ECONOMICS

Entrepreneurs,Economic
Growth,andtheEnlightenment
byTimSullivan
AUGUST10,2015

Diderots Encyclopedie, best known as an eighteenth-century repository of Enlightenment

principles, might also serve as an interesting lens into what makes economies grow.

The Encylcopedie was a project spearheaded by Denis Diderot, published in 28 volumes

between 1751 and 1772. It aimed to gather all the knowledge in the world, and, with 71,818
articles and more than 3,000illustrations, it was a valiant effort. While the Encyclopedie (or,

more properly, Encyclopdie, ou dictionnaire raisonn des sciences, des arts et des mtiers
[Encyclopedia, or a Systematic Dictionary of the Sciences, Arts, and Crafts]) is justly famous for
containing essays by the likes of Rousseau, Montesquieu, and Voltaire, and promoting values
like secularism, reason, and toleration, its the sciences et mtiers the mechanical arts piece
that interests us here.

In a new paper that will be published in the Quarterly Journal of Economics, two economists
Mara Squicciarini from the University of Leuven and Nico Voigtlander from UCLAs Anderson
School of Management argue, Subscriber density to the Encyclopedie is an important
predictor of city growth after the onset of industrialization in any given city in mid-18th
century France. That is, if you had a lot of smarty pants interested in the mechanical arts in
your city in the late 18thcentury (as revealed by their propensity to subscribe to the
Encyclopedie), you were much more likely to grow faster later on. Those early adopters of
technology lets call them entrepreneurs, or maybe even founders helped drive overall
economic vitality. Other measures like literacy rates, by contrast, did not predict future
growth.

Why? The authors hypothesize that these early adopters used their newly acquired
knowledge to build technologically based businesses that drove regional prosperity. If thats
true, then upper tail knowledge, as the authors put it knowledge of new technology, from
chemistry to engine building in the hands of highly talented people who could do
something with it may be a major factor in creating prosperity, one distinct from a societys
overall level of education.

This argument does have precedent.Enrico Moretti and Dan Wilson, two economists, have
written about the influence of star scientists on highly productive tech industries, and Dan
Stengler, the head of research at the entrepreneurially focused Kauffman Foundation, has
argued for the disproportionate impact of a small number of gazelle startups on economic
growth.(For the classic economics paper on the role of technology on growth, see Paul
Romers 1990 article Endogenous Technological Growth or read David Warshs terrific
book, Knowledge and the Wealth of Nations.)

Joel Mokyr, a doyen of economic history writing in Science (where I first saw mention of the
QJE paper), draws out one contemporary lesson from the example of the Encyclopedie. Mokyr
writes, For economies that are at the technological frontier, investing in the education of the
best and the brightest may be as important as raising the mean of the entire distribution. For
the rest of the world, which imitates and adopts rather than invents, investing in mass
education is still the best strategy for economic growth. For advanced economies, like that
of the United States, upper-tail skills even if confined to a small elite are crucial, fostering
growth via the innovation and diffusion of modern technology. For us today, upper-tail
education isnt a PhD in English lit (not that theres anything wrong with that), its the kind of
knowledge you need to create Tesla.

But elite is a tricky word, so lets be careful to define our terms. In this case, the elite are not
the rich or the one percent or the stars of stage and screen. In the historical context, it was
those with the interest in and capacity to use the scientific and mechanical ideas in the
Encyclopedie. It was they who set the groundwork for growth in the coming industrial era.
While they may also have been rich, that wasnt the point.

What Squicciarini and Voigtlanders paper is capturing isnt the importance of social elites per
se (in fact, it would probably be better to jettison that word altogether for the confusion it can
create); its the importance of scientific and technical knowledge, and its effective
application. But the ability to understand and use those ideas isnt confined to just the top of
the socioeconomic ladder. Talent is spread evenly throughout the population. People who
could make important breakthroughs in applying scientific and technical insight are as likely
to be born into families at the lower end of the socioeconomic spectrum as among those at the
upper end.

Which is a problem for Americans in particular, because the United States does a terrible job
of educating smart but poor kids.

Consider a paper presented at the Summer Session of the National Bureau of Economic
Research by Raj Chetty, Bloomberg Professor of Economics at Harvard University,
Innovation Policy and the Lifecycle of Inventors. (The presentation was
apreliminaryversion of research that Chetty has done with other researchers at Harvard, the
Office of Tax Analysis, and the LSE; the slides are no longer available on the web, but the
researchers will release a new version in a few weeks.)In it, Chetty and colleagues explore the
relationship between the propensity to file a patent and socioeconomic status by linking
millions of individual tax records to around 1.5 million patent filings, which allows them to
characterize the lives of inventors. (No one is suggesting that filing a patent is the
equivalent of being Elon Musk, but its at least directional.)

Perhaps unsurprisingly, children of low-income parents are far less likely to file patents than
are children of the well-to-do. But what surprised me was the size of the gap that the
researchers found, especially among the kids who were best at math. Third graders who do
poorly on the standardized tests and those who do average to slightly above average pretty
much patent at about the same rate, rich or poor. But among those third graders who scored
two standard deviations above average on their math scores that is, eight and nine year olds
who were pretty darn good at math those with high income parents were three to four times
more likely to file a patent later in life than were those with low income parents (around 22.5
patents filed per 10,000 people versus around 6 per 10,000).

This innovation gap represents not just another instance of inequality of opportunity and
outcome, as many have rightly noted, but also an insane amount of social loss. By not
properly educating those people rich or poor who have the greatest propensity to
understand and use technical knowledge of the kind similar to that which helped spur and
spread industrialization in 19thcentury France, we may be slowing our future economic
growth even more than we think. How many Teslas are we smothering by not focusing on
young kids with a potential talent for STEM?

It also worth noting that poor kids who are good at math patent more than rich ones who
arent. As a consequence, it can sometimes look like were in a meritocracy, since we can
point to disadvantaged kids who make good. But that analysis ignores the counterfactual:

that poor kid should really have patented so much more.

If we do want future growth, we should be focusing on young, smart kids and giving them
access to whatever kind of knowledge and support they need. Make them subscribers, as it
were, to our own Encyclopedie which might include technical knowledge but also the right
mindset, call it what you will: maker, hacker, practical and creative.

Of course, innovation policy and education have to focus on more than just smart people.
Even if those with upper tail knowledge have disproportionate influence on productivity
tech, its not the whole story.Productivity of new tech is unlocked over time during
adoption process. (See this HBR post by Jim Bessen, for instance, on the diffusion of
technological know-how). We cant exactly abandon the educational goals that support
diffusion (and, incidentally, a properly functioning democratic republic).

But it does imply that our current system is simply not going to help foster tomorrows
explosive growth. If you take seriously the economic contributions of great entrepreneurs
(and the evidence from the Encyclopedie and elsewhere suggests we have to), you have to
grapple with the toll inequality takes on so many peoples ability to become one.

TimSullivan(@Tim_Org)istheeditorialdirectorofHarvardBusinessReviewPress.He
isacoauthorofTheOrg:TheUnderlyingLogicoftheOffice(Twelve,2013).

ThisarticleisaboutECONOMICS
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vaishuvenkatesh

amonthago

goodarticle,ithelpsinfindingchallengesandopportunities
00

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