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By Root 588 0

intelligentsia. This is not to condemn science as useless. The seventeenth-century discoveries of gravity and the circulation of the blood were splendid additions to the sum of human knowledge. But they did less to raise standards of living than the cotton gin and the steam engine. And even the later stages of the industrial revolution are replete with examples of technologies that were developed in remarkable ignorance of why they worked. This was especially true in the biological world. Aspirin was curing headaches for more than a century before anybody had the faintest idea of how. Penicillin’s ability to kill bacteria was finally understood around the time bacteria learnt to defeat it. Lime juice was preventing scurvy centuries before the discovery of vitamin C. Food was being preserved by canning long before anybody had any germ theory to explain why it helped.

Capital?

Perhaps money is the answer to the question of what drives the innovation engine. The way to incentivise innovation, as any Silicon Valley venture capitalist will tell you, is to bring capital and talent together. For most of history, people have been adept at keeping them apart. Inventors will always go where the money can be found to back them. One of Britain’s advantages in the eighteenth century was that it was accumulating a collective fortune, made from foreign trade, and a comparatively efficient capital market to distribute funds to innovators. More specifically, the industrial revolution required long-term investment in capital equipment that could not easily be liquidated – factories and machines, for the most part. More than other countries, Britain’s capital markets were in a position to supply this investment in the eighteenth century. London had managed to borrow from Amsterdam and nurture in the eighteenth century joint-stock, limited liability companies, liquid markets in bonds and shares, and a banking system capable of generating credit. These helped to give inventors the wherewithal to turn their ideas into products. By contrast in France capital markets were haunted by John Law’s failure, banks haunted by Louis XIV’s defaults, and corporate law haunted by the arbitrary extortions of tax farmers.

In an eerie repetition of the same pattern, Silicon Valley owes much of its explosion of novelty to its venture capitalists on Sandhill Road. Where would Amazon, Compaq, Genentech, Google, Netscape and Sun be without Kleiner Perkins Caulfield? It is no coincidence that the growth of technology industries took off after the mid-1970s when Congress freed pension funds and non-profits to invest some of their assets in venture funds. California is not the birthplace of entrepreneurs; it is the place they go to do their enterprising; fully one-third of successful start-ups in California between 1980 and 2000 had Indian- or Chinese-born founders.

In imperial Rome, no doubt scores of unknown slaves knew how to make better olive presses, better watermills and better wool looms, while scores of plutocrats knew how to save, invest and consume. But the two lived miles apart, separated by venal middlemen who had no desire to bring them together. A telling anecdote about glass repeated by several Roman authors rather drives home the point. A man demonstrates to the emperor Tiberius his invention of an unbreakable form of glass, hoping for a reward. Tiberius asks if anybody else knows his secret and is assured nobody does. So Tiberius beheads the man to prevent the new material reducing the relative value of gold to that of mud. The moral of the tale – whether it is true or not – is not just that Roman inventors receive negative reward for their pains, but that venture capital was so scarce, the only way to get a new idea funded was to go to the emperor. Imperial China, too, sent strong signals of discouragement to anybody whose inventiveness challenged the status quo. A Christian missionary in Ming China wrote: ‘Any man of genius is paralysed immediately by the thought that his efforts will bring him punishment rather than rewards.’

The financing