Beyond Innovation

In economically sluggish and uncertain times it is not surprising that our federal politicians should offer us new ideas to get things moving again. So they search for remedies that will promise a brighter future. One solution this time is ‘innovation’ that will allegedly start the economic wheels spinning and — hey presto — we’re on the way to prosperity again. More ambitiously, the government is also polishing up the old idea of ‘opening up the North’ and its potential bounty. This would entail a ‘cultural shift’ and the commitment of a very large amount of presumably borrowed capital from an otherwise empty federal till.

Some millions of dollars already underpin the ‘innovation’ push. The northern development program envisages expenditure of five billion dollars, in the shape of loan guarantees to selected beneficiaries. They will have to find half the funding for their approved enterprises, in infrastructure and resource development from the private sector. It will be some time, of course, before we know who are the beneficiaries and the nature of their proposed projects. But presumably this process and the decisions will be the ultimate responsibility of the federal government and its agents. Essentially, this is a commercial initiative of a major kind whose success or otherwise will depend upon the choices and decisions that are made.

It is the height of folly, and the mother of hubris, to believe that the federal government’s judgment in dispensing billions of dollars of taxpayers’ money to eager and agile commercial beneficiaries is the best way to promote ‘innovation’ and a ‘cultural shift’ towards productivity and wealth-creation. It is a form of ‘picking winners’ by political punters with a history of failure and the trashing of taxpayer capital.

The distinguished American economist, Thomas Sowell, gives some examples of innovation that make a point of universal validity:

“It was Thomas Edison who brought us electricity, not the Sierra Club. It was the Wright brothers who got us off the ground, not the Federal Aviation Administration. It was Henry Ford who ended the isolation of millions of Americans by making the automobile affordable, not Ralph Nader. Those who have helped the poor the most have not been those who have gone around loudly expressing ‘compassion’ for the poor, but those who found ways to make industry more productive and  distribution more efficient, so that the poor of today can afford things that the affluent of yesterday can only dream about”.

Australians would have waited a long time for government to deliver them the stump-jump plough, or the mechanical harvester; or, for any government anywhere to deliver the zip fastener. Just turn your mind to the flood of innovations over the last century and ask how many of them depended upon governments to initiate discovery, commercial exploitation of the innovation, and delivery to the consumer. Even if they took up somebody else’s innovation it is unlikely they would be able to deliver it efficiently. Think pink bats.

Implicit in what Sowell says are two things; first, that we need innovating or inventive minds; and second, and perhaps more important, we need entrepreneurs who can bring an invention or innovation to the ultimate consumers. This requires the recognition of an opportunity to make a profit, commercial skills, productive know-how and a modicum of organisational capacity

To sum up, the federal government does not have the knowledge necessary to make sound commercial judgments about chosen individuals or enterprises because, in a fundamentally commercial nation, that knowledge and the capacity to allocate and employ capital successfully is more securely lodged in dispersed millions of private minds and thousands of enterprises throughout the nation. It is the mode of operation of a free market that spontaneously coordinates this dispersed knowledge, prices and productive capacity so that they can be brought efficiently to bear, under the stimulus of the profit motive, in employing capital effectively and efficiently. It is within such a dynamic order that private entrepreneurs can work their economic magic, and to ignore this reality would invite disaster and loss of a great deal of hard-earned (or borrowed?) money   .  But — and this is the crucial point — those entrepreneurs need broadly predictable and challenging circumstances to do their best.

It is the crucial role of government to achieve this, rather than becoming a commercial player itself. The government’s job is to establish the legal and policy conditions, such as the rule of law, confidence in property rights and full competition of enterprises that will support such an order. Three vital initiatives of previous governments have laid the groundwork for this and promoting them is essential. Their rapid and determined implementation will achieve infinitely more than airy talk of innovation and governmental investments of a commercial kind.

The first, the Heydon report on trade unions, has made a crystal clear case justifying the need to bring the trade unions under the rule of law and ending   trade union intimidation and legal privilege that have led to ravaging the labour market, bullying of individuals and enterprises, and adverse effects upon the wages system. This report also exposes the need to end corrupt transactions between some enterprise managements and union leaders. It provides a once-in-a-generation opportunity for wide-ranging reform of a crucial institution.

The second, the Competition Policy Review by Professor Ian Harper and his colleagues, has given the federal government a wide-ranging and practical plan for radical reform of a system that falls far short of the universal, level-ground competition necessary for promoting efficiency, alertness and innovation in enterprises. The government has made encouraging noises about its implementation; and the sooner, the better.

The third is that, under Minister Andrew Robb’s energetic leadership, valuable free trade agreements have been brought to completion after years of negotiation. They open up opportunities for an Australia ready, especially if re-invigorated by the reforms sketched above, to fully consummate avenues for new trading and wealth creation.

Rapidly fulfilling the promise of these reforms should be the focus of the federal government. Given that, if there are fortunes to be made in the north, private entrepreneurs risking their own money are those most likely to make them. And if innovation of value occurs, it, too, will come from them.

Barry Maley is a Senior Fellow at The Centre for Independent Studies.