti has found evidence that productivity rises more than one-for-one with an increase in a city’s number of college graduates, implying that smart people complement each other.
Much of the modern economy is based on this idea. Universities gather scholars in the same place, and academic conferences and publications create communities across distances. Venture capitalists encourage tech-company founders to move to Silicon Valley, Seattle, or Austin, Texas. The government creates national laboratories to bring smart people together in the service of long-term research projects.
So far, it seems to have worked. The rich countries of the world have continued to push the boundaries of technology ever outward. China, India and other developing countries are now getting in on the act, using similar strategies.
But productivity growth in rich countries has been slowing. Technology is a long-term determinant of productivity, so many economists are naturally worried that the engines of innovation are sputtering. There are signs that technological improvements in established fields are getting more costly to find. That implies two things. First, in order to maintain the pace of innovation in existing areas of technology, it will help to figure out how to make research more productive. Second, we need to increase the chances of whole new fields of technology being created, as when information technology and genetics suddenly emerged in the 20th century.
The obvious way to address both of these needs is to double down on the strategy that worked well in past centuries -- do more to encourage smart people to locate in communities where they can exchange ideas. The internet will hopefully help this happen, especially once machine translation lowers language barriers across countries.
But online interaction is still fundamentally limited, and may remain so for a long time to come. Physical proximity, and the random extended interactions it generates, is still important. That means that concentrating smart people in cities and universities is important.
The U.S. and other rich countries can accomplish this if they do three things. First, they need to allow high-skilled immigration to continue and even to increase. Rich countries provide researchers and engineers and thinkers with the most resources, and already have high-class universities and thriving tech hubs. High-skilled immigration simply builds on these existing strengths, letting smart people go where their ideas can be realized most quickly.
Second, rich countries should provide ways for smart people to live close to one another. Tech hubs need to provide enough housing so that smart residents can afford to be in densely concentrated areas. Universities should be enlarged, and their research capacities upgraded.
Finally, countries need to adopt policies that facilitate the free flow of ideas among their smart people. Harsh restrictions on speech, as China now maintains, are a big impediment to group creativity. And the U.S.'s slowdown in research spending starves smart people of the physical resources they need to innovate.
It’s likely that the engines of tomorrow’s innovation will be the same as yesterday’s -- namely, dense communities of freely interacting smart people. Rich countries should aim to create ever-better intelligent communities in order to keep pushing out the boundaries of human technology. To do otherwise, risks stagnation and an end to the remarkable human progress of the last few centuries.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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