Hello everyone, welcome to Quark Says. I am Quark. In this episode, we will talk about this year's Nobel Prize in Economic Sciences and the explanations it offers for numerous economic phenomena, including those in China. Believe me, after watching this episode, especially the latter half of the discussion, some of your previously deeply held beliefs might be overturned. Without further ado, let's begin.

The 2025 Nobel Prize in Economic Sciences was awarded to three economists. For ease of memory, we will refer to these three as Old Qiao, Philip, and Peter. Old Qiao is one group, and Philip and Peter are another. Together, they researched a major and old problem that has puzzled humanity: why did the economy stagnate for most of human history, while after the Industrial Revolution, the world's GDP has continuously grown, and living standards have risen?

People before the Industrial Revolution wouldn't have asked such questions. The reason is simple: for thousands of years, human productivity, wealth accumulation, and per capita GDP were stagnant. In that era, the understanding of wealth was still a zero-sum game mentality. For example, in the first year of Xining in the Northern Song Dynasty, Wang Anshi and Sima Guang once debated in front of Emperor Shenzong. Wang Anshi believed that financial management was an urgent priority because the imperial treasury was tight, and he could achieve "the people are not enriched, but the state's expenditure is sufficient," meaning he could increase fiscal revenue without burdening the common people. On the other hand, Sima Guang said, "You are a great deceiver! The world's output is fixed; wealth is either with the people or with the officials. If the government has money, doesn't that mean tormenting the common people?" It should be said that in that era, Sima Guang's view was reasonable. The later failure of Wang Anshi's reforms, which caused widespread resentment, also indirectly confirmed this point. Today, we often talk about incremental thinking, but the premise of this incremental thinking is "growth"; if there is no growth and productivity remains at the same level, then it can indeed only be a zero-sum game.

Regarding the secret of wealth growth since the Industrial Revolution, many scholars have previously put forward different views, leading to various schools of thought. The three economists we are discussing today—Old Qiao, Philip, and Peter—also won their award by explaining this very problem. I will briefly introduce their work below.

Let's start with Old Qiao. He is an economic historian who, after studying massive economic data from England and Sweden between the 14th and 18th centuries, found that economic development in both countries was almost stagnant during these centuries. Although occasional small inventions emerged, the overall wealth of society largely remained static, with little change, until the Industrial Revolution in 1760, after which it advanced by leaps and bounds.

Here, I'll briefly add: what is the definition of wealth? The image shows the definition from Wikipedia, which I'll read out: wealth includes natural wealth, material wealth, and spiritual wealth. Here, we mainly discuss material wealth, which refers to all property or resources that have monetary value, exchange value, or economic utility, including currency, real estate, ownership, etc., and sometimes also includes the enjoyment of basic services like healthcare, and ownership of crops and livestock. You might have noticed that the total wealth of society is related to productivity. For example, if there are ten thousand acres of wasteland, and you cultivate it yourself, your family might only be able to cultivate ten acres, harvesting perhaps 4,000 kilograms of wheat per year, leaving the other nine thousand-plus acres fallow, right? But what if you use modern agricultural machinery? Perhaps two or three people could manage it, and the yield would be 1,000 times the original. Correspondingly, wouldn't the total wealth of society and your own total wealth be greater than before?

Similarly, because your average cost of producing grain has decreased, wouldn't the relative price of grain in the market become cheaper? For example, a hairdresser named Tony, whose daily wage used to buy 20 catties of rice, might now be able to buy 100 catties. Relatively speaking, hasn't his personal wealth also increased? Because for the same working hours, he can now buy more goods. This is the miracle of wealth growth that has occurred worldwide over the past 200 years.

According to Old Qiao, this extraordinary wealth growth stemmed from a change in the mode of innovation, transitioning from random trial-and-error to systematic advancement. To elaborate, Old Qiao first categorized knowledge into two types: one is propositional knowledge, which addresses "why" and "how things work," such as common physical laws and chemical-biological knowledge; the second type is prescriptive knowledge, which pertains to "how to do things," such as how a blacksmith forges iron or how to make paper. We can roughly understand the former as science and the latter as technology. Before the Industrial Revolution, these two were separate. More specifically, the former was underdeveloped; that is, people engaged in technical invention always existed, but systematic, abstract, and verifiable scientific theories had not yet developed.

