Some thoughts on innovation

Investing in the future

Few will need reminding that we are in a period of low measured productivity growth around much of the world outside of the US. In the UK and elsewhere, much of dynamism and inventiveness that characterised the period since the 18th century seem to have gone missing for much of this millennium.

In amongst the many biblical problems confronting our species at this moment, productivity may seem low down the list - a problem to worry about if we actually make it to tomorrow some of the doomers might argue.

There is some truth in this of course. War, plague, recession, inflation have bludgeoned many. However, productivity growth is not only central to our long-term futures, allowing the wondrous advances in global living standards of the last few hundred years to continue, it is also everything for long term investment returns.

The relationship between innovation and investment returns is often misunderstood. Some will simply look at certain types of companies as the beneficiaries, or perhaps the instigators of, innovation. The technology sector, and some of the sub sectors within, tends to be very popular here of course. Thematic baskets of stocks purporting to contain directly related exposure to Artificial Intelligence, Quantum computing or whatever else grabs the imagination, tend to sell well. ‘Thematic’ investments can help cut through in what tends to be a cluttered and noisy investments shop window - a very helpful trait in the context of time poor investors trying to grapple with a world often moated by inaccessible jargon.??

However, there are dangers here too. A close study of the innovation of the past and its key beneficiaries speaks of the need to cast your investment net wider than these thematic baskets often allow (if held in isolation). Below we explain why the diversification we spend so much energy on in our multi asset class funds and portfolios is not just about the defence, amply demonstrated so far this year, but also attack.

A short history of innovation

Our species has shown innovative urges for a lot longer than the last few hundred years. In the thousands of years since we dropped anchor and began to farm food, our species has continuously invented (and applied) new tools and methods to the various challenges we face. However, for most of that time, these inventions did not appear to sustainably change the lot of our species. Whether you look at human heights, life expectancies or even the price of light over the very long term (Nordhaus), very little changes for thousands of years until you get to the 18th and 19th centuries.

At around that point Europe, particularly its North-Western corner, happens upon a mix of institutional, cultural, and other factors, that ultimately start the engine of modern economic growth. Many countries and regions had grown before – China surged to a level of sophistication in the early Middle-ages that was the envy of all who saw (see Marco Polo/Franciscans). However, none managed to string together these bursts of growth into something eventually self-sustaining.

There are many theories as to why this is the case, we look at two potential inputs below.

Institutions

Essentially over the course of the pre-modern period, Europe began to more effectively shackle its rulers, developing restraints on executive leadership and ultimately installing the means of increasingly bloodlessly transferring power – the main tenets of liberal Democracy. The Glorious Revolution of 1688 in the UK is seen as the watershed moment when Parliamentary democracy takes hold, but the birth is likely more protracted.

The point here is that whether at country, company or even activity level, we need protection from the fallibility of the individual. As noted, lots of economies had managed brief spurts of productivity growth in the run up to Europe’s take off in the 18th and 19th century. However, these spurts generally died as entrenched interests grew and ultimately became blockers of the next technological change. Those who benefited from one technological leap forward gained sufficient political influence to make sure that they could preserve the now happy status quo – stagnation quickly returned. Over the pre-modern period Europe managed to hit upon a sufficiently supple institutional context that allowed for the chaos of repeated technological breakthroughs. [1]

Culture

Institutions and the increasingly plausible rules of the game were certainly important. However, another part is clearly us as individuals. Under certain conditions, lured by the right incentives, our capabilities collectively are pretty much limitless, certainly unknowable from our current vantage point. Invention is about people, not just certain colours, creeds, or brain-types. Innovation is necessarily much more inclusive than that.

One interesting strand of study linking culture to institutions centres on how the institution of marriage differed in Europe relative to everywhere else in the medieval period. Europeans today, as Joseph Henrich has argued, are psychologically distinct.[2] They are more individualistic, more trusting of strangers, less willing to bend to authority, and more eager to develop distinctive personal characteristics and achievements in the name of competition. One explanation for this psychological schism with the rest of the world comes from the behaviour of the early Catholic Church and its increasingly entangled enforcers, the Carolingian dynasty. Needing to break into a society organised around family, the bonds of which were continually reinforced through intermarriage, polygamy, and other such practices, the Church’s answer came in the form of very specific prescriptions around the institution of marriage. Banned from marrying cousins (up to sixth) and funnelled towards monogamy, European families took on a very different shape to the rest of the world, with far-reaching consequences.[3]

Opportunities for independent decision-making, both male and female, multiplied as young families were forced to set up home far from the nest. This left gaps in areas such as care for the elderly, where impersonal institutions began to step in to help. Interestingly, this perpetually reinforcing cultural and institutional European path, distinct from the rest of the world, becomes more visible with the arrival of the movable type printing press. In Europe, the arrival in the 15th century of the printing press sparked an information revolution. Literacy surged with book sales across Europe. Public dissent, disagreement, and debate followed. The resulting reformation further weakened the Catholic Church’s grip on power. Over time, rulers responded by falling into the arms of more commercial interests to prop up their leadership. In turn, those commercial interests demanded stiffer shackles on these same rulers as a price for their support, as well as the means of bloodlessly transferring power between rulers. So goes one version of events anyway.

