The essence and system key of industrial revolution

The topic I want to discuss with you today is “Industrial Revolution, Technological Innovation and Institutions”.

This is not just an academic topic, but a very real, happening, and unstoppable thing – the fourth industrial revolution, which is rapidly emerging, showing its extensive and profound impact.

Today, we will focus on this issue and discuss a series of basic institutional issues related to the industrial revolution.

01The fourth industrial revolution is rapidly emerging

The fourth industrial revolution, which mainly occurred in the United States, is currently in the rapid rise. Since it’s still early days, and everything is changing rapidly, no one can predict with certainty what the specific content will be.

But it can be seen that one that has had a major impact is artificial intelligence. It has in fact produced revolutionary, comprehensive changes to the entire economy and society. Based on machine learning since the 1990s, it has begun to show a large number of practical applications in various industries and businesses in recent years. What is accompanied by this is that the labor productivity of the United States has begun to show a substantial increase in the past one or two years. Even since the new crown epidemic, it has been It’s still very special.

Despite the rapid momentum, the algorithm of artificial intelligence is still in the early stage of development in the field, and there are still major inventions and breakthroughs to be made. The next question is who will invent it? Who will break through it? How to invent? How to break through? …

Another major development closely related to artificial intelligence is quantum computing. In theory, once quantum computing achieves a breakthrough, it will show trillions of times the current computing power. This qualitative change will revolutionize the concept and capabilities of computing, and will result in a series of fundamental changes, such as artificial intelligence, cryptography-related security, pharmaceuticals, new materials, etc., and many more areas that we cannot foresee today. . At the same time, since quantum computing principles are fundamentally different from current digital computing principles, quantum computing also involves changes in the entire algorithm. Therefore, algorithms that use analog quantum computers in most fields in the future will have to be invented.

The industrial revolution also involves revolutionary developments in the field of biomedicine based on the human genome. In fact, people have seen its major breakthroughs and widespread applications, such as mRNA vaccines. mRNA, its original development target was cancer. Due to the urgency of the new crown epidemic, mRNA-related research institutions have used new technologies to create a new type of vaccine in a very short period of time. This is a major breakthrough in science and technology. There are also several categories that the fourth industrial revolution will involve, such as hypersonic sustainable power, new energy, and new materials. It can be seen from this that China’s future development faces enormous challenges and opportunities.

Looking back at China, there was no opportunity to participate in the past three industrial revolutions, each of which was after the industrial revolution occurred, and then tried to catch up with the world’s frontier. The emerging fourth industrial revolution is the first time in history that China has participated in the stage of the industrial revolution. What we want to focus on today is the challenges and opportunities China faces.

First, let’s take a look at what the Industrial Revolution is all about. Looking at this picture, the line above is the frontier state of the world, the frontier refers to the frontier of the economy, and the frontier of economy and technology is directly related to the frontier of basic science. The quantitative measure is GDP per capita, which is expressed here by logarithm, which can clearly express the wide gap. The horizontal axis is time. Economic historians can use economic history materials and raw materials to calculate the per capita GDP in history. The earliest can be calculated to more than a thousand years ago, and time is also expressed in logarithmic terms.

What is the state of China? Before 1900, China’s per capita GDP was generally average in the world. Before the first industrial revolution, the gap between the world’s developed economy and the average state was not very large. The real rapid separation of the world’s economy started from the industrial revolution. In fact, from 1900 to 1978, China fell from the average level of the world to the poorest state in the world in seven or eighty years. The bottom was roughly in 1950. From 1950 to 1978, China’s status in the world did not change significantly. Since the reform and opening up, China has developed rapidly. In the global comparison, it has recovered from the poorest state to the global average state, which is what we call the middle-income level today.

02The basic nature of the industrial revolution is creative destruction

From a global perspective, the first time that rich countries and ordinary countries are separated is the first industrial revolution, then the second industrial revolution, and then the third industrial revolution. The distance between countries is further widened.

What is the nature of the Industrial Revolution? Of course, it is a lot of scientific and technological innovation, but it is not only scientific and technological innovation. What is the most important nature of the Industrial Revolution from a social science perspective? A very clear understanding is needed here—industrial revolutions are not all very comfortable things. Industrial revolutions actually bring both creation and destruction. Its most basic nature is the process of creative destruction.

First, where did the creation come from? Creation is generated from the market system. The market system provides a huge incentive mechanism for inventors and entrepreneurs, which is the basis of the industrial revolution. The core content of the incentive mechanism is intellectual property rights. Without intellectual property rights, the incentive mechanism will be destroyed.