The result was that inventors relied entirely on empirical guesswork and random trial-and-error, making it difficult to improve their creations and easy for them to be lost. For example, suppose you are exceptionally gifted and discover that steam pushes open a kettle lid when water boils, leading you to build a simple steam engine. If you then want to improve it, you face a problem: you need to understand some basic knowledge of mechanics and thermodynamics, knowing the mathematical relationships between temperature, pressure, and output power. But what if you live in an era without thermodynamics, without thermometers, or even before Newton's three laws of motion were discovered? That would mean you couldn't precisely calculate or define directions for improvement; you could only rely on experience, repeatedly trying and failing, much like blindly stumbling upon a dead mouse. At the same time, because you don't understand the underlying scientific principles, even if you succeed, you can't pass on this design idea to others. Once you die, or the original blueprints are lost, it would be very difficult for future generations to replicate your invention.

Before the Industrial Revolution, a large number of inventions in various countries, including China, were fleeting and eventually lost. The most important reason for this was the lack of theoretical knowledge. Because once there is a systematic theory and precise measuring tools, even if the original blueprints are lost, future generations, as long as they know the function and principle, will eventually be able to replicate or reinvent it, and continuously improve it generation after generation.

The above only covers the technological aspect. For an innovation to be realized, it also requires a complete supporting environment. Let's take Leonardo da Vinci as an example; as early as the 15th century, he had already drawn blueprints for airplanes and helicopters. Of course, at that time, aerodynamics had not yet emerged, but even if he understood aerodynamics and designed them, he still couldn't build an airplane. Why? Do you have suitable aerospace materials for modern aircraft? Do you have powerful enough aero-engines? Do you have fuel? Do you have rubber tires? None of these. You'll find that behind any of these components is actually a vast industrial production system, which cannot be built overnight. In addition, you might need investors, a mature and monetizable business model, and user acceptance of the product. Lacking any of these, your airplane cannot be made.

The above are just the hardware-related supporting environments; more importantly, there's the software environment. Imagine that you, living several centuries ago, suddenly had a remarkable invention, say, the telegraph. In the past, communication relied on post stations, where even a 600-li urgent message would take half a month, and carrier pigeons would still take several days. But with the telegraph, you send it, and the other side receives it instantly, a significant improvement in efficiency, right?

But does this mean you can get rich and reach the pinnacle of your life with this invention? It depends on the circumstances. If you live in a civilized and law-abiding society with mature patent laws protecting private property rights, and a mature financial system, investment and financing environment, and business atmosphere, then there's no problem. You can first register a patent, and with this patent, you can get a bank loan or seek venture capital. Since this is an exclusive business during the patent protection period, you can sue anyone who infringes, and many people will rush to lend or invest money in you. Then, with this money, you can establish your R&D department, set up production lines, improve yield rates, and hire a large sales force to promote your product. Initially, your telegraph machine might sell for a high price because the cost is high. But gradually, as you achieve mass production, the price will come down.

At the same time, your sales and market share will rapidly climb, and you'll be raking in profits. With this money, you can start developing new products, such as telephones or even video phones. But conversely, what if you live in a very poor society where none of the above conditions exist? What would happen? First, without patent protection laws, it means that once your product hits the market, someone can quickly copy it, so you can only act fast to capture the market before others react. At the same time, because the financial system is very backward, you can only borrow money from temples, and since you have no patent and no asset collateral, and you are not a government official, you are unlikely to get a loan.

Someone introduces you to a wealthy individual. After you present your invention, they refuse you without hesitation. They say, "Your invention is indeed good, but you have no connections. Suppose I invest money in you, and the product is made, can you handle government procurement? You must know how many people's interests this thing will affect and how many people it will put out of work once it hits the market. The relationships involved are complex; it would be good if they don't kill you."

