Recommendation: Paul Romer on progress, economic growth and combinatorial innovation

To understand how persistent growth, even accelerating growth is possible, it helps to step back and ask where growth comes from. At the most basic level, an economy grows when whenever people take resources and rearrange them in a way that makes them more valuable. A useful metaphor for rearrangement as value creation comes from the kitchen. To create valuable final products, we mix inexpensive ingredients together according to a recipe. The cooking one can do is limited by the supply of ingredients, and most cooking in the economy produces undesirable side effects. If economic growth could be achieved only by doing more and more of the same kind of cooking, we would eventually run out of raw materials and suffer from unacceptable levels of pollution and nuisance. Human history teaches us, however, that economic growth springs from better recipes, not just from more cooking. New recipes produce fewer unpleasant side effects and generate more economic value per unit of raw material.

Take one small example. In many coffee shops, you can now use the same size lid for medium and large paper coffee cups. Before, they each had a separate lid. A small change in the design of the cups means that a shop can serve customers at lower cost. Storeowners need to manage the inventory for only one type of lid. Employees can replenish supplies more quickly.

Big discoveries–the transistor, antibiotics, the internal combustion engine–get most of the attention, but improvements in standards of living also spring from untold numbers of discoveries about something as simple as the shape to use when turning tree pulp into drinking cups.

Every generation has perceived the limits to growth that finite resources and undesirable side effects would pose if no new recipes or ideas were discovered. And every generation has underestimated the potential for finding new recipes and ideas. We consistently fail to grasp how many ideas remain to be discovered. The difficulty is the same one we have with compounding: possibilities do not merely add up; they multiply.

To get some sense of how much scope there is for more such discoveries, we can calculate as follows. The periodic table contains about a hundred different types of atoms. If a recipe is simply an indication of whether an element is included or not, there will be 100 x 99 recipes like the one for bronze or steel that involve only two elements. For recipes that can have four elements, there are 100 x 99 x 98 x 97 recipes, which is more 94 million. With up to 5 elements, more than 9 billion. Mathematicians call this increase in the number of combinations “combinatorial explosion.”

Once you get to 10 elements, there are more recipes than seconds since the big bang created the universe. As you keep going, it becomes obvious that there have been two few people on earth and too little time since we showed up, for us to have tried more than a minuscule fraction of the all the possibilities.

Paul Romer – The Deep Structure of Economic Growth

The whole article is well worth reading (he’s a Nobel Prize winner after all) and has a lovely little riff about “the ideal chemical refinery” – i.e. “the cow.” Recommended.

See Also:

Brian W. Arthur on Combinatorial Innovation
Matt Ridley: 15 principles of innovation
Efosa Ojomo on market-creating innovation
Marks and Spencer as disruptive innovators
Marc Andreesen on networks of innovation
… and on “Scenius”
César Hidalgo on the importance of trust in networks of innovation
Astro Teller on planning, experimentation and innovation
Resource: Clayton Christensen on disruptive innovation
Zen Hae on cross-pollination, imitation and innovation
The innovation in your head…
Seeds (2): bikes, planes and automobiles
Hybrids (2): combinations and connections

I'd love to hear your thoughts and recommended resources...