Recently BBC Radio 4 the series Fifty Inventions That Shaped the Modern Economy finished. There were fifty inventions chosen by the economist Tim Harford and one from the listeners. Harford’s eight-minute, 1200-word audio essays have now been turned into a book. The book is full of fascinating nuggets of trivia and important economic insights. Here is my selection:
The media’s scramble for new business models is one obvious economic impact of Google search. But the invention of functional search technology has created value in many ways. A few years ago, consultants at McKinsey tried to list the most important. There are time savings. Studies suggest that googling is about three times as quick as finding information in a library, and that’s before you count the time spent travelling to the library. Likewise, finding a business online is about three times faster than using a traditional, printed directory such as the Yellow Pages. McKinsey put the productivity gains into the hundreds of billions.
American families spend more and more on eating outside the home—on fast food, restaurant meals, sandwiches, and snacks. In the 1960s, only a quarter of food spending was on food prepared and eaten outside the home; it’s been rising steadily since then, and in 2015 a landmark was reached: for the first time in their history, Americans spent more on food and drink consumed outside the home than on food and beverages purchased at grocery stores. In case you think Americans are unusual in that, the British passed that particular milestone more than a decade earlier.
The data are clear that the washing machine didn’t save a lot of time, because before the washing machine we didn’t wash clothes very often. When it took all day to wash and dry a few shirts, people would use replaceable collars and cuffs or dark outer layers to hide the grime on their clothes. But we cannot skip many meals in the way that we can skip the laundry. When it took two or three hours to prepare a meal, that was a job someone had to take the time to do. The washing machine didn’t save much time, and the ready meal did, because we were willing to stink, but we weren’t willing to starve.
The answer is that by giving women control over their fertility, the pill allowed them to invest in their careers. Before the pill was available, taking five years or more to qualify as a doctor or a lawyer did not look like a good use of time and money. To reap the benefits of those courses, a woman would need to be able to reliably delay becoming a mother until she was thirty at least—having a baby would derail her studies or delay her professional progress at a critical time. A sexually active woman who tried to become a doctor, dentist, or lawyer was doing the equivalent of building a factory in an earthquake zone: just one bit of bad luck and the expensive investment would be trashed.
Of course, women could have simply abstained from sex if they wanted to study for a professional career. But many women didn’t want to. And that decision wasn’t just about having fun; it was also about finding a husband. Before the pill, people married young. A woman who decided to abstain from sex while developing her career might try to find a husband at the age of thirty and find that, quite literally, all the good men had been taken.
The pill changed those dynamics. It meant that unmarried women could have sex with substantially less risk of an unwanted pregnancy. But it also changed the whole pattern of marriage. People—particularly people with college educations—started to marry later. Why hurry? Even women who didn’t use the pill found that they didn’t have to rush into marriage, either, because there would still be plenty of single men to marry a little later in life. The babies started to arrive later, and at a time that women chose for themselves. And that meant that women, at least, had time to establish professional careers.
In 2016, four economists presented research into a puzzling fact about the U.S. labour market: the economy was growing strongly, unemployment rates were low, and yet a surprisingly large number of able-bodied young men were either working part-time or not working at all. More puzzling still, while most studies of unemployment find that it makes people thoroughly miserable, against expectations the happiness of these young men was rising. The researchers concluded that the explanation was . . . well, they were living at home, sponging off their parents, and playing video games. These young men were deciding they didn’t want to be a Starbucks server. Being a starship captain was far more appealing.
Without air-conditioning, glass-fronted skyscrapers are not a sensible option: you’d bake on the upper floors. With air-conditioning, old workarounds become irrelevant and new building designs become possible.
Air-conditioning has changed demographics, too. Without it, it’s hard to imagine the rise of cities such as Houston, Phoenix, or Atlanta, as well as Dubai or Singapore. As new housing spread rapidly across America in the second half of the twentieth century, population boomed in the Sun Belt—the warmer south of the country, from Florida to California—from 28 percent of Americans to 40 percent. As retirees in particular moved from north to south, they also changed the nation’s political balance: the author Steven Johnson has plausibly argued that air-conditioning elected Ronald Reagan.
