Innovate or Die

“The problem with the French is… they don’t have a word for ‘entrepreneur.’” — rumored to have been uttered by President George W. Bush to British Prime Minister Tony Blair

“I get up in the morning,” our friend Juan Enriquez told us during an interview one day late in 2011, “I read the paper and see all the bad things going on with the debt, deficits, wars and the economy. Then I step into a lab and see all the potential breakthroughs the scientists I work with are about to unveil.”

We began following Enriquez with a camera crew not long after our I.O.U.S.A. documentary project had run its course. Among other eccentric pursuits, Juan was a development economist who ran the Urban Development Corp. in Mexico City and later helped finance the mapping of the human genome with Craig Venter.

During I.O.U.S.A., we kept hearing the tandem refrain from men like Buffett, Volcker and Rubin that “Deficits don’t matter” and “We’ll grow our way out of this.” We wanted to learn from entrepreneurs on the front lines… who, in fact, is going to help grow our way out of the debt crisis?

Enriquez’s greatest fear at the time was that the political world would overwhelm the entrepreneurs — and the financial markets they depend on — before their discoveries could get put to good use. In fact, Juan’s bipolar view — debt, deficits and war versus inspiration, innovation and achievement — inspired the theme of our 2013 Agora Financial Investment Symposium in Vancouver: “A Tale of Two Americas.” It was the final Vancouver Symposium we hosted, in fact.

“When you look at the world,” a symposium regular said at the time, expressing a similar sentiment:

“you see one contradiction after another. Cyberwarfare, rogue political leaders, random acts of terror, the militarization of police and expanded surveillance equipment and drone usage make for a future resembling an Orwellian nightmare.

“But at the same time, you can track breathtaking technological breakthroughs in oil exploration and new technologies that will revolutionize our health care, computing, automobiles, communication and agriculture… the many items we use every day.”

China is one such contradiction. For years in these pages, we’ve focused on their economic rise, despite having questions about its sustainability. But despite their economy slowing recently, China’s innovators are making leaps and bounds. It’s estimated that this year, the country will graduate 17,000 postdoctoral fellows in science, math and engineering. That’s a 60% increase from 2010.

They’re building supercomputers that rival IBM’s and 3-D printers big enough to print air wings. The Chinese also granted 217,000 patents last year — a 26% increase in the past two years alone.

German economist Joseph Schumpeter famously observed a similar bipolar disorder during the great credit bust of the 1930s.

“Lack of outlets, excess capacity, complete deadlock,” he wrote in Capitalism, Socialism and Democracy:

“in the end regular recurrence of national bankruptcies and other disasters — perhaps world wars from sheer capitalist despair — may confidently be anticipated. History is as simple as that…

“The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U.S. Steel illustrate the same process of industrial mutation — if I may use that biological term — that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism.”

In his day, Schumpeter witnessed the triumphs of radio, frozen food, the gas stove and the traffic light — all technologies we currently take for granted. But his observations of “how” these innovations come about remain as relevant today as ever.

“Existing structures and all the conditions of doing business,” Schumpeter concluded, “are always in a process of change. Every situation is being upset before it has had time to work itself out. Economic progress, in a capitalist society, means turmoil.”

In an ideal world, entrepreneurs and innovators, the risk-takers, would be free to embrace the turmoil at their own peril. But no… in the real world, we have the meddlers, the world improvers, (ahem) bureaucrats.

Yet two years on, the tug of war between government meddlers and entrepreneurs hasn’t been clearly decided one way or the other. And so, determined to find answers, we pick up our investigation where we left off last.

Over the next few days, we’ll examine the forces of innovation… the countervailing forces emanating from the paper pushers in Washington, D.C., and the net effect both will have on your wealth, the job you hold, the way you raise your children, where you live, how long you live and much, much more.

To kick us off, we feature an edited excerpt from a seminal conversation I had with Juan Enriquez on camera back in 2011.

Read on…

How Innovation Builds and Destroys Society

A Conversation Between Juan Enriquez and Addison Wiggin

Addison Wiggin: I wonder if, to start, we could walk through the different revolutions that have taken place since the founding of the country.

