The COVID crisis has emphasised a dire lack of ideas and innovation
Remember innovation? If the economy is to prosper once more, we need to allow ideas to flourish
Some people are arguing that we live in an age of innovation crisis: too little, not too much. The Western world, especially since 2009, seems to have forgotten how to expand its economy at any reasonable speed. The rest of the world is making up for this, with Africa in particular beginning to rival the explosive growth rates that Asia achieved in the previous two decades. But most of this is catch-up growth, caused by adopting the innovations already in use in the West.
By contrast, the forces of complacency and stagnation sometimes seem to be winning in Europe, America and Japan. Fredrik Erixon and Bjorn Weigel, in their book, The Innovation Illusion: How So Little is Created by So Many Working So Hard, argue that the existential challenge of today’s capitalism is to break the habit of both companies’ and governments’ reluctance to encourage innovation, despite their words.
Schumpeter’s “perennial gale of creative destruction” has been replaced by the gentle breezes of rent-seeking. Corporate managerialism is gradually squeezing the life out of enterprise as big companies in cosy cahoots with big government increasingly dominate the scene. Their bosses shy away from uncertainty, and instead make their companies increasingly bureaucratic. Economists such as Tyler Cowen and Robert Gordon have likewise argued that we are no longer inventing things that really change the world, like toilets and cars, but increasingly playing with trivia like social media.
One immediate effect of the COVID-19 virus was to shut down the world economy. As it spread through Europe and other continents in March, governments took the tough decision to lock down their populations, telling all but essential workers to stay at home. The impact has been devastating, but it is worth reflecting on how much worse it would have been 20 years before, when videoconference calls to grandchildren were not an option for most people, online meetings were impossible and online shopping barely existed. The existence of broadband made the lockdown far more productive for some than it would have been before, and probably caused many people to rethink their commuting habits.
In this way the pandemic should surely unleash a torrent of innovation. It looks like it has tipped a critical mass of the population into videoconferencing for the first time, introducing many of us to systems like Zoom, Teams, Facetime and Skype.
Virtually productive
Maybe it is naive, but I hope I can attend literary festivals all over the world to publicise this book without slogging through airports, security checks, hotel lobbies and time zones. Surely, too, working from home will be much more common and less stigmatised after the pandemic fades, as will virtual visits to the doctor and other professionals.
Already in some countries workers are demanding more rights to work from home. Productivity in the healthcare, accounting and legal sectors can surely begin to accelerate, instead of stagnating, if tele-meeting innovations are permitted to help here. There has been a surge of free data sharing to help researchers, too, and the opening up of access to scientific papers. The profiteering oligopolies of scientific publishing will surely not be the same after this. Lack of free access to the research that we all pay for has long been a scandal.
The demise of cash has probably been accelerated, as has the decline of high-street retailing in favour of online. Some social events like videoconferenced dinners — invented during the lockdown for friends to see each other — will fade away again as we go back to real parties, but not the family chats among those living far from parents or grandparents.
Digital innovation has medical uses, too. The ability to trace the movements of people by their smartphones, and thus track down contacts with infected people, was widely used in countries such as South Korea and will be key to managing the disease everywhere.
This technology is already being made even more effective, safer and more confidential. For example, smartphones will exchange encrypted but meaningless messages that leave a trail of anonymised data revealing when two people came close to each other, one of whom was infected. Thus you could be warned that you should self-isolate by your phone without anybody in government or a big tech firm knowing your name or your habits. Contact tracing need not lead us into the clammy embrace of Big Brother. It’s not saying no that is the problem, it’s saying yes slowly.
These few bright spots notwithstanding, there will be terrible economic damage to be repaired when the pandemic ends. A deep recession is inevitable. Unemployment will greatly increase, inflation will rocket, many people’s debts will become unsustainable, trade protectionism will spread.
These shocks will undoubtedly hit the poor the hardest, ruining many lives. And it is here that the world must learn the main lesson of this book. Prosperity comes from innovation, innovation comes from the freedom to experiment and try new things, and freedom relies upon sensible regulation that is permissive, encouraging and quick to give decisions.
Tripped up by red tape
By far the surest way to rediscover rapid economic growth and help the poorest will be to study the regulatory delays and hurdles that were swept aside to encourage innovators in medical devices and therapies during the pandemic, then see whether such reforms could be made permanent and applied to other parts of the economy, too. Again and again during the crisis I have spoken to entrepreneurs and scientists frustrated at the unnecessary delays introduced by bureaucratic procedures. Ten days to finalise a contract for the government to purchase diagnostic tests, for example. The lack of urgency displayed by administrators, consultants and legal negotiators, especially in the public sector, is a problem in a crisis but it should have been a problem all along.