Reagan became president in 1980. Back then, America alone, with just five percent of the world’s population, used more than half the world’s air-conditioning. Emerging economies have since caught up quickly: China will soon become the global leader. The proportion of air-conditioned homes in Chinese cities jumped from under one-tenth to more than two-thirds in just ten years. In countries such as India, Brazil, and Indonesia, the market for air conditioners is expanding at double-digit rates. And there’s plenty more room for growth: from Manila to Kinshasa, eleven of the world’s thirty largest cities are in the tropics.
But over time it became apparent that the bar code was changing the tilt of the playing field in favour of a certain kind of retailer. For a small, family-run convenience store, the bar code scanner was an expensive solution to problems the store didn’t really have. But big-box supermarkets could spread the cost of the scanners across many more sales. Such stores value shorter lines at the checkout. They need to keep track of inventory. With a manual checkout, a shop assistant might charge a customer for a product, then slip the cash into her pocket without registering the sale. With a bar code and scanner system, such behaviour can be pretty conspicuous. And in the 1970s, a time of high inflation in America, bar codes let supermarkets change the price of products by sticking a new price tag on the shelf rather than on each item.
It’s hardly surprising that as the bar code spread across retailing in the 1970s and 1980s, big-box retailers also expanded. The scanner data underpinned customer databases and loyalty cards. By tracking and automating inventory, it made just-in-time deliveries more attractive and lowered the cost of having a wide variety of products. Shops in general, and supermarkets in particular, started to generalize—selling flowers, clothes, and electronic products. Running a huge, diversified, logistically complex operation was all so much easier in the world of the bar code.
Perhaps the ultimate expression of that fact came in 1988—when the discount department store Wal-Mart decided to start selling food. It is now the largest grocery chain in America—and by far the largest general retailer on the planet, about as large as its five closest rivals combined.8 Wal-Mart was an early adopter of the bar code and has continued to invest in cutting-edge computer-driven logistics and inventory management.
The cold chain
The cold chain is one of the pillars of the global trading system. As we’ve seen, the shipping container made long-distance commerce cheaper, quicker, and more predictable. The bar code helped huge, diverse retailers keep track of complex supply chains. The diesel engine made huge oceangoing ships amazingly efficient.
The cold chain took all these other inventions and extended their reach to perishables. Now meat, fruit, and vegetables were subject to the economic logic of global specialization and global trade. Yes, you can grow French beans in France—but perhaps you should fly them in from Uganda. Different growing conditions mean this kind of shipping can make both economic and environmental sense. One study found it was eco-friendlier to grow tomatoes in Spain and transport them to Sweden than it was to grow them in Sweden. Another claimed that raising a lamb in New Zealand and shipping it to England emits less greenhouse gas than raising a lamb in England.
The Billy bookcase
And that’s what seems to explain the enduring popularity of the Billy bookcase. “Simple, practical and timeless” is how Gillis Lundgren once described the designs he hoped to create; and the Billy is surprisingly well accepted by the type of people you might expect to be sniffy about mass-produced MDF. Sophie Donelson edits the interiors magazine House Beautiful. She told AdWeek the Billy is “unfussy” and “unfettered,” and “modern without trying too hard.”
Furniture designer Matthew Hilton praises an interesting quality of the Billy: anonymity. Interior design expert Mat Sanders agrees, declaring that IKEA is “a great place for basic you can really dress up to make feel high-end.” The Billy’s a bare-bones, functional bookshelf if that’s all you want from it, or it’s a blank canvas for creativity: on ikeahackers.net you’ll see it repurposed as everything from a wine rack to a room divider to a baby-changing station.
But business and supply-chain nerds don’t admire the Billy bookcase for its modernity or flexibility. They admire it—and IKEA in general—for relentlessly finding ways to cut costs and prices without reducing the quality of its products. That is why the Billy is a symbol of how innovation in the modern economy isn’t just about snazzy new technologies, but also boringly efficient systems. The Billy bookcase isn’t innovative in the way that the iPhone is innovative. The innovations are about working within the limits of production and logistics, finding tiny ways to shave more off the cost, all while producing something that looks inoffensive and does the job.
The modern form of intellectual property originated, like so many things, in fifteenth-century Venice. Venetian patents were explicitly designed to encourage innovation. They applied consistent rules: the inventor would automatically receive a patent if the invention was useful; the patent was temporary, but while it lasted it could be sold, transferred, or even inherited; the patent would be forfeited if it wasn’t used; and the patent would be invalidated if the invention proved to be closely based on some previous idea. These are all very modern ideas.
