Any innovation policy must be centred on enabling entrepreneurial discovery by embracing economic freedom — lowering taxes, cutting spending, abolishing licensing, de-zoning. Only these reforms return the entrepreneur to their rightful place at the centre of innovation policy.
Today there’s a piece in the AFR penned by Alan Mitchell: Competition reform is a key test of Turnbull’s commitment to innovation (note there is also a piece by Wyatt Roy, I’ll touch on this at the end). The argument is that competition reform is key to innovation, citing a 2011 Productivity Commission and Australian Bureau of Statistics report linking competition with innovation. The logic flows like this:
The more competitors, the lower the mark-ups, the greater the competitive pressure to keep profit margins low, and being an exporter were all associated with increased innovation. Businesses innovate to gain a competitive advantage.
After citing the classic Ken Arrow and Dick Nelson market failure public goods investment argument, and noting that we should be seeking ‘more bang for the government’s buck’ (which is true), Mitchell finally gets closer to what innovation policy should look like:
… the more fundamental reform is to increase the demand for research and innovation by removing both the barriers to innovation and the protection of the uncompetitive industries.
Rather than an innovation policy based on spending and funding research, this is about aiding the process of entrepreneurial discovery by getting out of the way. But why? And how?
Innovation policy too often transforms into industry policy built on an industrial-linear model. Governments begin planning the development of the economy through their various interventions of R&D tax credits, public science, co-investment, and so on. The Arrow and Nelson market failure problem (of too little private investment in producing new ideas) is supposedly ameliorated by throwing money around. Governments also like to do this to nice shiny things (think: coding, solar panels, STEM).
This approach to innovation policy gets very expensive very quickly. Rent seekers line up at the door. Everyone tries to get their hand in the public purse by citing words such as ‘disruptive’, ‘agile’, and ‘digital’. And while most efforts to revitalise innovation policy (e.g. the recent hack-a-thon) start by citing ‘let’s not spend extra money’, the debates soon enough turn back on the government doing things, which almost always ends in them spending money.
But to look only at spending on innovation is to ignore what innovation is. Innovation is a process of market discovery. Entrepreneurs need to test and experiment with their conjectures under diverse conditions, free from the shackles of government regulation. True innovation policy, at its roots, is about fostering economic freedom because this enables entrepreneurs to discover. This approach to innovation policy—removing barriers, cutting taxes, de-zoning, and abolishing hand outs, for instance—is centred on enabling a market process of entrepreneurial discovery.
It is inevitable that innovation will create winners and losers. By definition, any disruptive technologies will leave some constituents worse off. Effective innovation policy looks past the upside (how the government spends on innovation to produce more new ideas) but on managing the transitions and losses that emerge on the downside (how the government enables transition from one period to the next). The smoother and freer this process, the more entrepreneurial discovery. Note that the friction in this downside process is predominantly government-granted — monopolies, industry production, occupational licensing, and so on.
A 21st century innovation policy is centred on entrepreneurial discovery. That discovery happens in permissionless free markets.
P.S. – In Wyatt Roy’s piece today he said:
We must embrace a new political environment where government has the freedom to try things. This also means, as the Prime Minister stated at the Economic and Social Outlook Conference, that if a policy is not working we’re unafraid to “chuck it out”.
It must be made clear that the point of ‘chucking things out’ is not to allow the government to try new things, but the entrepreneur to try new things. And, based on that criterion, it is very quickly obvious that most of innovation policy needs to be ‘chucked out’.