This report from the UK think tank IEA looks at how institutions can encourage rather than stifle innovation.
Innovation is a very important source of economic growth. It increases productivity and creates wealth by freeing up resources to be used for other activity and hence more output. Despite its economic importance, innovation is still not fully understood and is difficult to predict. In pre-modern societies, institutions and practices worked against innovation. Their main aim was to make life more predictable and stable and to minimise the effects of change, but they hindered or outright prevented the kind of sustained innovation that leads to escape from the Malthusian cage.
Innovation is the natural and inevitable result of trade and exchange. When people meet, they not only trade material goods but also exchange ideas and knowledge, which can then be combined in new and unexpected ways. The meeting of minds is not just a figure of speech, but an expression of how new ideas arise and are tested collectively. Technological innovation is a bottom-up phenomenon that emerges by trial and error among the ideas of ordinary people, not a deus ex machina that descends upon a few brilliant minds. It relies on dispersed knowledge which is not available to central planners. Picking winners is a mistake. Government attempts to champion new technologies have a long record of failure. Instead of trying to find a magic way to create innovation, governments should focus on removing things that stop it.
Big companies and state bureaucracies often attempt to stifle innovation in order to prevent competition and maintain their privileged positions. Intellectual property, occupational licensing and government favouritism are ways of keeping innovators out. Patents and copyrights have become ways of defending monopolies against disruption, hampering innovation that takes place through the copying and improvement of existing technology. They have created a class of rentiers who gain wealth and income not by innovation but through the monopoly they have been granted by the state. Intellectual property increasingly undermines real property rights in actual physical commodities by limiting the use their owners can make of them in all kinds of intrusive ways. While it is sensible to be concerned about the unintended consequences of innovation, the ‘precautionary principle’ is used by activists to prevent new technologies getting started, even when these are demonstrably safer and better than existing technologies. Both action and inaction create some risk.
Standing in the way of an innovation that might do good can cause real harm. EU regulation has hampered innovation by introducing excessive precaution, legal uncertainty, inconsistency with other regulations, technology prescriptive rules, burdensome packaging requirements and high compliance costs. Post-Brexit, the UK government could decide to adopt the ‘innovation principle’ to balance the precautionary principle. In essence, this means re-thinking policies if evidence is found that they are going to impede innovation. The harmonisation of regulation through ‘trade deals’ and by transnational regimes such as the EU threatens to undermine innovation by stifling policy competition. The incentives for ruling elites to check innovation are extremely powerful if they no longer need to fear competition in the way that rulers of smaller states do. The current trend to create a global regulatory order threatens to stop innovation in its tracks.Read Full Report