When Joseph Stalin became Secretary General of the Communist Party of the Soviet Union in 1924, he got to work implementing his centrally-planned economy. The first of his so-called five-year plans largely ignored science, but his second did not. The second five-year plan directed the Soviet Union’s top scientists to study biological evolution and determine how the principles of evolution could help promote agriculture and industry.
The unusual thing about Stalin’s directive is that it didn’t result in any scientific breakthroughs. Not one.
Meanwhile, those five years were rich in scientific achievement outside of the Soviet Union. James Chadwick discovered the neutron (1932), Carl Anderson discovered the positron (1932), Edwin Armstrong invented FM radio (1933), James Gamble discovered the importance of electrolytes in human health (1933), Norman Haworth successfully synthesized Vitamin C (1934), Earnest Lawrence patented the cyclotron (1934), Wallace Carothers invented nylon (1935), and Alan Turning invented the first computer (1936).
Innovation is a critical source of business value in practically every industry we study. Understanding innovation and why it occurs makes us better investors.
Stalin was unable to inspire innovation. Why? Innovation, in fact, curiously flourishes alongside freedom and personal liberties while stagnating or disappearing in the absence of freedom and personal liberties. Why is that?
When we build a house, we first hire an architect to make plans. We pass the plans on to a contractor. The contractor builds the house according to the plans. This is a top-down process. If the contractor is a good one, he or she builds the house exactly according to the plans.
That process works because the contractor has experience building houses. The architectural plan is a bridge between the desires of the owner on one hand and the known process of building houses on the other. If the owner wants five bedrooms and a big kitchen, the contractor knows exactly how to deliver. He has done it before.
Innovation is different. Innovation involves going somewhere new, somewhere that no one has gone before. The pathway to building a big kitchen is known. The pathway to innovation is both unknown and unknowable.
When Percy Spenser noticed that a chocolate bar melted in his pocket as he was hard at work perfecting his radar system for World War II, he took note and eventually discovered the microwave oven. How could anyone direct that from above? Alexander Fleming returned from vacation to find mold growing on his petri dishes. He went on to discover penicillin. No one can put that into a five-year plan and somehow make it happen, not even Stalin.
Therein lies one problem with directing innovation from the top. Innovation requires the unexpected outcome and unexpected outcomes are, well, unexpected. They aren’t planned. They just happen.
As much as Stalin wanted to advance the understanding of biological evolution, he couldn’t just snap his fingers and create an unexpected outcome in the field of his choice. It just doesn’t work that way.
There is a much more sinister and cancerous element of directing innovation from the top than the inability to plan for the unexpected outcome. Besides the unexpected outcome, innovation requires both a curious person to observe the unexpected outcome and an environment that allows the curious person to pursue the circumstances surrounding the unexpected event. A curious person asks how and why when they see an unexpected event. The environment then gives them the time and resources to answer the how and why.
Those, then, are the three conditions precedent for innovation: an unexpected outcome, a curious person, and an enabling environment. If one of those three conditions is absent, no innovation occurs. If two of those conditions are widely available and the third is chronically absent, that third chronically absent condition is the controlling factor for innovation. That third condition is the innovation switch. Flip it on, innovation occurs. Flip it off, innovation disappears.
Of the three conditions precedent for innovation, we believe unexpected outcomes and curious people occur in all geographies and all political regimes. The condition that is chronically missing is the enabling environment. The enabling environment is the switch that flips innovation on. That switch is the link between innovation and personal liberties.
When Stalin directed his top scientists to study biological evolution, he robbed them of their ability to pursue the unexpected outcome. By narrowing the scope of scientific activity, he prevented scientists and innovators from pursuing all those unexpected outcomes that had applications outside of that narrowly-defined scope. If the government somehow forbid Percy Spenser from working on anything but his radar, he wouldn’t have discovered the microwave oven. It is that simple.
Innovation, it turns out, cannot be directed from the top. Any attempt to do so turns off the innovation switch by preventing innovators from pursuing unexpected outcomes outside of the scope of the directive.
As we try to anticipate innovation, one thing we look for is an enabling environment that allows curious people to pursue their curiosities. Rarely if ever do innovative companies direct innovation from the top. As a rule with few exceptions, innovative companies let innovation bubble up from the from the bottom.
