An innovator discovers a new idea and uses this private knowledge to earn extraordinary profits. Competitors eventually figure out what the innovator knows and the idea becomes public information. As the idea becomes public, the innovator’s profits fall to the ordinary level. The public uses the idea to increase productivity and wealth. Because economic innovation begins with private information, it is unpredictable before it occurs, and because it ends with public information, it is understandable afterwards. In this respect, innovation resembles biological mutation. These facts have consequences for law and policy to foster economic growth. To avoid corruption, state officials who invest public money should rely exclusively on public information. Officials who rely on public information, however, cannot predict which firms or industries will experience rapid growth. That would require private information. Consequently, public policies that promote growth by investing in particular industries or firms are unlikely to succeed. Responding to these facts, rich countries rely mostly on the private sector as the engine of growth. In rich countries the state supports growth indirectly by supplying legal and physical infrastructure. The best approach for rich countries is also best for poor countries. Unfortunately, some politicians and intellectuals regard poor countries as exceptions that require the state to direct the economy. In these circumstances, the state could accomplish more by attempting less.
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