Whether it is approving a new medical device or building a new airport runway, the process of decision-making has become lethargic to the point of paralysis and encrusted with the requirement to reward legions of unelected “consultees” for their leisurely attention. The problem for entrepreneurs, watching their capital dwindle as they try to bring an innovation to market, is not so much that regulators say no, but that they take an age to say yes. If we are to return to prosperity after the virus, that has to change.
Politicians should go further and rethink their incentives for innovation more generally so that we are never again caught out with too little innovation having happened in a crucial field of human endeavour. One option is to expand the use of prizes, to replace reliance on grants and patents. The famous Longitude Prize was a £20,000 prize offered in 1714 for the first person to solve the problem of accurately measuring one’s longitude at sea within 30 minutes, announced after the failure of expert navigators and astronomers to crack the problem.
It eventually elicited a solution from such an unexpected direction — accurate and robust clocks made by a humble clockmaker — that the authorities were reluctant to grant it for many years, to John Harrison’s fury. A modern Longitude Prize, offering £8m to a point-of-care diagnostic device to prevent the overprescribing of antibiotics, was set up in 2014 and remains unclaimed.
Similar serendipity happens today. One study of the online problem-sharing forum known as Innocentive, where individuals, companies and organisations can post details of problems that are baffling them and offer rewards for crowd-sourced solutions, found that “the further the focal problem was from the solvers’ field of expertise, the more likely they were to solve it”. Just like John Harrison. Innocentive has attracted 400,000 contributors from 190 countries and awarded more than $20m to successful solutions.
Eyes on the prize
In March, economist Tyler Cowen announced a series of modest prizes to reward innovations in social distancing, online worship, easier ways to work from home and treatments for COVID-19. Prizes, he says, are ideal “when you don’t know who is likely to make the breakthrough, you value the final output more than the process, there is an urgency to solutions (talent development is too slow), success is relatively easy to define, and efforts and investments are likely to be undercompensated”.
Yet such a list applies to almost all fields of human endeavour, not just this pandemic. Why don’t we do more with prizes?
Nobel-winning economist Michael Kremer came up with a concept that would finetune prizes as incentives to innovate, called the Advance Market Commitment. After all, there is no point in giving a prize to a company that invents a vaccine if the firm pockets the reward but then decides not to produce the vaccine because it cannot recoup the costs of doing so. In 2007 the Gates Foundation committed $1.5bn to a prize fund to find a vaccine for pneumococcus bacteria for use in developing countries. Such a vaccine would be of most use to people who could not afford to pay for it, so no pharmaceutical company could make money from inventing it, however long the patent.
But rather than a single lump-sum prize, the companies were invited to bid for 10-year contracts to develop and manufacture the vaccine. The prizemoney effectively topped up the sum received by the pharmaceutical firm for every vaccine sold. The result of the auction was three good vaccines, costing $2 per dose, which have been given to 150 million children, saving 700,000 lives.
Governments could also consider buying out patents to free up innovation. Anton Howes, of the Royal Society of Arts in London, argues that such buyouts have worked well in the past. The French government bought out Louis Daguerre’s patent for photography in 1839 and made it freely available to all, unleashing a burst of creative innovation. The recent expiry of 3D printing patents has led to a burst of innovative activity, which could have come a decade sooner if the patents had been bought out. In 1998 Kremer came up with a way of valuing patents so they can be bought out at the right price, using auctions: a bunch of different patents are auctioned for private sale, without the bidders knowing which the government intends to buy.
The government steps in at the price discovered by the auction. If it did so rarely, then the private bidders need not be unduly discouraged from taking part. Howes argues: “As we look to fight coronavirus and any future pandemics, we should perhaps consider which patents — for antivirals, vaccines, ventilators, and other hygienic equipment — might be bought out in order to remove … innovation bottlenecks.”
I ended my book in a mood of unaccustomed pessimism, lamenting the innovation famine that seems to have gradually developed, courtesy of complacent big companies, bureaucratic big governments and neophobic big protest groups. With some exceptions, mostly in the digital world, the innovation engine is sputtering and society is not seeing as many new products and services of value as it needs. COVID-19 has driven home that message in emphatic fashion. It is time to let innovation work.
This is an extract from How Innovation Works by Matt Ridley published by HarperCollins and is now available in paperback,
e-book and audio.