Juan Enriquez: Sure. These days, when your iPhone becomes obsolete every six months and you’re standing in line again to get the newest, greatest whatever, it’s almost impossible to comprehend that during most lifetimes nothing changed in human history.

When you think of the agricultural world and you think of how a peasant lived in Rome and in France over a 2,000-year period, there was almost no difference. How your time was spent — how you’d go out to your crops, how you’d do other task, how you’d be born in a house and usually wouldn’t move more than a few dozen miles from that house — didn’t change much.

This way of life went on for generations and generations and generations. But what the industrial revolution did is all of a sudden it accelerated everything.

With the Industrial Revolution all of a sudden things started to accelerate. Change started becoming prevalent. The speed of introduction of dyes, textiles and more just exploded.

Later, cars meant that you no longer did it at walking speed or horse speed, you did it at ten miles an hour, 50 miles an hour, 100 miles an hour.

Now with the digital revolution what’s started to happen is we’re doubling the amount of data generated by all humans across all time about every five years. Which means every song ever written, every word ever written, every poem, every photograph, every film ever written in human history is going to double over the next five years.

These waves of change that some of us have gotten used to and some of us are terrified by, are accelerating in how fast they’re coming… how quickly they make countries, industries and jobs appear and disappear… and how they up-end your life.

Addison Wiggin: That makes many people fearful. We’ve seen that expressed mostly in political terms. There’s a pessimistic phase underway in politics as people express their fears of change in a negative way.

Juan Enriquez: Today there’s a lot of geographical mobility. You’re not living in the same house your parents grew up in for the most part. Often you’re not living in the same community. And until the housing crash it was common for families in the United States to move time and again and again and again. Now, the housing crash has made it harder to leave one house, sell it and buy another house. But that’ll start happening again. People will start moving.

And when those people arrive in a completely new community, they may be working for a new business because their last one merged or was bought out or went broke. They’ll have completely new neighbors, a completely new community and they’ll be overwhelmed because your kids come home with some gadget or idea that you have no idea how it works, where it came from, how to apply it.

Plus they’ll have to learn all this new technology at work, in their car, in operating a phone, in watching TV, in figuring out a remote, etc.

For a lot of people, instead of being an opportunity and something that they celebrate, these changes become something really scary. So people try to root themselves.

And there’s a whole bunch of hucksters out there who are selling bills of goods that are really dangerous. Those bills of goods say if only we keep the foreigners out we’ll be safe. Don’t bring any more smart college students or Ph.D.s; kick them out of the country.

There are people who say if only women knew their place, then things would go back to the way they were. There are people who are telling you if you get more and more and more conservative in your religious or ethical beliefs, and if you’re able to impose your beliefs on a broader swath of society, then all this will stop.

The answer is no. That’s the way you destroy a society.

These waves of change may or may not occur specifically in your community, in your state, in your country or in your region. But they’re going to occur because this technology’s going to come. And if we don’t learn to live with it, if we don’t learn how to teach our kids about these changes, we become one more of those societies that became archeological ruins.

What we have to remember is all of the greatest societies in the world — all of the greatest civilizations — eventually got scared of change, quit adapting and adopting and became ruins.

Ruins are wonderful to climb… they’re wonderful to photograph… they’re wonderful to visit on cruise ships… but they’re irrelevant as economies and cities and past civilizations and opposed to current ones.

Addison Wiggin: I’m interested in the tension between politics and innovation. Can you expand on that?

Juan Enriquez: In any society that is changing at a very rapid clip, there are always going to be people that say “slow down the train or stop the train, I don’t want any more change. I wanna go back to the good old days.”

The first problem with that is, the good old days really weren’t for the most part the good old days. The amount of violence in human history a century ago, two centuries ago, five centuries ago, a millennia ago, is on order of magnitude greater than what we live with today. The average lifespan just over a century ago was about half of what it is today. The average state of education and health in women was not particularly good in the good old days.