And they soon created very modern problems. During the British industrial revolution, for example, the great engineer James Watt figured out a better way to design a steam engine. He spent months developing a prototype, but then put even more effort into securing a patent. His influential business partner, Matthew Boulton, even got the patent extended by lobbying Parliament. Boulton and Watt used it to extract licensing fees and crush rivals—among them Jonathan Hornblower, who made a superior steam engine yet found himself ruined and imprisoned.
Ask yourself: What actually makes an iPhone an iPhone? It’s partly the cool design, the user interface, the attention to details in the way the software works and the hardware feels. But underneath the charming surface of the iPhone are some critical elements that made it, and all the other smartphones, possible.
The economist Mariana Mazzucato has made a list of twelve key technologies that make smartphones work. One: tiny microprocessors. Two: memory chips. Three: solid state hard drives. Four: liquid crystal displays. Five: lithium-based batteries. That’s the hardware.
Then there are the networks and the software.
Continuing the count: Six: fast-Fourier-transform algorithms. These are clever bits of math that make it possible to swiftly turn analogue signals such as sound, visible light and radio waves into digital signals that a computer can handle.
Seven—and you might have heard of this one: the Internet. A smartphone isn’t a smartphone without the Internet.
Eight: HTTP and HTML, the languages and protocols that turned the hard-to-use Internet into the easy-to-access World Wide Web. Nine: cellular networks. Otherwise your smartphone not only isn’t smart, it’s not even a phone. Ten: global positioning systems, or GPS. Eleven: the touchscreen. Twelve: Siri, the voice-activated artificial-intelligence agent.
All of these technologies are important components of what makes an iPhone, or any smartphone, work. Some of them are not just important but indispensable. But when Mariana Mazzucato assembled this list of technologies and reviewed their history, she found something striking. The foundational figure in the development of the iPhone wasn’t Steve Jobs. It was Uncle Sam. Every single one of these twelve key technologies was supported in significant ways by governments—often the American government.
The Knights Templar were warrior monks: they were a religious order, with a theologically inspired hierarchy, mission statement, and code of ethics. But they were also heavily armed and dedicated to a holy war. How did those guys get into the banking game?
The Templars dedicated themselves to the defence of Christian pilgrims to Jerusalem. In 1099, with the First Crusade, Jerusalem had been captured from the Fatimid Caliphate, and pilgrims began to stream in, travelling thousands of miles across Europe. And if you are a Christian pilgrim, you have a problem: you need to somehow fund months of food and transport and accommodation, yet you also want to avoid carrying huge sums around, because that makes you a target for robbers. Fortunately, the Templars had that covered. A pilgrim could deposit funds at Temple Church in London and withdraw them in Jerusalem. Instead of carrying a purse stuffed with money, he’d carry a letter of credit. The Knights Templar were the Western Union of the Crusades.
We don’t actually know how the Templars made this system work and protected themselves against fraud. Was there a secret code verifying the document and the identity of the traveller? We can only guess. But that wouldn’t be the only mystery to shroud the Templars, an organization sufficiently steeped in legend that Dan Brown set a scene of The Da Vinci Code in Temple Church.
…The Knights Templar did much more than transfer money across long distances. They provided a range of recognizably modern financial services. If you wanted to purchase a nice island off the west coast of France—as King Henry III of England did in the 1200s with Oléron, northwest of Bordeaux—the Templars could broker the deal. Henry paid £200 a year for five years to the Temple in London, and when his men took possession of Oléron, the Templars made sure that the island’s previous owner was paid. Oh, and the Crown Jewels of England, stored today at the Tower of London? In the 1200s, the Crown Jewels were stored at the Temple—security on a loan. That was the Templars operating as a very high-end pawnbroker.
The Knights Templar weren’t Europe’s bank forever, of course. The order lost its reason to exist after European Christians completely lost control of Jerusalem in 1244; the Templars were eventually disbanded in 1312.
Razors and blades
The model of cheap razors and expensive blades evolved only later, as Gillette’s patents expired and competitors got in on the act. Today two-part pricing is everywhere. Consider the PlayStation. Every time Sony sells one, it loses money: the retail price is less than it costs to manufacture and distribute. But that’s okay with Sony, because Sony coins it in whenever a PlayStation 4 owner buys a game. Or how about Nespresso? Nestlé makes its money not from the machine, but from the coffee pods.