Furthermore, even if society slowly accepts your invention, will that money end up in your pocket? The son of the Minister of Works has a business specializing in postal services. Believe it or not, the moment your telegraph hits the market, he can immediately poach your people and create a counterfeit product. Then, they can secure government procurement, have money to build factories, and wage a price war against you. You sell for 50 taels, they sell for 40. Finally, with a simple word from them, the yamen constables will come to your door, arbitrarily accuse you of tax evasion or similar crimes, and confiscation and exile would be getting off lightly. In the end, the wealthy individual didn't invest in you, but you were still unconvinced and managed to raise money from relatives and friends to start your company. As a result, after selling just five telegraph machines, you saw similar products on the market, sold by that wealthy individual and the Minister's son. You were furious and wanted to confront them, but as soon as you arrived at their doorstep, you saw a notice stating that after cabinet discussions, it was deemed that the telegraph was too dangerous, prone to leaking state secrets, and belonged to a major industry concerning national security and international livelihood. Effective immediately, the telegraph industry could only be state-owned, the Minister's son became the general manager of the newly established national telegraph company, and your factory was directly nationalized.

Understanding all of this, you realize that innovation is never merely the flash of genius from one or a few brilliant inventors; it relies on modern science, engineering, and a supportive legal, financial, and business environment. And behind all of this, ultimately, are institutions. The society you are in must be a relatively free and open environment.

That's roughly Old Qiao's main point, nothing too surprising, right? Don't rush, because the most exciting part of this year's economics prize is yet to come. I briefly mentioned the Austrian economist Joseph Schumpeter's theory of creative destruction in a previous episode when discussing Philip and Peter. Here, I can elaborate a bit more. Simply put, Schumpeter believed that the fundamental driving force for capitalism's continuous wealth creation lies in creative destruction. That is, entrepreneurs constantly innovate, developing better products and services. In this process, they disrupt existing balances, creating new and better things while destroying old and outdated ones. During the period they temporarily lead their competitors, they can obtain excess profits from their monopoly.

The theory of creative destruction was proposed in 1912 and caused a tremendous shock in academia at the time. A significant reason for this was that it fundamentally challenged the core tenets of Karl Marx. As we all know, the most central theory of Marxism is surplus value, which posits that capitalists gain without labor and make no contribution. Social wealth is 100% created by the labor of workers and is linked to working hours; the longer the working hours, the more wealth is created. Given that capitalists hardly labor, they essentially create no value, and the portion they take is surplus value extracted from exploiting workers. How terribly wrong this theory is, I won't elaborate here; perhaps in a future episode. In short, Marx believed that the sole source of wealth creation was the labor of workers.

Schumpeter, however, sang a different tune. According to Old Schumpeter's theory, the root of wealth creation, especially the explosive growth of total social wealth since the Industrial Revolution, lies not in the labor of workers but in the innovation of entrepreneurs. To illustrate, Marx believed capitalism was a juicer that developed by exploiting workers, while Schumpeter saw capitalism more as a magician constantly creating new things.

So, which of the two is closer to the truth? It's actually easy to judge. According to the research of Angus Maddison, a renowned economic historian from the University of Groningen in the Netherlands, over the past 200-plus years, from 1750 to the present, the total amount of wealth created by humanity annually has increased by about 300 times, while the population has only increased by about 10 times. This translates to an approximate 29-fold increase in per capita GDP. But surely, the average working hours of today's workers cannot be 29 times that of 1750, can they? On the contrary, modern people have an 8-hour workday, weekends, and various holidays, meaning working hours are only shorter than they were then. What does this indicate? It indicates that production efficiency has increased. And what is this increased production efficiency due to? It's due to inventions, innovations, and improved management methods, which, in the vast majority of cases, are invented by entrepreneurs, not by workers.

Some might argue, "Why do you claim that all inventions and creations are the credit of entrepreneurs? Don't the proletariat possess such intelligence and talent? This is arrogant slander." The reason is actually very simple: as we've demonstrated earlier, in a society that protects patents and private property rights and has a mature financial system, once someone comes up with a brilliant invention, even if they were originally a worker, they would very likely transform into an owner, shareholder, or company partner, rather than just a wage earner. This is because the market rewards and monetizes their contribution.

And under what circumstances do workers' inventions and innovations not get rewarded or recognized, leaving them with the same meager wages after inventing? In state-owned enterprises in socialist countries. Because they don't protect patents and private property rights, any invention or creation you make is considered a "collective contribution," with leadership providing effective guidance. In other words, within the framework of creative destruction theory, entrepreneurs are not parasites; on the contrary, they are the primary source of wealth creation. As for which theory, Marx's or Schumpeter's, is more accurate, I believe the reality of the past 200 years has largely answered that question.

