The new Protection and Utilisation of Publicly Funded Intellectual Property Bill, which is to be reintroduced in the monsoon session of Parliament, proposes to split the royalty from publicly funded research among the researchers, the institution and the government. This is a welcome step since economic research highlights that innovation and entrepreneurship are the ultimate drivers of economic growth in a country. And this Bill would be useful in spurring researchers to undertake more mould-breaking research by providing them the necessary incentives.
To recognise that economic growth through innovation dwarfs all other economic policy concerns for a nation, consider this apocryphal story. Say an investment banker asks to be paid by placing one paisa on the first square of a chessboard, two paise on the second square, four on the third, eight on the fourth, etc. If his employer had bargained that only the white squares be used, even then the initial penny would have doubled in value 31 times, leaving Rs 2.15 crore on the last square to the investment banker. If the employer had agreed to using both the black and the white squares, then our lucky banker would have seen the one paisa grow to Rs 9.2 billion crore!
This example is intended to illustrate the point that while people are reasonably good at forming estimates based on addition, for operations such as compounding that depend on repeated multiplication, most of us systematically underestimate how quickly things can grow. As a result, we often lose sight of how important the average rate of growth is for an economy. For an investment banker, the choice between a payment that doubles with every square on the chessboard and one that doubles with every other square is more important than any other part of the contract. Who cares whether the payment is in paisa, pennies, pounds or pesos? Similarly, whether he pays a 25% tax on income or a 30% tax is really a second-order issue compared to whether his income doubles every five years or every 10 years. For a nation, the choices that determine whether income doubles with every generation, or instead with every other generation, dwarf all other economic policy concerns.
You can figure out how long it takes for something to double by dividing the number 72 by the growth rate. In the 25 years between 1950 and 1975, income per capita in India grew at the rate of 1.8% per annum. If we had continued growing at this ?Hindu rate of growth?, the income of an average Indian would have doubled every 40 years because 72 divided by 1.8 equals 40. In contrast, in the 15-year period from 1990-2005, our income per capita has grown by 4.2% annually. If we continue growing at this rate of growth, the income of an average Indian would double every 17 years because 72 divided by 4.2 equals 17. Thus, by growing at 4.2%, by 2005, we had almost doubled our income from 1990 levels.
Even though we have grown much faster over the last two decades, we still have considerable catching up to do vis-?-vis China. In the 25 years between 1975 and 2000, income per capita in China grew at almost 6% per year. At this rate, income in China doubles every 12 years. These differences in the time taken to double average income have huge effects for a nation, just as they do for our banker. If we had not unshackled our economy in the 1990s from the limits of licence permit raj and continued at our earlier rate of growth, in the same 40-year time span that it would have taken us to double our income, income would have doubled thrice, to eight times its initial level, at China?s faster growth rate.
Economic growth occurs whenever people take resources and rearrange them in ways that are more valuable. A useful metaphor for production in an economy comes from the kitchen. To create valuable final products, we mix inexpensive ingredients together according to a recipe. The cooking one can do is limited by the supply of ingredients and most cooking in the economy produces some undesirable side effects. If economic growth could be achieved only by doing more and more of the same kind of cooking, we would eventually run out of raw materials and suffer from unacceptable levels of pollution and nuisance. Human history teaches us, however, that economic growth springs from better recipes, not just from more cooking. New recipes generally produce fewer unpleasant side effects and generate more economic value per unit of raw material.
Take one small example. In most coffee shops, you can now use the same size lid for small, medium and large cups of coffee. That wasn?t true as recently as 1995. That small change in the geometry of the cups means that a coffee shop can serve customers at lower cost. Store owners need to manage the inventory for only one type of lid. Employees can replenish supplies more quickly throughout the day. Customers can get their coffee just a bit faster. Such big discoveries as the transistor, antibiotics and the electric motor attract most of the attention, but it takes millions of little discoveries like the new design for the cup and lid to double average income in a nation.
Every generation has perceived the limits to growth that finite resources and undesirable side effects would pose if no new recipes or ideas were discovered. And every generation has underestimated the potential for finding new recipes and ideas. We consistently fail to grasp how many ideas remain to be discovered. The difficulty is the same one we have with compounding: possibilities do not merely add up, they multiply.
In a branch of physical chemistry known as exploratory synthesis, chemists try mixing selected elements together at different temperatures and pressures to see what comes out. More than a decade back, one of the hundreds of compounds discovered this way?a mixture of copper, yttrium, barium and oxygen?was found to be a superconductor at temperatures far higher than anyone had previously thought possible. This discovery has far-reaching implications for the storage and transmission of electrical energy.
To get some sense of how much scope there is for more such discoveries, we can calculate as follows. Recall the periodic table that one learnt in high school chemistry. The periodic table contains about a hundred different types of elements, which means that the number of combinations made up of four different elements is about 100 ? 99 ? 98 ? 97 = 94,000,000. A list of numbers like 6, 2, 1, 7 can represent the proportions for using the four elements in a recipe. To keep things simple, assume that the numbers in the list must lie between one and 10, that no fractions are allowed, and that the smallest number must always be one. Then there are about 3,500 different sets of proportions for each choice of four elements, and 3,500 ? 94,000,000 (or 330 billion) different recipes in total. If laboratories around the world evaluated 1,000 recipes each day, it would take nearly a million years to go through them all. In fact, the previous calculation vastly underestimates the amount of exploration that remains to be done because mixtures can be made of more than four elements, fractional proportions can be selected and a wide variety of pressures and temperatures can be used during mixing. Even after correcting for these additional factors, this kind of calculation only begins to suggest the range of possibilities. Instead of just mixing elements together in a disorganised fashion, we can use chemical reactions to combine elements such as hydrogen and carbon into ordered structures like polymers or proteins. To see how far this kind of a process can take us, imagine the ideal chemical refinery. It would convert abundant, renewable resources into a product that humans value. It would be smaller than a car, mobile so that it could search out its own inputs, capable of maintaining the temperature necessary for its reactions within narrow bounds and able to automatically heal most systemic failures. It would build replicas of itself for use after it wears out and it would do all of this with little human supervision. All we would have to do is get it to stay still periodically so that we could hook up some pipes and drain off the final product.
This refinery already exists. It is the cow that is so revered by Hindus, also called Kamadhenu?or the granter of desires. If nature can produce this structured collection of hydrogen, carbon and miscellaneous other elements by meandering along one particular evolutionary path of trial and error (albeit one that took hundreds of millions of years), there must be an unimaginably large number of valuable structures and recipes for combining atoms that we have yet to discover.
(To be concluded)
The author is assistant professor of finance at Emory University, Atlanta, and a visiting scholar at ISB, Hyderabad