What is intellectual property? The core component of intellectual property rights is monopoly rights, without monopoly rights there will be no intellectual property rights. Intellectual property is the protection of new inventions. How to protect? Just give him a monopoly. When people talk about anti-monopoly, they must make it clear what monopoly is being opposed. A one-size-fits-all anti-monopoly will destroy intellectual property rights.

Another important mechanism by which the market system provides incentives for inventors and entrepreneurs is the survival of the fittest. The core of survival of the fittest is screening, because innovation, especially revolutionary innovation, no one can predict before it occurs. The judgment of the market will screen innovation, that is, the market mechanism of survival of the fittest can screen out the best things among a large number of inventions.

To protect private investment. All the industrial revolutions in the past and emerging industrial revolutions, in which major inventions come from private investment. Private investment is flexible and subject to market judgment. Protecting private investment is a necessary condition for the industrial revolution. Protecting private investment is actually protecting individual inventions and inventors.

Industrial revolutions all occur in the market, not in the activities of government organizations, because the government cannot replicate the incentive mechanism provided by the market system. If the government pushes it forcibly, it will violate the laws of the market and destroy the mechanism of the market, which will often have counterproductive effects.

The industrial revolution is a process of creative destruction, and cutting-edge innovations have no shortcuts or opportunities for overtaking in corners. To win creative destruction, you must have created a revolutionary new product to replace the existing system. This destruction must depend on your innovative product itself. For example, both Google and Apple are trying very hard to compete with Microsoft. In the end, Google develops Android, and Apple develops IOS. Only their operating systems can substantially surpass Microsoft’s WINDOWS to defeat it. There is no other way.

If there is no innovation in basic science and technology, it is impossible to win in the industrial revolution by relying on administration, planning, imitation, and improvement. At most, the gap can only be narrowed. We can see the inherent laws through previous industrial revolutions. The first industrial revolution emerged from the British system, the core content of which was mechanization. The second industrial revolution emerged from the Anglo-American system, the specific locations are the United Kingdom and the United States, and the core content is electricity. Electricity was not discovered in technology, but brought about by breakthroughs in physics. The third industrial revolution originated from the Anglo-American system, dominated by the United States, and its core content is information technology and biomedicine. During the second and third industrial revolutions, the pharmaceutical industry was still dominated by chemical pharmaceuticals; now in the fourth industrial revolution, large-scale non-chemical pharmaceuticals have begun.

The common law of the three industrial revolutions is that the origin of each industrial revolution is the innovation of individual inventors and entrepreneurs. Their innovations are not organized or planned, but are spontaneously generated. Every time a revolutionary innovative technology is spontaneously generated, it destroys the economy based on the old technology in the past. This destruction is very cruel and very painful. The achievements of the free development of inventors and entrepreneurs all depend on the system of the host country. The fourth industrial revolution, which is rapidly emerging, shows the same laws as the past three. Only by looking back at the past can we better look forward to the future.

03Industrial Revolution and Institution

The origin systems of the past three industrial revolutions are basically the Anglo-American system, and the important reason is the rule of law environment. From the perspective of the rule of law system, there are two major legal systems in the world: the common law system and the European civil law system. The difference is that the European civil law system is a highly top-down legal system, while the common law system is not a top-down legal system. It’s called case law. Case law is that when a court makes a case, the case automatically becomes law. In contrast, the common law system is more specific and flexible in protecting property rights and freedoms than the continental law system, and better protects the freedom of individuals, thus enabling greater creativity, tolerance and encouragement of entrepreneurial inventions under this system. New thing. China belongs to the continental law system. Civil law, commercial law, corporate law, and contract law were all imported from abroad in the early 20th century, basically originating from Germany.

The Anglo-American system protects and encourages a highly autonomous university system, the source of innovative knowledge and manpower in the Industrial Revolution.

Secondly, to protect entrepreneurs, whether there are entrepreneurs determines whether new knowledge is possible to be used in business, and the important content is the protection of intellectual property rights.

Once again protect and support the financial market, which is the resource allocation center of the previous industrial revolutions. From an economic point of view, the most direct impact on revolutionary innovation is venture capital, which is a derivative of the financial market.

Globally, the most developed financial markets are concentrated in common law locations. For example, Hong Kong and Singapore outside New York and London, the rule of law systems that govern their fields belong to the common law system.

In the system of the legal environment of the common law system, the basic characteristic of the innovation system is based on the rule of law, through the market and competition, to solve the incentive mechanism of each link of innovation as a whole. Through the fierce competition in the financial market, the intellectual property market, the product market, and the labor market, innovation projects are selected by the survival of the fittest.

