Our future and effective innovation

Will Hutton is courageously idiosyncratic about innovation, proposing a simple combination of general purpose technologies (GPTs) and good capitalism as the explanation for the rapid rise in living standards in the west over the last 250 years. For Hutton, the source of growth is ‘the combination of science’s capacity to transform how we live and a capitalism constantly pushed and prodded by democratic governments towards exploiting those opportunities.’ [See ‘Britain’s future lies in a culture of open and vigorous innovation’, Will Hutton, The Observer, 14 Oct 2012].

However, the massive empirical and theoretical literature on innovation presents quite a different story. Hutton suggests one exemplar GPT was the steam engine. First identified as a possibility in ancient times, drawn up in some detail in late 15th century by Leonardo da Vinci, it wasn’t till late 18th century that the first working engines were built by Thomas Newcomen for pumping water out of Cornish tin mines. Newcomen’s engine was taken several stages further by James Watt, with among other refinements, an external condenser and rotary drive which made it feasible to run the new cotton mill machinery invented by Arkwright, Crompton and the rest which had previously been driven by water power, the whole made more efficient by the greater precision of machining developed at Watt & Boulton’s Soho foundry and powered by coal made economic by the new transport infrastructure provided by canals. The steam engine wasn’t a GPT. It was an important component of a technological revolution, comprising a whole collection of fundamental innovations which, while not all strictly interdependent, tended to feed into and reinforce each other.

Mainstream innovation literature has identified three such technological revolutions, the third of which was identified as based primarily on electronics, information technology and the internet, new forms of energy and energy substitute, biotechnology, molecular engineering, genetic engineering, ocean development and possibly new forms of transport and transport substitute. That third revolution is now moving towards its mature phase. These innovations are largely motivated by the needs of companies to improve their performance so as to beat competitors. This requires companies to invest in specialist technologists and science to invent the new. They need to invest in technology and systems to bring the new to market. And they need to maintain that investment so as to bring the new to full profitability. It’s an expensive and long term process.

Of course there is risk, and the return to a successful project must also be sufficient to compensate for the projects that fail. But public limited liability companies were first set up for exactly that reason: to handle such risks. In the early days of industrialisation, corporate innovators were supported by the financial sector which was brought into its modern existence for just that purpose: to raise the necessary capital for the technological development and economic growth from which everyone benefited.

Today, in the UK, things are very different. The financial sector has completely reversed its role and become a predator on the real economy, systematically destructive of any long term corporate positions. Companies which invest for the long term, and especially those which have achieved promising innovations, make themselves extremely vulnerable to being taken over and their value extracted for the immediate benefit of those financial sector institutions, investment banks, hedgers, private equity and sovereign funds, and financial intermediaries of all kinds.

The innovators need protection against this predatory finance. And competition needs to be protected if the motivation to innovate is to prevail. Both these protections have been dismantled in the UK.

A review of the position in Japan, Germany, China and India reveals that the real economy, manufacturers and corporate innovators, in those jurisdictions enjoy substantial protection from financial predators (see http://www.gordonpearson.co.uk/books/the-road-to-co-operation/). Comparison of the GDP mix in UK with these other industrial and industrialising economies highlights the destruction of UK manufacturing.
Over the past three decades successive UK governments have supported and encouraged the predatory financial sector, and singularly failed to provide any protection for the real economy. While those policies prevail, the predation will continue, till there is nothing left.

Measures to restrict the financial sector are well known and have been flagged up on this site many times (see, for example, http://www.gordonpearson.co.uk/28/labour%e2%80%99s-balls-on-taxation-and-spending/) as have measures supporting competition and protecting markets from monopolistic abuse (see, for example, http://www.gordonpearson.co.uk/13/the-glencores-xstratas-and-blairs/#more-1192).

Apart from these initiatives, governments should restrict their involvement in innovation to support for universities and others conducting scientific and technological research which is too ‘blue skies’ to be fully financed by commercial companies. Innovators certainly don’t need, as Hutton suggested, to be ‘constantly pushed and prodded by democratic governments’ towards exploiting opportunities. All they need is freedom from predation so they can focus on being better than their competitors.

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