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(The online version of this article appears in four parts. Click here to go to parts one, two, and four.)

Rule 6 No society that values order above all else will be creative; but without some degree of order creativity disappears.

CONSIDER China at the outset of the fifteenth century. Its curiosity, its instinct for exploration, and its drive to build had created all the technologies necessary to launch the Industrial Revolution -- something that would not actually occur for another 400 years. It had the blast furnace and piston bellows for making steel (the amount of pig iron that China produced annually in the late eleventh century would not be matched anywhere in the world for 700 years); gunpowder and the cannon for military conquest; the compass and the rudder for exploration; paper and movable type for printing; the iron plough, the horse collar, rotary threshing machines, and mechanical seeders to generate agricultural surpluses; the ability to drill for natural gas; and in mathematics the decimal system, negative numbers, and the concept of zero, which put the Chinese far ahead of the Europeans. Large Chinese armadas -- carrying as many as 28,000 men -- were exploring Africa's east coast at about the same time that Portugal and Spain were sending much smaller expeditions down the west coast of Africa. Seven major Chinese expeditions explored the Indian Ocean with ships four times as large as those of Columbus.

building wealth But the geographic conquests and the industrial revolution that were possible did not happen. The Chinese rejected and ultimately forgot the technologies that could have given them world dominance. New technologies were perceived as threats rather than opportunities. Innovation was forbidden. Imperial edicts prohibited the building of new oceangoing ships and sailing away from the Chinese coastline. By the end of the fifteenth century the demand for order had overridden intrinsic human curiosity, the desire to explore, and the drive to build.

Consider the opposite case of Russia in the seventy-five years before the Russian Revolution. Creativity flourished in the chaos of a dying empire. Think of all the great authors: Tolstoy, Dostoevski, Chekhov, Turgenev, Gogol -- the list goes on and on. Likewise in the world of music and the arts. Stravinsky, Tchaikovsky, Kandinsky, Kasimir, and many others are still played in our concert halls or admired in our museums. In science Russia was a leader. Wilhelm Ostwald was one of the first Nobel Prize winners in chemistry, for his work on the speed of chemical reactions. Ivan Pavlov, also a Nobel Prize winner, is perhaps the most famous physiologist ever. Dmitri Mendeleyev devised the periodic table of chemical elements. Markov chains -- named for the mathematician Andrei Markov -- have found a wide variety of applications in physics, biology, linguistics, and economics. Nikolai Lobachevski developed non-Euclidean geometry. Being skeptical and refusing to accept authority are the secrets of scientific advancement. Living in chaos, Russians could be skeptical. Compared with the dangers of political revolt against the Czar, the risks of scientific revolt against perceived wisdom were small.

Creativity flourished in the chaos, yes, but without some degree of order it was impossible for the Russians to use that creativity to develop a successful economy. Chaos led to more chaos, and ultimately to the Russian Revolution. Order was reimposed. Creativity died.

To advance and use knowledge a society needs the right combination of chaos and order. Too much order (China) does not work. Too much chaos (Russia) does not work. Although not as extreme, America and Japan are in many ways similar to Russia and China. America has more than enough chaos to be creative, but too little order to use its ideas in the most efficient ways. Japan has more than enough order to be efficient but too little chaos to be creative. Both could gain if each moved a little in the direction of the other. Successful societies create and manage a tension between order and chaos without letting either of them get out of hand. New ideas are easily frustrated if societies are not receptive to the chaos that comes from change, yet societies have to maintain an appropriate degree of order to take advantage of creative breakthroughs.

At the individual level these same forces show up as a tension between tradition and rebellion. Einstein dropped out of high school at the age of fifteen; renounced his citizenship a year later; lived on the margins socially, economically, and morally; and called himself a gypsy and was viewed as a bohemian. His life was in some sense a search for order in disorder, both scientifically and socially. Great creativity requires hard facts, wild imagination, and nonlogical jumps forward that are then proved to be right by working backward to known principles. Only the rebellious can do it.