The industrial revolution is destroying every step, and the industrial revolution is highly dependent on the incentive mechanism provided in the allocation of resources, which cannot be simulated by the government. Among the hundreds of revolutionary inventions in the past century, the vast majority were produced in market economy countries. For example, semiconductor research in the 1940s, the United States and the Soviet Union were vigorously developing after World War II, but in the process, the Soviet Union planned to choose microelectronic devices instead of semiconductor devices; in semiconductors, its priority was also copper oxide, and not in silicon. Why is there a priority decision? Because of the national system of the Soviet Union, collective discussion determined the key development direction. In the United States, no one makes a decision, and different laboratories choose different paths for research and development, and these research and development are all risky and personal behaviors. Not only government plans fail, but big companies’ plans are also difficult to succeed. All revolutionary achievements are produced by small companies and funded by venture capital. We can only rely on market competition to tell everyone that whoever will win in the end will be the most competitive.

Einstein said that if we had known the work we were doing, our work could not be called research. Using a plan to control people doing research is actually incompatible with creation. It is impossible for anyone to tell you about any creative work. Once someone tells you, it is no longer creation.

Einstein also said that if people worked hard for fear of punishment and a desire to reward, we would be a hopeless bunch. The driving force behind truly creative research does not come from rewards and punishments, but truly great creations come from one’s own interests.

Innovation is divided into two broad categories of work, one is breakthrough, revolutionary innovation, and the motivation of those who engage in these innovations is curiosity; there is also applied work and follow-up work, in this case To give these innovative people more incentives for fame and fortune. Therefore, great incentives should be given to entrepreneurs so that they can obtain commercial benefits, otherwise there will be no entrepreneurs born.

Revolutionary innovation relies on indispensable institutions:

First, there must be the rule of law, and only from the rule of law can there be intellectual property rights.

Second, there must be an autonomous university, and it must be a university with autonomous professors. The key is to ensure the freedom of exploration. The basic characteristics are that professors run the university, personnel autonomy, and resource autonomy.

Take the number of Nobel Prizes awarded by universities around the world as an example. As of 2018, the United States has the most and the United Kingdom is the second. This is also a data that can be used for reference.

The venture capital system is very important to realize innovation in business. Taking innovative drugs as an example, every time a new drug is invented, many companies are required to join forces. Why? Because real revolutionary major discoveries are almost never produced in big companies, but new drugs are sold by big companies. In fact, innovative drugs are mostly invented by individuals who have obtained venture capital. These individuals use venture capital to create small businesses. Many small businesses have formed alliances with large corporations, and finally they have become drugs that are seen in the market. , the truly revolutionary inventions come from these individuals and venture capital. Big pharmaceutical companies often do the next step of research and development, mostly development and market entry, rather than invention. 100% of the world’s innovative drugs are born in developed market economy countries.

In the past 70 years, almost all revolutions, including the entire third industrial revolution, started with venture capital. The venture capital system is the most important basic mechanism for the selection of innovative projects by the survival of the fittest in the market. The reason is that revolutionary innovation can only rely on an effective post-screening mechanism, not pre-screening. There must be a system for post-event screening. This system can help timely terminate projects that have been made but have no hope, thereby reducing costs. Increase the number of items.

In short, from the historical facts of previous industrial revolutions, revolutionary innovations are basically produced in the market system based on the common law system. The legal environment of the continental legal system supports the market system. Although it is not the birthplace of the industrial revolution, it can follow closely. The planned economy based on state ownership is good at imitating and catching up, but due to the characteristics of the system, it is difficult to innovate revolutionary content.

The basic institutions that determine revolutionary innovation come down to three broad categories:

First, the rule of law system strictly protects private property rights.

Second, the market system, including the system of the four major markets of human, capital, intellectual property and product market.

Third, a system that guarantees individual liberty and a system of university autonomy, in which the key individuals to protect include researchers, inventors, and entrepreneurs.

The previous industrial revolutions and China’s own historical lessons tell us that in the face of the enormous challenges and opportunities brought about by the emerging industrial revolution, the decisive issue is the system. Only by developing towards the rule of law and towards the establishment of a market system under the rule of law, can it be possible not to repeat the mistakes of history.

Xu Chenggang Visiting Research Fellow at Stanford Hoover Institution, Visiting Professor at Imperial College London

(This article is the content of Xu Chenggang’s lecture at the Executive Education Center of Tsinghua University School of Economics and Management, “E-Class”, which is transferred from “Carbon 9 Capital”)

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