The Rational Optimist

Q4 | December 2021

Vector of light bulbs on green background.

Topic: Investments

John C.A. Stevenson, CFA

December 13, 2021

Image used with permission: iStock/Feodora Chiosea


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The Rational Optimist

Q4 | December 2021

This note takes its title from the 2010 book by Matt Ridley. The book was well-regarded internationally, but perhaps nowhere more admired than within the walls of Nexus. As we contemplated one more year of offering an annual client event virtually, we thought Matt Ridley might be the perfect person to present an entertaining and thought-provoking talk. Miraculously, we were able to convince him to do so.

For those who are not familiar with Ridley, he is the author of many books, including the aforementioned The Rational Optimist: How Prosperity Evolves (2010), How Innovation Works: And Why It Flourishes in Freedom (2020), and, most recently, Viral: The Search of the Origins of COVID-19 (2021). He is a true polymath in the renaissance tradition, being a Fellow of the Royal Society of Literature AND the British Academy of Medical Sciences. Also known as Viscount Ridley, he is a sitting member of the British House of Lords. In fact, he spoke to us from a conference room in Westminster and those who paid sharp attention may have heard a faint bell after which he had to vote on a motion from his phone.

Ridley’s message in all his writing is one of underlying optimism. The human race has an incredible capacity to innovate and improve the lives of mankind. Problems that were thought to be impossible to solve have been conquered time and again over the centuries. In the 1960s, predictions were widespread that the pace of population growth would overwhelm the ability to produce food. Sensible people predicted that famines were inevitable and hundreds of millions of people would die. Since then, the number of people dying from famines has plunged to levels that are a tiny fraction of what was experienced historically. Similarly, the number of people living in absolute poverty around the world has declined steadily over centuries, but this decline has accelerated since 1960. All of this is because of innovation. Innovation, in his view, is the most important phenomenon in the modern world.

In his book, and in his talk, Ridley distinguishes between invention and innovation. Twenty-one different people can lay claim to inventing the electric light bulb before Thomas Edison started to work on it. What Edison did was to innovate to make it commercially viable. He experimented with 6,000 different plant materials in order to make the filament last. Because of his dogged determination, his innovation is what led to the light bulb catching on.

Reflecting the dominance of the pandemic in our current lives, Ridley took us back to the origins of vaccines. Lady Mary Wortley travelled with her husband to Constantinople when he became British ambassador in 1716. At the time, the world was being ravaged by smallpox. Lady Mary witnessed a procedure called “inoculation” in which the pus from a smallpox survivor was mixed with a person’s blood and introduced to their body through an open cut. No one understood why it worked, but it seemed to have the effect of protecting a person from smallpox. Lady Mary was brave enough to try it successfully on her own children. Ultimately, she brought the procedure back to England and convinced the Prince of Wales to use it on his children in 1722. Current mRNA COVID vaccines can trace their origins back to this practice of inoculation. And we can thank Lady Mary for introducing this knowledge from the Eastern world to the Western world’s medical community.

As the title of the book suggests, a condition that is required to foster innovation is freedom – in particular, the freedom to experiment and pursue trial and error. An example of how innovation has been frustrated by this lack of freedom is in the realm of energy. In Ridley’s view, the answer to the challenge posed by climate change is well known: nuclear power. And there has been significant innovation in nuclear power. The monolithic nuclear plants we have at Bruce, Pickering and Darlington are ancient technology. Small modular reactors now exist that use a liquid salt made of a variety of elements. Thorium, for example, is more abundant than uranium and produces 100 times more energy for the same amount of fuel. It has the property that as the temperature rises, the reaction slows so a meltdown is impossible. There is dramatically less waste to dispose of, and weapons-grade material cannot be derived from the fuel used in small modular reactors. Yet the answer to our climate change problem sits largely on the drawing board because of government regulation and reluctance to support it. Believe it or not, a jurisdiction that seems to have the courage to pursue this compelling new technology is Ontario. Ontario Power Generation announced in the last couple of weeks that it would build a new small modular reactor at Darlington. That decision made Ridley smile.

In the question and answer session that followed his remarks, Devin Crago observed that, despite Ridley’s underlying optimism, there must be something that keeps him awake at night. What is it? Ridley responded that indeed there is: the disappearance of “enlightenment values”, and specifically, the willingness of people to engage in constructive discussion on important issues, to talk about alternative points of view, and to seek common ground with one another. Like many of us, he despairs over the polarization that exists with the current political discourse and he worries that people’s opinions seem to be getting more and more extreme. The world is not without challenges.

I think one of the reasons that Ridley’s writing resonates so strongly at Nexus is because his belief in the power of innovation to create a better future serves as powerful support to the idea of being a long-term investor. We’ve said repeatedly how it is impossible to see around corners – to predict the future. Without doubt, crises will arise. Nothing is perfect. But over time, the ingenuity of the human race means that good things will happen. Human beings are often seduced by someone predicting doom and gloom (e.g., famine, poverty…) because we instinctively think they must be trying to help us by pointing out the disasters ahead. In contrast, someone who has an optimistic outlook must either be naïve, or worse, duplicitous. Ridley’s thinking reinforces our view that it is rational to be optimistic.

We highly recommend Matt Ridley’s books and, particularly, the presentation he made to Nexus clients. I think it lived up to our very high expectations. Please contact any of us at Nexus to get a link to it on our website.

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