The comparison with the rest of the world at this point is illustrative. China invented the moveable type printing press centuries earlier, a time when it understandably looked down on Europe as a savage little backwater. However, the effects were more muted. In contrast to Europe, which at the time was a collection of jostling states, endlessly at war, in the more tranquil middle kingdom, the printing press does not light the path to institutional change, the scientific revolution and beyond.

Some lessons for today…

There are several important aspects in here. The information revolution sparked by the printing press was often messy. There was cynicism, misinformation and more besides. However, the winding path led ultimately to the explosion in our collective knowledge base, which in turn laid the foundations for the miracle of modern economic growth.[4]

There is no agreed secret sauce behind this transformative moment for our species. Many academics hold many different views on what really mattered. However, the mix of agency and individuality, harnessed by a more flexible institutional context in Europe was surely an important part of it. A first wave of innovations was followed this time by hundreds of smaller related breakthroughs. Importantly, entrenched interests failed to accrue sufficient political power to preserve their status quo.

For what it’s worth, the expansion of the scientific knowledge base did not always move lockstep with the technological breakthroughs. Sometimes, the breakthrough came first with scientific understanding following. However, this rapidly growing pile of explanatory/propositional knowledge helped broaden the horizon of possibility for inventors. It may have been key to luring that second wave of tinkering and iteration described above.[5]

Some conclusions

Many contributors to this debate have often sailed dangerously close to ethnocentrism and its many darker variants. If certain cultural traits are instrumental in success, can we not say their absence or opposite elsewhere is a deficiency? However, the point of the above is to illustrate that certain cultures can fit certain paradigms. The winning cultural strategy in the transition to modern economic growth (and in some ways a key driver of that transition) was not a matter of design or intent. It was conceivably an accidental biproduct of the early Catholic Church’s expansion strategy.

This debate also may shed a different light on the in-motion information revolution of our times. The various social media algorithms have done as designed and foie gras’ed us with outrage. Many now suffer the very modern addiction to then spewing that bile, backed by misinformation and factoids, all over the world at each other.

We should obviously be wary of facile comparisons with the arrival of the printing press. The contexts into which these two information revolutions arrived are separated by over 500 years for a start. However, there is something in here about the ability to conduct public debate, as freely as civilised society permits. Freedom of expression and dissent played a clear role in Europe’s dramatic ascent to the top table. This still seems something to cherish, however unseemly some of the views you have to hear as a result. As the economic historian, Jack Goldstone observed, “Technological progress requires above all tolerance towards the unfamiliar and the eccentric.”

This may also call into question the long term growth prospects of some of those societies without some of the freedoms above. Many see this precise wrestle as key to understanding the re-election of President Trump.

In terms of practical investment advice, the message should be familiar. Innovation is not predictable (by design!). We cannot possibly know about the breakthroughs of the next decade and beyond from where we sit. Even if we could identify those breakthroughs, be they in Artificial Intelligence or something a little less sexy (shipping container, excel spreadsheet), we should be wary of confidently identifying (and investing in) the perceived beneficiaries. The winners from technological breakthroughs are often distant from the source. By concentrating exposures in one geography, sector or even sub sector, the real risk is that you miss the action elsewhere. Worse yet, we can find that the more popular or intuitive a theme, the more overloaded it becomes with investors looking to profit.

Our multi asset class funds and portfolios are painstakingly calibrated to not miss out on the next wave of breakthroughs. Part of this is always keeping a foot in some of the dustier corners of the world’s capital markets. Owning this meticulously designed and updated exposure to the world economy is tantamount to employing the world to work on your savings day and night. As described above, we see humanity as only beginning to touch its innovative capacity. Our collective knowledge is now growing faster than our ability to explain with theory thanks to the latest advances in Artificial Intelligence. Investing in a properly diversified multi asset class fund or portfolio represents a bet that innovation will certainly continue, tinged with a necessary humility as to the detail.

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*This article is for information purposes only. It is not intended as a product offer or investment advice