People have this Pollyanna image in their minds of where we were and where we came from. That becomes accentuated particularly when these upheavals of jobs, cities and civilizations come through.

In that environment there you see the politics of conservatism. It’s the politics of “if only things went back to the way they were.”

If only women weren’t so vocal. If only there weren’t so much change. If only these folks with brown skin and strange accents weren’t walking around our streets — then things would go back to the white picket fence. Things would go back to the nine-to-five job. Things would go back to having one job across your entire lifetime and security.

The answer is no. That’s simply not coming back. It’s simply not going to happen. That’s not the way the world is working, today. But it’s a very tempting vision…

We have an incredibly ironic situation today. The billionaire is paying less in taxes than every person who’s working for him. And when you see an elevator operator who is barely making ends meet paying less a billionaire over here, and you see the maid paying more over there. And you see the waiter, and the cook, and the secretary all paying more. And you’re cutting school systems, and you’re telling smart foreigners not to come here. Or you’re telling people that the way this society gets ahead is by restricting other people’s rights, by putting more regulation onto them, by having a privileged class in a society.

That’s a place where problems and injustice begin to spread so broadly that you are going to have a revolution. It’s going to be a serious revolution, too, because the gaps have gotten too wide.

Addison Wiggin: Can you characterize the revolution that would happen in response to injustice? In our discussions you’ve mentioned you were fearful that the political revolution that could happen and impede the benefits of a scientific revolution.

Juan Enriquez: One of the things that is hardest to understand and wrap your mind around is the cost of not acting. Part of why regulation and politics can be so damaging and insidious is because they can sound perfectly rational and at the same time have some absolutely horrifying effects. Let me give you a couple of examples…

We’ve put out exactly the same number of medicines per year since 1985. But during that period — when we’re putting out 25-35 new medicines per year — the research budgets have absolutely gone through the roof.

The cost of bringing a medicine to market has gone from about $40 million to about a $1.2 billion. When you think of the change in the cost per medicine — how many dollars you have to invest to get that new pill — productivity has just dropped off a cliff. It’s just two or three orders of magnitude what it was a decade or two ago.

Why is that happening?

Well, part of it is because discovery’s getting harder. But part of it is because we’ve gotten so scared and focused on regulation, that what sounds perfectly reasonable becomes completely unreasonable.

One of the things people want is completely safe medicines. If we applied that same mindset to staircases, we wouldn’t have staircases. If we applied that to automobiles, automobiles would cost a million dollars or two million dollars or five million dollars each. And they’d be like armored tanks surrounded by plastic balls that could only be driven on Sundays when certain people weren’t on the road.

I’ll give you a second example. People thought when airbags were being introduced that maybe airbags when they blow up will hurt pipe smokers. And so they didn’t deploy airbags for a while. It was possible that pipe smokers could be hurt when the airbag inflates, but the cost of not deploying those airbags — in terms of thousands of lives saved by airbags every year — I think significantly exceeds the potential number of pipe smokers who would be hurt.

What we have to do when a politician comes up with an easy solution or says regulate more, or let me protect you more, or let me give you more, we have to ask the question: What is the cost of acting and what is the cost of not acting?

That is particularly important during a period where the national debt of the United States has grown to an absolutely unmanageable level. It’s particularly important in the United States during a period of time when what we’ve promised people we will give them — in retirement benefits, in medical benefits, in a whole series of other benefits — is going to exceed the entire budget of the United States. All of the budget — from every source, from every taxpayer in the reasonably near future — and we’re talking in less than a decade.

So, we have to adjust, we have to help regulation become reasonable. We can’t keep putting out hundreds of thousands of pages every year that try and regulate every aspect of every potential thing a human does. We can’t have the Congress micromanaging every aspect of the budget to gerrymander their own constituencies. Because if we do that we will kill entrepreneurs and we will kill new industries.

Those industries will go offshore. The life science revolution, for example, if we get scared of it or if it gets politicized and as a result, gets too hard to do it here, you’ll get the same thing that happened with computers and software. They’ll get made elsewhere.

