Innovation requires making stuff

Bill Gates has a favorite author, Vaclav Smil, who has an understanding on how most innovation takes place. 

“You also say that manufacturing is crucial to innovation.

Most innovation is not done by research institutes and national laboratories. It comes from manufacturing—from companies that want to extend their product reach, improve their costs, increase their returns. What’s very important is in-house research. Innovation usually arises from somebody taking a product already in production and making it better: better glass, better aluminum, a better chip. Innovation always starts with a product.

Look at LCD screens. Most of the advances are coming from big industrial conglomerates in Korea like Samsung or LG. The only good thing in the US is Gorilla Glass, because it’s Corning, and Corning spends $700 million a year on research.

I wrote about this over at Traders Crucible when right before I switched to Monetary Realism. The Unappreciated Effects of Making Stuff remain unappreciated.

  • Making things gives you feedback on how to make them better
  • Lots of people making things in the same area gives easy access to expertise

Capitalism is a great way for innovation to take place, but there are two components which are required for this to happen. The first component is actually making stuff, and the second component is the profit motive.

But we only hear about the profit motive part – we do not hear as much about the making stuff part. It’s a true tragedy here in the midwest, where generations of innovation and a giant geographic innovation hub was shipped overseas in exchange for cheap toys from Japan and China.

We get a direct benefit from  running a current account deficit. We get free stuff in exchange for our credible currency. However, we miss out on the subsequent innovation which can only happen when you make stuff.




Expert in business development, product development, and direct marketing. Developed strategic sales plans, product innovations, and business plans for multiple companies. Conceived the patent pending Spot Equivalent Futures (SEF) mechanism, which allows true replication of spot and swap like products in the futures space.

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Erik V
3 years 3 months ago

This doesn’t neccessarily make the world a worse place. It just means we need to rely on China, Japan, Korea etc. to do more of the innovating.

3 years 3 months ago

From your linked post:

“Making stuff has spillover effects on the economy that aren’t easily measured in statistics.”

It already exists – it’s called the Kaldor-Verdoorn Law.

3 years 3 months ago

And you rightly suspect the connection to balance of payments. The story goes under the phrase “Circular and Cumulative Causation” phrased first by Gunnar Myrdal and then exploited heavily to tell the growth story of nations by Kaldor.

3 years 3 months ago

You’re totally right. Stiglitz also says that much of the point of running a big trade surplus is so as to gain expertise through producing stuff for export. In that sense the trillions of USD amassed by China and Japan are really a waste product of facilitating a trade surplus.

Expertise of the population is an extremely valuable resource for any community (including the global community).

I had a go at a (somewhat farfetched) post about this too

I think the history of the steam engine also shows so clearly how practical use can drive knowledge. The first steam engine was a whimsical flight of fancy by a gentleman scientist and was too inefficient to be of much use. But once they started being used to pump water out of mines, the efficiency improved in leaps and bounds. The physics explaining the theory of heat engines played catch up with the practical developments that were made by industrialists.