For this model to work you need some way to prevent customers putting cheap, generic blades in your razor. One solution is legal: patent-protect your blades. But patents don’t last forever. Patents on coffee pods have started expiring, so brands like Nespresso now face competitors selling cheap, compatible alternatives. Some companies are looking for another kind of solution: technological. Just as other companies’ games don’t work on the PlayStation, some coffee companies have put chip readers in their machines to stop you from trying to brew a generic cup of joe.
Two-part pricing models work by imposing what economists call “switching costs.” Want to brew another brand’s coffee? Then buy another machine. Two-part pricing is especially prevalent with digital goods. If you have a huge library of games for your PlayStation or books for your Kindle, it’s no small thing to switch to another platform.
Switching costs don’t have to be just financial. They can come in the form of time or hassle. Say I’m already familiar with Photoshop; I might prefer to pay for an expensive upgrade than buy a cheaper alternative to it, which I would then have to learn how to use. That’s why software vendors offer free trials. It’s also why service providers (anything from your gym to your cable provider) offer special “teaser” rates to draw people in: when they quietly raise their prices or make the terms and conditions less attractive, many customers won’t bother to change.
The economist Gabriel Zucman came up with an ingenious way to estimate the wealth hidden in the offshore banking system. In theory, if you add up the assets and liabilities reported by every global financial centre, the books should balance—but they don’t. Each individual centre tends to report more liabilities than assets. Zucman crunched the numbers and found that globally, total liabilities were 8 percent higher than total assets. That suggests at least 8 percent of the world’s wealth is illegally unreported. Other methods have come up with even higher estimates.
The problem is particularly acute in developing countries. For example, Zucman finds that 30 percent of wealth in Africa is hidden offshore. He calculates an annual loss of $14 billion in tax revenue. That would build plenty of schools and hospitals.
Zucman’s solution is transparency: creating a global register of who owns what, to end banking secrecy and anonymity-preserving shell corporations and trusts. That might well help with tax evasion. But tax avoidance is a subtler and more complex problem.
To see why, imagine I own a bakery in Belgium, a dairy in Denmark, and a sandwich shop in Slovenia. I sell a cheese sandwich, making one euro of profit. On how much of that profit should I pay tax in Slovenia, where I sold the sandwich; or Denmark, where I made the cheese; or Belgium, where I baked the bread? There’s no obvious answer. As rising taxes met increasing globalization in the 1920s, the League of Nations devised protocols for handling such questions. They allow companies some leeway to choose where to book their profits. There’s a case for that, but it opened the door to some dubious accounting tricks. One widely reported example may be apocryphal, but it illustrates the logical extreme of these practices: A company in Trinidad apparently sold ballpoint pens to a sister company for $8,500 apiece. The result: more profit booked in low-tax Trinidad; less in higher-tax regimes elsewhere.
Most such tricks are less obvious, and consequently harder to quantify. Still, Zucman estimates that 55 percent of U.S.-based companies’ profits are routed through some unlikely-looking jurisdiction such as Luxembourg or Bermuda, costing the U.S. government $130 billion a year. Another estimate puts the losses to governments in developing countries at many times the amount they receive in foreign aid.
And what of the scientist who first put lead in gasoline? By all accounts, Thomas Midgley was a genial man; he may even have believed his own spin about the safety of a daily hand-wash in tetraethyl lead. But as an inventor, his inspirations seem to have been cursed. His second major contribution to civilization was the chlorofluorocarbon, or CFC. It improved refrigerators, but destroyed the ozone layer.
In middle age, afflicted by polio, Midgley applied his inventor’s mind to lifting his weakened body out of bed. He devised an ingenious system of pulleys and strings. One day they tangled around his neck and killed him.
Today, paper is increasingly made out of paper itself—often recycled, appropriately enough, in China. A cardboard box emerges from the paper mills of Ningbo, 130 miles south of Shanghai; it’s used to package a laptop computer; the box is shipped across the Pacific; the laptop is extracted, and the box is thrown into a recycling bin in Seattle. Then it’s shipped back to Ningbo, to be pulped and turned into another box. The process can be repeated six or seven times before the paper fibres themselves become weak and unusable.
