This blog is written weekly by Dock David Treece, a registered investment advisor with Treece Investment Advisory Corp. It is meant to share insight of investment professionals, including Dock David and his father, Dock, and brother, Ben, with the public at large. The hope is that the knowledge shared will help individuals to better navigate the investment world.

Thursday, December 9, 2010

Innovation: Death by Regulation

The theory of Diffusion of Innovations states that innovation begets further innovation; that when one person makes progress in some way, they spark or allow for various further innovations. So, theoretically, innovation ought to occur at an ever-increasing pace.

The truth, however, is quite different. As physicists Jonathan Huebner and Theodore Modis have noted in modern studies, it appears that global innovation isn’t occurring nearly as quick as it should be, and may actually be slowing down.

Many separate theorists including John Smart, founder of the Acceleration Studies Foundation, criticize elements of arguments made by Huebner and Modis. For example, Hueber argues that the number of patents issued per person peaked in 1873; while Smart notes that the vast population growth since then would seriously impact this calculation. Huebner also forgets to take into account innovations for which patents are not filed, including the development of existing “technologies.”

There is, however, a different theory – one most free market capitalists would probably find much more appealing. This argument looks past the scientific calculations and cuts down to solid fundamentals.

Simply put, innovation isn’t occurring at a quickening pace because governments, through their endless rules and regulations, are killing it.

Consider, for example, the incredible rate of progress seen in Russia directly following its conversation to capitalism less than 20 years ago. The amount of wealth created in the former Soviet stronghold has been incredible, and already the country is gaining prominence around the world, this time as an economic rather than military power.

Why, in just last year alone we saw the number of Russian billionaires more than double. That’s certainly nothing to shake a stick at.

To our point, though, the progress made in Russia is not by happenstance. The Russians and their trading partners can thank the lack of regulation in the region that resulted from the final collapse of the socialist government that previously controlled the region.

For more evidence, look at China. Though still technically a communist country, the Reds certainly got a few things right – but don’t tell that to Google. The Chinese may like to have a say in the crazy theories that infect the minds of their people, but the government still leaves its people mostly free to innovate. And thanks to cheap power produced from burning mountains of coal, the Chinese have left their role as trinket-supplier to the world and is now innovating, designing, and engineering right alongside the largest American enterprises.

Still not convinced? Consider the histories of two separate industries right here in America, perhaps the two that impacted people’s lives more than anything that had come before them: cars and computers.

Pop quiz: When did either of these industries experience their most rapid rates of innovation?

Answer: In their infancy, before the government started regulating them “for the public good.”

Now for a test of wits: Name one meaningful innovation that has come out of Cuba in the past 50 years.

[Crickets]

It seems so simple, and yet some people just don’t get it. Unfortunately they’re called politicians. But mark my words, the more rules and regulations the government makes, the further they will slow innovation and the further people’s standard of living will fall.

For the better part of this country’s history it’s been headed down a path of increased government regulation. We’ve seen this progression with other societies before, and we’ve seen this movie ends. It’s our choice; this country can keep going the way it’s been headed, or it can choose a new path. If we keep going, we will see standards of living decline as innovation slows to a snail’s pace. But it’s not too late.

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