THE OUTLOOK FOR INNOVATION IN FINANCES
If innovation has been the source of our extraordinary prosperity, it is important to inquire about its future. The good news is that the rate of discontinuous innovation in Western society appears to be accelerating. This rate is likely to hold if the two bedrock premises of innovation also hold over time: (1) the willingness of investors to accept high risk and (2) the continued existence of opportunity.
Today, investors seem very willing to accept high risks. The level of financing is virtually unprecedented, with the prospect of more than $50 billion being invested per year by venture capitalists alone, a 10-fold increase over the previous decade. Whether this pace of investment will be sustained is another issue. Too much capital chasing too few good ideas is a sure way to drive down returns. But if we believe Daniel Bernoulli’s ideas about utility, the fact that investors have a greater stock of capital than ever before virtually ensures that they will, over time, be more tolerant of high risks.
What about the continued existence of opportunity? At the end of the nineteenth century, the commissioner of the U.S. Patent Office famously recommended that the office be shut down because everything that could be invented already had been. His colossal misjudgment is as widely quoted by speakers at innovation conferences as is Malthus in economics textbooks—but the number of issued patents continues to grow exponentially.