Having discussed Schumpeter, let's now turn to Philip and Peter this year. They developed a mathematically measurable model for Schumpeter's theory of creative destruction. Simply put, Schumpeter's earlier view was that innovative destruction leads to prosperity and economic growth, but he didn't elaborate on how this process actually occurs. Because new inventions, such as the steam engine, also destroy the existing horse-carriage industry, leading to a large number of job losses, right? How do you prove that this increase and decrease result in a net positive gain? Although intuitively we know that trains replacing horse carriages and steamships replacing wooden boats should be a good thing, this process still needs to be clearly demonstrated.

What these two gentlemen did was complete this puzzle and clarify a long-standing problem that has bothered many: monopoly. It's worth noting that the original papers' argumentation process is very complex, involving differential equations, and listing it out verbatim would likely frustrate most viewers. Below, I've made some simplifications, trying to explain the process using mathematics no more advanced than junior high level, ensuring you grasp it instantly.

First, you can imagine the economy as a series of product lines, each producing different products. For example, one line makes mobile phones, another makes airplanes. Each product line then has a leading company with the industry's most advanced technology. Let's take the computer CPU sector as an example; there are two main players in the market: Intel and AMD. Intel is the leader with more advanced technology, while AMD is in a catching-up position. Suppose Intel's current best product quality is Q, and AMD wants to surpass Intel through innovative upgrades, creating a product with quality EQ. Here, E is greater than 1, say 1.5, meaning creating a CPU that is 50% better in quality than Intel's current best product. Once AMD achieves this goal, it amounts to an act of creative destruction.

The probability of AMD achieving this goal is what we call Z, also known as the disruption rate. For example, if Z equals 20%, it means there's a 20% chance within a year that it can surpass Intel and produce a product with quality EQ. So, what factors collectively determine this disruption rate? Philip and Peter provided the following formula: Z equals X multiplied by W, divided by Q. Here, X is the R&D expenditure, W is the R&D efficiency, and Q, as mentioned before, is product quality. This means that, given constant R&D expenditure and efficiency, the better Intel's current product quality, the lower the probability of surpassing it through disruptive innovation. Conversely, with other conditions being equal, the higher your R&D expenditure X, the higher the probability of surpassing it. It should be noted that this disruption rate Z does not necessarily come from a competitor; it can also be the company's own next-generation product.

Having understood the above concepts, let's look at how to calculate a company's value. The formula they provided is V=L/(R+Z). Here, V is the company's market capitalization, L is the company's net profit for the year, R is the current central bank's benchmark interest rate or the treasury bond interest rate. Z is still the disruption rate mentioned above. Students who took economics in college might know that when valuing a company, a formula sometimes used is V equals L divided by R. If you haven't taken it, it's simple. Suppose Intel's net profit this year is 10 billion USD, and the US treasury bond interest rate is 5%, then Intel's market capitalization would be 100 divided by 5%, which equals 200 billion USD.

The logic is as follows: suppose you have 200 billion USD and you invest all of it in US treasury bonds, then your annual interest income would be 10 billion USD. Intel's annual profit is also 10 billion USD. This suggests that Intel, as a company, is equivalent to 200 billion USD in deposits. However, you might have noticed that this calculation has a slight problem: the difference in risk. Typically, the risk of US treasury bonds is almost zero, meaning your interest income is very stable. But Intel is different; it belongs to a high-tech industry and could be replaced, or disrupted, by a competitor at any time. It might earn 10 billion this year and then incur losses or even go bankrupt next year. So, you also need to consider the risk factor. Thus, these two gentlemen adjusted the formula by adding a Z to the denominator. We assume Z equals 20%, meaning there's a one-fifth probability that Intel could be overturned by AMD within a year, losing its leading position.

Considering this factor, calculate again: V equals 10 billion divided by (5% plus 20%), which equals 40 billion USD, only one-fifth of the original. So you understand that if a company can be surpassed by competitors at any time, its valuation will be significantly discounted. Conversely, if a company holds a monopoly position, with Z close to 0, or if it is itself a leader in innovation, only it replaces others, and others find it difficult to replace it, like Tesla, there would be a different set of calculation methods, which I won't detail here.