Entrepreneurial and organizational skills, curiosity, the desire to explore, and the drive to build can be enhanced. Useful curiosity is a characteristic of individuals who have mastered the existing body of knowledge but are not paralyzed by it.

Rule 7 A successful knowledge-based economy requires large public investments in education, infrastructure, and
research and development.

IT is not just a matter of brilliant individuals and aggressive entrepreneurs. The new economic game is simultaneously a team game and an individual sport. Without the support of the team the individual fails. Without individual initiative the team fails. Both are necessary.

From the archives:

"The Morning After," by Peter G. Peterson (October, 1987)
America has let its infrastructure crumble, its foreign markets decline, its productivity dwindle, its savings evaporate, and its budget and borrowing burgeon. And now the day of reckoning is at hand.

Some countries are willing to invest in research and development; others are not. The right amount to invest is not obvious. The industrial world's four biggest economies spend very similar percentages of GDP on R&D: France and Germany spend 2.3 percent, Japan 2.8 percent, and the United States 2.5 percent. But the similarity derives more from a desire in each not to let the other three get ahead than from any proof that they are spending the right amount.

Most private American R&D, about four fifths, is done by big firms. Even among these big spenders, however, spending levels vary greatly: Boeing spends four percent of sales, Intel nine percent, Lucent 12 percent, and Microsoft 17 percent. Expenditure levels depend on the industry under consideration and on whether firms in that industry believe that the basic science is in place to make real progress in developing new goods or services. Virtually 100 percent of Intel's sales and profits come from products developed within the past three years, but only about 30 to 40 percent of IBM's profits come from recently developed products.

For countries or companies technological leadership is not the same thing as R&D spending. Europe spends its share on research, but if one looks at technological leadership, that spending does not seem to be paying off. To pay off, obviously, research has to be followed by the activities necessary to embed the newly developed technologies in the economy. Where America outclasses Europe is not so much in R&D spending on information technology, for example, as in investments in information hardware and software. As a fraction of GDP, U.S. investments were twice those of Germany or France in 1996. What has been learned isn't very different, but what is being done with the learning is quite different.

Private rates of return on R&D spending (the financial benefits that accrue to the firm doing the spending) average about 24 percent. But social rates of return on R&D spending (the economic benefits that accrue to the entire society) are about 66 percent (as computed by averaging eight different studies), with a range from 50 to 105 percent -- almost three times as high as private rates. Two out of three dollars in net benefits generated do not accrue to those paying for the R&D. This result, never contradicted in the economic literature, provides powerful evidence that there are huge positive social spillovers from research and development. Left to themselves, private firms will spend too little, because they cannot capture all the benefits that flow from their activities.

Because the government doesn't care exactly which Americans reap the benefits, it has a very important role to play in R&D. Rates of return on R&D spending are far above those found elsewhere in the economy. Government now pays for about 30 percent of total R&D, but with a 66 percent rate of return it should be spending much more. Americans as a whole are investing too little in R&D. Put simply, the payoff from social investment in basic research is as clear as anything is ever going to be in economics.

Private returns are apt to be much more certain if one is looking for an extension of existing knowledge rather than for a major breakthrough; thus private firms tend to concentrate their money on the developmental end of the R&D process. Time lags are also shorter, and in the business world speed is everything.

Because of this proclivity in the private sector, government should focus its spending on long-tailed projects for advancing basic knowledge. This is where private firms won't invest, but it is also precisely where the breakthroughs that generate private business opportunities are made. That is why biotechnology had to be supported by the government. Where it did not receive government support -- everywhere except the United States -- it did not develop. No private company would have made the investments that the National Institutes of Health did, even if the company had known that success was certain, because money went in for more than twenty-five years before any salable products came out.

Continued...

The online version of this article appears in four parts. Click here to go to parts one, two, and four.


Illustrations by Alison Seiffer.

Copyright © 1999 by The Atlantic Monthly Company. All rights reserved.
The Atlantic Monthly; June 1999; Building Wealth - 99.06 (Part Three); Volume 283, No. 6; page 57-69.