Economists often propose new ideas which would create economic value, improve markets, or make taxation more efficient. But their faith in the efficiencies of the market forces them to answer an awkward question: why hasn’t their idea already been built?
There are many examples of ideas which have great promise but are underutilized such as dominant assurance contracts, advance market commitments, land-value taxation, and patent buyouts to name a few.
But if these really are good ideas, why aren’t we already doing them a lot? In response to questions like this, some people might argue that these are not actually good ideas when we take into account new (or more realistic) assumptions about behavior, while others might point to an issue with modern politics as the reason good things don’t get done.
Instead, I propose a different explanation for this discrepancy inspired by chemistry: all ideas, even good ones, face a “reaction barrier” which prevents or slows their adoption. This has implications for people and countries wishing to increase the rate of positive change in society.
But before we go into the details, lets review the chemistry.
Let’s say we have a generic chemical reaction, going from molecule A to molecule B:
A -> B
If B is lower in energy than A, this reaction is energetically favorable and will happen on its own. However, that doesn’t mean that our reaction will happen quickly. There are many bxszareactions which are energetically favorable but happen very slowly. For example, diamond reacting to form graphite is energetically favorable. This means that, with time, precious diamonds would transform into boring pencil lead!
Why are these reactions so slow? Because there is a reaction barrier which reduces the probability of the reaction happening, thus slowing it down. Imagine there is an axis along which we can travel between molecule A and molecule B. If we plot the energy at each point, it would look like this:
The hill that the reaction has to climb slows down the rate of the reaction. In fact, at a given temperature, the rate of a reaction is inverse exponential in the height of the barrier.
Fortunately, we have a way to speed reactions up using catalysts. These are molecular structures which speed up a reaction by reducing the reaction barrier without being consumed by the reaction itself.
As you can see, the catalyst decreases the activation barrier without changing the energy of the product or reactant. Changes in the barrier height can lead to exponential increases in the rate of a reaction, which is why a lot of research goes into making better catalysts for important chemical reactions.
Application to Economics
With the chem review complete, we can jump into the interesting questions: what creates a “reaction barrier” in an economy?
I can think of a few things:
- Capital: Good ideas can’t get started until they have enough financial backing.
- User Acquisition: A new innovation often requires many faithful users. If nobody uses an innovation, what good is it? Additionally, these users all have to coalesce at about the same time.
- Talent Acquisition: capable personnel are vital to the success of a new venture. Most innovations require at least a technically skilled team, a team to “sell” the new idea to funders/users/the public, and business savvy. All of these require competent management as well.
- Attention: A prerequisite for getting users, capital, and talent is getting enough attention from the population to attract other people willing to contribute.
- Cultural Acceptance: Culture is essential to innovation. If all of your potential funders/users/staff have a deep cultural dislike of your idea (or dislike change in general) there is no way of getting off the ground.
- Risk Aversion: For example, a startup in particular can be risky financially, discouraging funding. Additionally, an unpopular innovation could pose professional, personal, or social risks to a founder which can prevent potential founders from entering the market. This is related to the point about cultural acceptance.
- Entry Barriers: These might manifest as the difficulty of starting a business or passing new laws. Legal prohibitions, legal ambiguity, or the existence of many stakeholders with veto power all present major entry barriers.
- Coordination Problems: Some innovations are public goods. Some innovations require everyone to use the same platform or agree to the same rules in order to be functional. Imagine if we had two great ways of voting for our next president but couldn’t agree on which one to use!
These barriers can compound one another. For example, a startup might need to find several talented people at key positions in order to be successful. Alternatively, having multiple simultaneous barriers in, say, talent as well as entry would reduce innovation even more.
Given these barriers to beneficial ideas, what can we do to reduce them? As we have seen in chemistry, even small reductions in the barrier height can greatly increase the rate of a reaction, so reducing these economic barriers might accelerate the pace of innovation. In short, we need economic catalysts to assist beneficial change in areas with a barrier preventing improvement.
Of course, making it easier to obtain funding and start a new business would help. This is a common justification for reducing regulation and improving the process of funding startups.
Being able to quickly allocate talent to a new project is also important, this requires fluid labor markets and better laws around hiring and firing. Non-compete clauses are a clear enemy here, since they prevent talented people from joining a new, promising venture.
Risk aversion could be tackled by creating income share agreements between many ventures, which would offer something like “startup welfare”. Welfare for citizens may be helpful as well, one of the justifications for a UBI is that it will reduce financial risk for potential founders and allow people to invent new things.
Cultural acceptance is perhaps the trickiest to improve. I would imagine this would involve something like public acceptance of experimentation which I consider to be an important future innovation. But how to we actually go about making the public more open to experimentation? I am still not sure, but this is worth examining further. This is another benefit of the Archipelago as some states might succeed in creating a culture of experimentation and reap the benefits.
User acquisition seems important for two reasons. First, happy users can help achieve cultural acceptance, and second, more users increases the attention a new invention gets, creating a positive feedback loop where an idea can get more capital, talent, and users. But how do we get large groups of people to start using a new idea all at once?
One quick idea: an “attention lottery” analogous to a donor lottery where each person suggests an activity that they want everyone to try at the same time. Then, one of the suggestions is picked at random and everyone does it at the same time. This would quickly add users to a new idea, and, if the community enjoys it, may spark society-wide adoption of the innovation.
This lottery idea seems directly applicable to many of the coordination issues inherent in the barriers I have listed.
There is certainly room for more state-organized economic catalysis. For example, a government might identify a promising new development and create X-prize-type incentives for innovation in that area. Even better, the government might create an innovation incubator which helps companies develop new capacities, provides resources from the public sector and coordinates action between firms.
Note that I have only covered a few problems and solutions, but there are still other reaction barriers to innovation I have not discussed here, and many other possible solutions. Additionally, my focus has been on barriers in the economic sphere, but these barriers also manifest in the political sphere as well.
The economic catalysis approach offers a new model for the things which prevent positive change from happening, and how much influence they have. Though it suggests new avenues of research, the practical impact of these different factors, and the possible policy solutions, requires empirical study.