The result is that, as an entrepreneur, to keep your company more valuable and prevent your wealth from shrinking, you must continuously increase R&D investment, ensuring as much as possible that you are the one who innovates and disrupts others, rather than competitors disrupting you. A classic example is the sudden rise of AI in recent years. Before OpenAI emerged, Google, Microsoft, and Meta were undisputed leaders, monopoly enterprises in their respective fields. Then, other GPT models burst onto the scene, nearly overturning these giants.

This is also why Apple, despite being so powerful, must continuously develop new products, ensuring that each generation of iPhone has a certain degree of performance improvement. Because if you stand still, users might turn to better Android phones, like Samsung. So, why does this process of disruptive innovation increase the total wealth of society?

I'll give two easy-to-understand examples. Take the Apple iPhone as an example: in 2007, the iPhone burst onto the scene and within a few years, it brought down the then-industry giants Nokia and Motorola. Everyone knows this. So, how did it do it? At that time, Nokia's flagship phone was priced around 550 USD. Then Apple launched the first-generation iPhone, and users immediately found its experience far superior to Nokia's, feeling like it belonged to a completely different era. Now, the question is, if you were transported back to that era and asked to choose, how much would you be willing to pay for this much better iPhone? Personally, I would accept a price two or three times higher than Nokia's, say 1500 USD. But what was its actual price? 499 USD, even cheaper than Nokia! As a consumer, wouldn't you feel it was an incredible value? Here, we introduce a concept called consumer surplus, which is the difference between the maximum price a consumer is willing to pay for a product and the actual price they pay. In layman's terms, it's the bargain you get when buying something. It can be used to measure the increase in happiness brought about by technological progress.

A similar situation might be even more evident in another case. Suppose you are an ancient scholar traveling to the capital for imperial examinations. By old methods, you would have to take a horse carriage, traveling for three months, costing 50 taels of silver for the entire journey. Now, someone invents something called a train, and you can reach the capital in just a few hours, not three months. How much would you be willing to pay for this ticket? You might find it worth 500 taels, because it's not only fast but also safe, avoiding highway bandits and such, and it's equivalent to extending your life—what couldn't you do with that half-year saved on travel, right? But in reality, a high-speed rail ticket costs only 5 taels, meaning you get a service hundreds of times faster than before for one-tenth of the original price. Doesn't that instantly fill you with a sense of happiness?

Some might argue, "I agree that technological progress brings an increase in happiness, but the total wealth hasn't changed; it's merely transferred from one person to another. For example, Apple made money, but didn't Nokia collapse? The train company rose, but the coachmen collectively lost their jobs. Although some new jobs like train drivers and attendants were created, the number of jobs lost must be greater than those gained, because in the horse carriage era, one coachman served one passenger, while a train attendant might serve 30 passengers, so jobs are clearly fewer. How do you prove that wealth is increasing?"

However, the above calculation is actually problematic; it's a static calculation. The reality is that technological progress leads to an increase in the overall efficiency of economic operations. For example, in the horse carriage era, due to excessively high travel costs, 95% of ordinary people might never have had the chance to leave home unless it was for a major event like traveling to the capital for imperial examinations. This resulted in a very small overall travel market and limited job opportunities. After the advent of trains, the barrier to travel was significantly lowered, and people no longer traveled only for examinations; they could also go on trips, visit relatives and friends, and move to other places. The average annual number of trips might have increased a thousandfold. In this situation, the number of jobs it provides might actually be much greater than before. This is actually easy to understand: just consider, before the advent of cars, short-distance travel within cities relied on sedan chairs, right? An official going to court required four sedan chair bearers. So, would you say there were more sedan chair bearers during the Qianlong era, or more taxi and ride-hailing drivers today?

Furthermore, the improvement in travel efficiency not only created jobs like attendants but also significantly increased the frequency of people movement. This movement of people brings about a large number of business opportunities, such as tourism, dining, accommodation, cross-regional trade, and business cooperation. These industrial chains naturally generate many job opportunities and economic growth.

This might still be abstract, so let me give a concrete example. Take Apple, for instance: each generation of iPhone is a little more expensive than the last. If the previous generation was 1000 USD, this generation sells for 1100, a 10% price increase, but performance might have improved by 30%. When you compare them overall, it's still a good deal, so you buy it. On the surface, it seems like each time you upgrade your phone, you spend more than before, seemingly at a loss. But don't forget, your consumption is someone else's income. The more you spend, the higher Apple's revenue and profit, and the higher Apple employees' incomes. These people will drive more consumption, and eventually, your income might also increase. As a result, you might find it easier to buy the next generation iPhone. Of course, during this process, society will experience a certain degree of inflation, but even after accounting for this factor, the economy is still growing, and your real income and sense of happiness are still increasing.

