Fernando Fischmann

Innovation hurts. Governments make two mistakes trying to ease the pain

20 April, 2015 / Articles

Niels Bohr, the Danish physicist who made a major contribution to quantum theory, said “prediction is hard, especially if it is about the future”. However, the intergenerational report gives us sufficient predictability about Australia’s future to warrant an honest and broad ranging debate about our biggest opportunities and challenges, and how we address them.

Analysis Ignore the intergenerational report scaremongering – the news is good
A few tweaks are needed, yes, but the report shows there is no urgency for budget settings to change dramatically in the near term

It tells us that by 2050 our workforce will be diminished and older. While we should celebrate this, we must face the economic burden that this will place on younger Australians. As time goes by, each employed Australian will need to support far more people than ever before.

The report also tells us that if government spending growth continues at the current rate, it will take us over a cliff in terms of debt and taxes. We are also told that that the world is changing dramatically – especially as the Asian middle class continues to grow and global competition becomes more intense – and that this will continue.

While all this is happening, we know already that in Western economies there are monstrous challenges in delivering the growth in incomes we have seen in past decades.

This is the fundamental framework we must address. And we should respond to it by innovating, not just through working harder.

As a postgraduate economist at Oxford I was fascinated by growth theory. It tells us that innovation-driven growth is more important than growth driven by blood, sweat and tears. It’s the most important dynamic in human history, as it is highly cumulative. Today’s scientists and inventors stand on the shoulders of giants, as innovation today builds on the innovations of yesterday.

But we can’t see innovation as a kind of manna from heaven. The Austrian economist Joseph Schumpeter described the innovation process as one of “creative destruction” – new industries and skills replace old industries and skills. Steamships replaced sailing ships. Cars replaced horses. The internet is reshaping media, music, photography and now video.

Creative destruction sometimes occurs painlessly, but most often it is painful. Governments and communities are often enlisted to participate in the process. Sometimes, the path of least resistance is to help political allies in vicious battles between the old and new – and there are two versions of government involvement which can end in tears.

First, the old resists the new – often aggressively. In 1878, Sir William Preece, chief engineer of the British Post Office said “The Americans have need of the telephone, but we do not. We have plenty of messenger boys.” While loss of employment was awful for the individuals involved, the benefits of the telephone ultimately outweighed the short term costs as messenger boys found new roles.

Threatened industries and businesses often look to government for support to survive. Shielded from the realities of the emerging new world, the guardians of the old order start to resemble the Luddites, the Industrial Revolution machine-breakers who protested the loss of their traditional labour.

The modern Luddites don’t break machines, but they do bury their heads deep in the sand until, eventually, the government and investors give up. The costs to unsuspecting taxpayers who are asked to prop up dying industries for too long are unconscionable.

To take one example: perhaps Joe Hockey upset some by pointing out the advantages of Uber over traditional taxis. Luddites or not, the taxi industry must acknowledge the consumer response to the simplicity and customer focus of Uber. This pattern repeats itself everywhere, when existing players in the market fail to recognise the appeal of new entrants, and instead flatly oppose them.

Second, new entrants attempting to disrupt an industry look for every opportunity to reduce the serious risks of getting started. Every entrepreneur thinks they have the solution to one of the world’s big problems – usually that’s the source of their passion and energy.

Sometimes, they will enlist government to accelerate the “inevitable success” of their brainchild. Unfortunately, a big government subsidy is almost certain to stifle the rough and tumble process of product development, testing, failure and reformulation.

Innovation succeeds more as the result of repeated failures than repeated successes. Failure is prevented (or at least delayed) by government support for specific innovations to the exclusion of others. Sometimes governments back “false prophets” who pocket taxpayer money for the period of their support. The false prophets then move to the next thing when the innovation fails.

“Infant industry” arguments were given great credence in Australia for decades. The car industry was born on the back of the idea that new entrants need support to get started. It is hard to think of a long term success story that came out of infant industry support. The loss of incentive to innovate invariably sets the business up for failure, not success.

For cash strapped government faced with rising costs and sluggish revenue, growth in innovation is the only answer for continued the provision of basic services – historically the domain of the government.

Around the world, innovations in health services are accelerating. Not only are we seeing new devices, drugs and procedures, we also see broad ranging innovation in the models for purchasing and providing health services. Paying health service providers to provide better health outcomes at lower costs, rather than just paying them for consultations, is an important change that is currently sweeping the UK, US and NZ.

Using technology to provide world class education systems – in primary, secondary and tertiary education – has the potential to revolutionise the sector. In tertiary education, the traditional lecture is disappearing, text books are being replaced by technology solutions, the internet and video conferencing allows direct access to the world’s best thinkers in their field from anywhere. Meanwhile, increased contestability between service providers drives and support innovation like never before.

Targeting welfare to those who really need it is also easier than ever before. Identifying welfare fraud and, equally, identifying genuine vulnerability through smart and connected government systems is an opportunity to better target the biggest part of the government budget.

Meanwhile, innovation in energy technologies has the potential to break the trade-off between cost, carbon abatement and energy security, with low cost, decentralised solutions. Witness the potential in solar particularly in rural areas, where the costs of going off grid have already dropped below the costs of being on the network, even without subsidies.

So what’s stopping us? As a new member of parliament, I am struck by how successful both groups – the false prophets and luddites – are at capturing the political process. In health, education and welfare, aggressive fact-free campaigns put the brake on the natural innovation process. Stakeholders pursue their own interests, not the national interest.

It is time for policymakers, commentators, and all engaged in the political process to stand with mainstream Australia – the taxpayers who support the delivery of government services – by insisting on innovation in the delivery of government services.

That way we can determine our future, rather than allowing vested interests and budget constraints to control it.



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