You’ll get the same thing that’s happening with some of the high-end operations for hip replacements or spinal work. It’ll get done in Thailand, it’ll get done in India, it’ll get done in Canada, it’ll get done in Mexico. We have to be really careful with this stuff.

Addison Wiggin: I’d like to push you on this one idea. Is your fear that that would happen before benefits from, say, the life science revolution could be spread to groups on the margin? That that acrimony would grow quicker than the economy could accommodate new groups of people?

Juan Enriquez: I’ll tell you the thing that truly worries me about the United States in an absolutely fundamental way. This has always been a country that is reasonably moderate, open, welcoming, accepting, and that allows generations of people to rise up and do very well.

We saw that with waves of German, Irish and Hispanic immigrants and with very gradual improvement in African-American populations. But at this point we can go horribly off track if we think the only choices we can make in this society are either “you’re on the side of Howard Stern or you’re on the side of Rush Limbaugh.”

When politics becomes a caricature of either Howard Stern or Rush Limbaugh, and you’re voting 100% on this side or this side, then countries divide and fight. At that point, all this incredible opportunity to build things and all these incredible discoveries go horribly wrong because it becomes illegitimate to even talk to one another.

When you have congressmen and senators who are proud of the fact that they have never sat down to lunch with somebody from the other side, or when you have somebody say “I have a perfect 100% voting record on one side,” what they’re telling you is, “We know the absolute truth. I will never consider the other side, I will never vote with the other side and the other side has absolutely zero to offer me.”

The way you destroy a great country is you move it to the extremes and you eliminate the middle. But the real secret to building jobs, to solving the debt problem, to solving the medical problems, to getting people back into schools, to getting those schools to work is actually to work together with people. Some of those people you’re going to profoundly disagree with, but they are fundamentally decent people. We keep forgetting that.

We keep forgetting — in the same way we have an uncle who we may violently disagree with over politics at the Thanksgiving dinner table, but who’s a fundamentally decent person — who we can work with. That’s the way we have to treat politics. Instead, we’ve eliminated most of the moderates and we’re doing it systematically. We’re putting them up against the wall and we’re shooting them. That’s how you destroy a great country.

One of the things that’s incredibly fun sometimes to watch is full-contact sports. It’s one side against another side. That really works well when it’s football or boxing or full-contact cage fighting. But entertainment translated to politics is really dangerous.

When it’s one side against another side in politics and it’s extremes of being 100% behind Howard Stern or 100% behind Rush Limbaugh, there’s no middle ground. Only one side or the other is going to win. And, in the end, the two people end up really beat up.

But in this case, it’s society that ends up really beat up. It’s society that ends up polarized and not able to fix its schools, or not able to discuss tax policy, or address the deficit, or the other basic issues that affect you and I and everybody else in the society.

Those divided societies end up being societies that don’t survive as nations. Because when you play cage fighting and there’s no quarter on either side and there’s no middle ground and there’s no talking between those two, then countries divide.

By the way, three-quarters of the flags that fly today over the United Nations did not exist 75 years ago. You’re seeing these splits happen in Spain with the Basques and the Catalans and the Galatians. You’re seeing it happening in the U.K. with Northern Ireland, with Wales and with Scotland. You’re seeing it happen in Northern Italy, in Finland, in Canada, in Belgium and in Holland, but we think we’re immune.

We think we can treat everybody else in an absolute winner take all style without consequences. Where “I’ll beat everything out of you. I’ll insult you, I’ll insult your daughters or I’ll insult your kids, I’ll call you ignorant.”

That’s actually really dangerous and our politicians today are being incredibly irresponsible in doing it. They are people who can split a nation by convincing half the nation that the other side are fundamentally evil, Godless, killers or bad people. That’s the wrong way to fix our problems.

Addison Wiggin: Thanks Juan. That’s a good place to stop for now. More to come, later…

Regards,

Addison Wiggin
for The Daily Reckoning

P.S. We’ll have more on this topic all week in the email edition of the Daily Reckoning. Click here now to sign up for free.