If you don't believe me, consider this: the original iPhone in 2007 sold for 500 USD, and now it's 1000 USD, roughly doubling in price. But over these nearly 20 years, how much has the iPhone's performance improved? How much has the average social wage increased? Isn't it easier to buy an iPhone now? Regarding the calculation of the economic growth rate, Philip and Peter developed a formula: G equals Z multiplied by the natural logarithm of E. Here, G is the annual economic growth rate, Z is the disruption rate mentioned earlier, and E is still the multiple of quality improvement discussed previously. We can plug in some numbers to calculate: suppose a country has Z equal to 10%, which you can understand as 10% of outdated capacity being replaced annually across society. E equals 1.3, meaning the average quality of products across society is 1.3 times that of the previous year. The natural logarithm of 1.3 is 0.262, multiplying by 10% gives 2.62%. This is the country's annual economic growth rate. From this formula, we can conclude that to increase the economic growth rate, G, the key lies in Z and E; that is, the higher the innovation disruption rate and the greater the magnitude of quality improvement each time, the faster the economic growth.

However, according to the previous formula Z=X*W/Q, which implies X=Z*Q/W. With R&D efficiency W and disruption rate Z constant, R&D investment X is directly proportional to product quality Q. This means the more advanced the technology, the higher the R&D funds required to reach the next level. For example, TSMC might need to invest 10 billion in R&D to upgrade from 7-nanometer to 5-nanometer process, but from 5-nanometer to 3-nanometer, it might require 30 billion. At the same time, we also know that a company's R&D investment is related to its profit; in most cases, you cannot maintain a profit of only 100 million while investing 10 billion in R&D—that's unhealthy, right? Therefore, to ensure continuous innovation and a sufficiently high Z, you must allow companies to maintain sufficiently high profits.

So how can companies achieve high profits? By maintaining a leading technological advantage, a monopoly. Do you see now? Philip and Peter's theory offers us a completely new perspective on corporate monopolies. In the past, we generally believed that monopolies were evil and harmful, which is why countries have successively introduced anti-monopoly laws.

But these two gentlemen tell us that this view might be wrong. What does that mean? Let's assume a company has no monopoly whatsoever and no technology superior to its peers; then it cannot earn profits above the industry average—in short, it doesn't make money. And not making money means it has no ability to increase R&D investment, making no contribution to overall social innovation.

This is why patent and copyright protection are so important. Imagine a pharmaceutical company that invests 10 billion over ten years to develop a drug that can treat heart disease. The moment it's released, other pharmaceutical companies counterfeit it, selling it for only one-tenth of your price. Some unscrupulous companies not only counterfeit but also mix the drug powder into traditional Chinese medicine, selling it at a high price and promoting it as "pure natural ancestral wisdom." If this continues, who would be willing to invest money in R&D? They could just copy it!

Conversely, if a company maintains a monopoly forever, that's also not good. Because if your position is completely unshakeable and you can make big money effortlessly, then you have no incentive to engage in R&D or innovation, and technology will stagnate. Therefore, the best scenario for a company is a moderate, phased monopoly under free competition. This means that each time you achieve disruptive innovation, society should, through institutional arrangements, guarantee that you enjoy this monopoly profit for a certain period.

With a certain level of profit, and fearing that competitors might surpass you, you will strive to invest in R&D, aiming to maintain your lead in the next phase and earn new monopoly profits. In this process, no single enterprise can maintain a monopoly indefinitely; disruptive innovation always exists, and technology continues to advance. This is also the driving force behind the exponential growth of human social wealth since the Industrial Revolution, which we discussed at the beginning.

Of course, the above refers to monopolies that emerge from free competition, such as Microsoft and Google. However, monopolies in non-free competitive environments, such as those maintained not by technological innovation but by public power or violence, prohibiting competitors from entering the industry—for example, PetroChina, Sinopec, China Tobacco, and even drug cartels in some countries—are very problematic. These essentially belong to the category of social scourges.