Is innovation at risk?

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“Will we ever invent something as important as this?”

The Great Innovation Debate

Here is another really interesting cover story from The Economist.  I find their editorial stance to be perplexingly schizophrenic.  They routinely support candidates and elected officials whose stance is for more government intervention.  And yet whenever it comes to discussing the need for entrepreneurship, economic growth, or innovation, government is the wrench in the works.  Here is a quote:

“So there are good reasons for thinking that the 21st century’s innovative juices will flow fast. But there are also reasons to watch out for impediments. The biggest danger is government.

When government was smaller, innovation was easier. Industrialists could introduce new processes or change a product’s design without a man from the ministry claiming some regulation had been broken. It is a good thing that these days pharmaceuticals are stringently tested and factory emissions controlled. But officialdom tends to write far more rules than are necessary for the public good; and thickets of red tape strangle innovation. Even many regulations designed to help innovation are not working well. The West’s intellectual-property system, for instance, is a mess, because it grants too many patents of dubious merit.

The state has also notably failed to open itself up to innovation. Productivity is mostly stagnant in the public sector. Unions have often managed to prevent governments even publishing the performance indicators which, elsewhere, have encouraged managers to innovate. There is vast scope for IT to boost productivity in health care and education, if only those sectors were more open to change.”

So — what do you think?  What should the government’s role be in encouraging innovation?  How can it best do this without “picking winners” (which government rarely does well; frankly – professional investors don’t do it all that well!)

7 thoughts on “Is innovation at risk?”

  1. I know that I am biased, but the more government can move out of innovation, the more streamlined it would be. Government does have a proper role, that being mostly of delineating and marking property both real and intellectual and of protecting the flow of information.
    To an extent, even the selection talks out of both sides of its mouth. “It is a good thing that these days pharmaceuticals are stringently tested and factory emissions controlled. But officialdom tends to write far more rules than are necessary for the public good; and thickets of red tape strangle innovation.” Who is to decide which rules are necessary, when one gives credence to the belief that “stringently test(ing)” drugs is acceptable? Why should it be the government’s role to ban medications, even if there are risks? The FDA allows some drugs through with very dangerous side effects but does not allow others. Surely, in some instances, it would be better to risk an FDA unapproved drug to treat an even worse illness. The government could still have a role in mandating information and guarding against fraud by testing and reviewing medicines, but accessing fines and banning products altogether may go too far.
    The conclusion of the article seems to continue the odd relationship between government and the market. It credits the innovations of the 70’s with government intervention and money, leaving an impression that the way to counteract too much government regulation would be to promote more government spending. It does not seem to logically follow that more money would come with fewer restrictions. The examples given of green foods and computers also barely, if at all, support the idea that “science, where there is no immediate economic gain” is the proper incubator of true innovation. Computers, in their initial capacity as room-sized monstrosities, would be of little use and have even less of an impact on popular society if not for the market forces pressing IBM and Microsoft.

    • What you describe – at least insofar as The Economist’s editorial posture is concerned – echoes what I have observed. There are publications that are unabashed advocates for government control of/participation in the marketplace. And then there are those that passionately espouse free market principles and argue – as you do – that the government’s role should be minimal. The Economist cannot seem to decide which posture it wants to adopt.

      • I concur with many of Adam’s comments. The more the government removes itself from trying to control the private markets, the better. I believe the government, specifically the courts and state and federal legislatures, should delineate the outer boundaries of the law. This is necessary in our society. The government should not, however, over-regulate. I think the most difficult issue is determining what too much regulation looks like. There is much debate surrounding this question. The level of the government’s intrusion into innovation should obviously vary with the type of innovation that is to be regulated. For example, I agree with the article in that “[i]t is a good thing that these days pharmaceuticals are stringently tested and factory emissions controlled.” Consumption of novel pharmaceuticals and factory emissions must be regulated to protect consumers and innocent bystanders. But to what extent must that regulation be? This is a difficult question. Furthermore, these regulations add increased hurdles to life science start-ups. These start-ups have enough hurdles with achieving financing, etc. In other areas of innovation, such as the computer and technology industries, the increased regulation that pharmaceutical companies face is not necessary.

        In sum, it is always difficult to determine where to draw the line. I believe the less government intrusion into the private sector, the better. Private Americans, not the government, are the pillars of America’s innovative spirit. The best thing the government can do is make it easier for entrepreneurs to innovate by way of decreased regulation.

  2. The Economist article dances around two separate justifications for government regulation: internalization of externalized costs and correction of the market’s under-investment in public goods. Both are common market failures in a capitalist society. See generally http://en.wikipedia.org/wiki/Market_failure.

    For example, the article briefly alludes to environmental regulations’ impact on growth. Environmental regulations are a classic example of internalizing costs that would otherwise not be borne by the innovator. But cost internalization regulations aren’t perfect. Such regulations will always increase transactions costs and may over-internalize. To the extent that government regulations do not address benefit-externalization (e.g. the development of technologies that will enter the intellectual public domain in the future), even government regulations that perfectly address externalities may be a net social loss if the costs internalized exceed private benefits but not private plus public benefits.

    The article also alludes to government investment in public goods. The market under-invests in public goods because it is difficult to capture the benefits associated with public goods. ARPANET, the predecessor to the modern internet, and GPS are examples of public goods that were unlikely to arise without a non-profit-seeking entity (such as the government) taking the investment lead.

    To measure the impact of government on entrepreneurship, we ought to be more nuanced about we mean by “government.” At the very least, we should distinguish between government regulation that seeks to internalize externalized costs and government investment in public goods. The Economist seems to take the position that government investment is a good thing but that government does a poor job of efficiently internalizing costs. Its tendency to endorse big-government presidential candidates (http://www.economist.com/blogs/democracyinamerica/2012/11/us-presidential-endorsements) probably reflects the bluntness of our political process. That is, the choice is typically between big government or small government, not between regulation-making government or investment-making government.

  3. One interesting issue in regards to the government picking winners and losers has been brought up during the debates around Dodd-Frank. This article actually shows why “Big Banks” who were mainly the target of Dodd-Frank would actually support the law because it will slow innovation of small community banks. This is the problem when too much government regulation occurs, it may make it harder for the smaller players to compete.

    http://www.americanbanker.com/dodd-frank/why-would-big-bank-leaders-support-dodd-frank-1055331-1.html

    • This is a view that is widely shared, I think — and a good launching point for the discussion of the essay from Rules for Growth this week. Is there a difference between funding the research, and funding the company(ies)? What is it? Why does it matter?