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As the United States gets ready to celebrate its 250th birthday, one of the more interesting areas
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to look at is how this country has developed in and around innovation. Certainly we know that the
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country has had untold numbers of innovators over the years, but as our next guest recently said in
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an article in Fortune, it's not just about innovating technologies, it's the fact that
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we're able to reinvent how innovation works. Pleasure to be joined here by Work Management
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Professor David Hsu. David, great to talk to you again. How are you, sir? Good, thank you, Dan.
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And you start off your article by talking about the fact that it's not always about
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the technology, but about the institution to commercialize the technology. They're not out
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there, they're not going to be out there, it's just an amazing push forward that we've been seeing
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over 250 years. Absolutely. I think there's a very natural tendency to celebrate inventors,
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and that's terrific over 250 years. We think about great names like Ben Franklin, Thomas Edison,
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Alexander Graham Bell, today's AI entrepreneurs. Obviously they deserve enormous credit,
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but if you actually look at the whole history, this other parallel story emerges, which is that
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America's greatest innovation may actually be more institutional innovation. That is,
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we repeatedly invent better ways to transform discoveries into industries, and those examples
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come up time and again. Patent system, the research university, how to organize corporate research,
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the whole notion of venture capital, and today's startup ecosystem. So these are all
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social inventions, they create the conditions that allow scientific breakthroughs to really
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spread and be useful throughout the economy. So my point is that the lesson of American history
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isn't simply that we are great at inventing technologies, which we are, but it's that we're
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also great at repeatedly reinventing the machinery of how to bring those inventions to market.
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Is this then an historical pattern that has occurred over the years where, as you alluded to with Alexander Graham Bell, it was kind of fostered a little bit back in those
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days, but as we have moved forward, history has allowed us to kind of open these doors as we move
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forward? Yeah, that's absolutely right, and I'd love to start with the example of Alexander Graham
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Bell, because it was in Philadelphia in 1876, so 150 years ago, there was a Philadelphia
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Centennial Exposition in which he introduced the telephone. Everyone was amazed, but then it became
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very obvious, a single telephone has almost no value, you really got to have it in the hands
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of millions of people to really make those connections and realize the value. And so
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the invention was important, but the system of bringing that invention to the market by forming
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the Bell Telephone Company, about adopting a leasing model rather than just simply selling
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the telephones, that there's repeated points of contact with the customers and upgrading the
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quality of the phones, securing the patents, getting the investment, making partners with
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the manufacturing company, in this case it was Western Electric. And then there's legal disputes
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in the early days with Western Union and telegraphy, and really just laying the infrastructure for those kind of thousands of miles of communication infrastructure,
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that goes way beyond just the simple invention of the telephone, that really to unlock the value,
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you need this whole system of commercialization, and that really illustrates well the kind of
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phenomenon I'm talking about. So as we see more and more companies and corporations develop over
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the years, you talk about the component of research and development, R&D, playing this next
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step kind of in the process, correct? Yeah, so if you think about R&D, now we can step forward
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into the early 20th century, and if you look at companies like Bell Labs or General Electric or DuPont, that was the era in which we faced a very different
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challenge than just the single entrepreneur. We began to develop these complex organizations
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and really thinking about just instead of just the flash or genius of one inventor,
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you really now wanted to go through and think about systematizing these inventions. And so
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Bell Labs is a great example because it brought together lots of different specialists, physicists,
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chemists, mathematicians, and the breakthroughs coming out of that lab was incredible.
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So just to name a few, the transistor, Claude Shannon's information theory, which actually
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Claude Code, a lot of people don't realize that Anthropics Claude is actually named after the
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father of information theory, Claude Shannon, who himself was an important person in Bell Labs.
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The laser, C programming language, lots of these technologies came out of Bell Labs. So really
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the greatest invention out of Bell Labs is really this whole organizational structure of assembling
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the lab itself, which is quite important in R&D. How then did the moving forward,
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the venture capital component end up factoring in how a lot of this innovation and development
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was occurring? So that's actually another really important innovation because it transitioned the
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era from big corporate invention to then democratizing it down to individual entrepreneurs.
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And that's what we celebrate today. And so the birth of venture capital institution
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really helped solve another bottleneck after the end of World War II. And because what these
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entrepreneurs really lacked was financing, mentors, industry connections. And so the,
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if you could really trace the birth of Silicon Valley and venture capital institution to some of
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the issues that were coming out of not only Silicon Valley, but also of the Boston area
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in trying to convert great inventions to become organizations that can, again, commercialize by
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not just adding money, but also all the value added components that are necessary to bring
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great ideas to markets, recruiting executives, connecting founders with customers,
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helping shape strategy, preparing companies to scale. All that is just another example of another
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chapter in which America reinvented itself for the challenge of the time, which was this
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financing of entrepreneurial type of problem. But you also had to have the regulatory process as
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part of this to make sure that as all of this development was occurring, we were still adhering to guidelines as we move forward, correct?
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Yeah. Regulation is a really important backdrop to this and actually gets to the,
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you know, the question of how do we govern good institutions? So we certainly need things like
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patent law. We need to get the right incentives so that inventors can feel confident in disclosing
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their ideas, having protection. Obviously, financial markets need investors to have
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confidence in order to finance very risky ventures. We need corporate law to be established
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so that we can build and grow new firms. Good rules really reduce uncertainty without eliminating
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experimentation. And so I think the upshot here is that throughout American history,
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institutional design supported by a regulatory, a stable regulatory structure really just allows
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us to unlock that technological ingenuity and bring to fruition all the pieces of the ecosystem
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we need to fully realize the value of these inventions. So now in the landscape of AI,
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how does the development and the use of that technology factor into this last 250 years of
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history and development that we've seen play out in terms of leading us into the next, I guess,
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250 years? Yeah, and I think this is an incredibly important point because so much of the media and
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attention is around the technical specifications of AI models and the companies are constantly
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pitting themselves on the technical specifications. And I'm not talking just about American companies,
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but if you look at the broader global picture, it's US versus Chinese technical models.
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But if we can learn the history here of reinventing institutions, I think we have to
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worry even more about the institutional structure, the guardrails, the complementary skills in our
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workforce, how people will use and misuse these technologies so that we can earn the public trust
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and feel confident about using this technology for the societal good. And so I think the lesson
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for me on AI is that we need to think hard about building great institutions to really enable this
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breakthrough technology to diffuse and diffuse in a way that's productive. And just because
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we've been able to solve that in prior eras with the R&D lab, with venture capital, etc.,
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we can't take for given that we'll automatically solve it. And so I'd love to see a lot more
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discourse about some of these more institutional structures rather than just focusing on how big
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are our models in AI, etc., etc. David, great to talk to you. Thanks for your time and your insight. All the best.
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Thank you so much. You got it. Wharton Management Professor David Su.