When it comes to writing, though, some say paper’s days are numbered—that the computer will usher in the age of the “paperless office.” The trouble is, the paperless office has been predicted since Thomas Edison in the late nineteenth century. Remember those wax cylinders, the technology that ushered in recorded music and introduced an age of vast inequality of musicians’ incomes? Edison thought they’d be used to replace paper: office memos would be recorded on his wax cylinders instead. Even Thomas Edison wasn’t right about everything—and when it comes to the death of paper, many other prognosticators have been made to look like fools.
The idea of the paperless office really caught on as computers started to enter the workplace in the 1970s, and it was repeated in breathless futurologists’ reports for the next quarter of a century. Meanwhile, paper sales stubbornly continued to boom: yes, computers made it easy to distribute documents without paper, but computer printers made it equally easy for the recipients to put them on paper anyway. America’s copiers, fax machines, and printers continued to spew out enough sheets of ordinary office paper to cover the country every five years. After a while, the idea of the paperless office became less of a prediction and more of a punchline.
Perhaps habits are finally changing: In 2013, the world hit peak paper. Many of us may still prefer the feel of a book or a physical newspaper to swiping a screen, but the cost of digital distribution is now so much lower, we often go for the cheaper option. Finally, digital is doing to paper what paper did to parchment with the help of the Gutenberg press: outcompeting it, not on quality, but on price.
Paper may be on the decline, but it’s hard to imagine it disappearing any more than the wheel itself is likely to disappear. It will survive not just on the supermarket shelf or beside the lavatory, but in the office, too. Old technologies have a habit of enduring. We still use pencils and candles. The world still produces more bicycles than cars. Paper was never just a home for the beautiful typesetting of a Gutenberg Bible; it was everyday stuff. And for jottings, lists, and doodles, you still can’t beat the back of an envelope.
For governments, fiat money represents a temptation: a government with bills to pay can simply print more money. And when more money chases the same amount of goods and services, prices go up. The temptation quickly proved too great to resist. Within a few decades of its invention in the early eleventh century, the jiaozi was devalued and discredited, trading at just 10 percent of its face value.
Other countries have since suffered much worse. Weimar Germany and Zimbabwe are famous examples of economies collapsing into chaos as excessive money-printing rendered prices meaningless. In Hungary in 1946, prices trebled every day. Walk into a Budapest café back then, and it was better to pay for your coffee when you arrived, not when you left.
These rare but terrifying episodes have convinced some economic radicals that fiat money can never be stable: they yearn for a return to the days of the gold standard, when paper money could be redeemed for a little piece of precious metal. But mainstream economists generally now believe that pegging the money supply to gold is a terrible idea. Most regard low and predictable inflation as no problem at all—perhaps even a useful lubricant to economic activity because it guards against the possibility of deflation, which can be economically disastrous. And while we may not always be able to trust central bankers to print just the right amount of new money, it probably makes more sense than trusting miners to dig up just the right amount of new gold.
Then, in 1687, a coffeehouse opened on Tower Street, near the London docks. It was comfortable and spacious, and business boomed. Patrons enjoyed the fire; tea, coffee, and sherbet; and, of course, the gossip. There was a lot to gossip about: London had recently experienced the Great Plague, the Great Fire, the Dutch navy sailing up the Thames, and a revolution that had overthrown the king.
But above all, the regulars at this coffeehouse loved to gossip about ships: what was sailing from where, with what cargo—and whether it would arrive safely or not. And where there was gossip, there was an opportunity for a wager. The patrons loved to bet. They bet, for instance, on whether Admiral John Byng would be shot for his incompetence in a naval battle with the French (he was). The gentlemen of Lloyd’s would have had no qualms about taking my bet on my own life.
The proprietor saw that his customers were as thirsty for information to fuel their bets and gossip as they were for coffee, and so he began to assemble a network of informants and a newsletter full of information about foreign ports, tides, and the comings and goings of ships. His name was Edward Lloyd. His newsletter became known as Lloyd’s List. Lloyd’s coffeehouse hosted ship auctions, and gatherings of sea captains who would share stories. And if someone wished to insure a ship, that could be done, too: a contract would be drawn up, and the insurer would sign his name underneath—hence the term “underwriter.” It became hard to say quite where coffeehouse gambling ended and formal insurance began.
Naturally, underwriters congregated where they could be best informed, because they needed the finest possible grasp of the risks they were buying and selling. Eight decades after Lloyd had established his coffeehouse, a group of underwriters who hung out there formed the Society of Lloyd’s. Today, Lloyd’s of London is one of the most famous names in insurance.