Why the state can’t innovate

Gordon Brown thinks that we — each household, that is — could be £5,000 a year richer if we Britons were more innovative. 

I have not had many chances to say this but Gordon Brown is right. Alas, Gordon Brown also thinks we could be more innovative if we had more government schemes to be innovative. Gordon Brown is wrong. For nationalisation means fewer, worse and more expensive industries and institutions. This is especially true of innovation — one of those areas where markets red in tooth and claw vastly outperform anything done by government and bureaucracy.

Yes, yes, I know, we’ve Ms. Mazzucato shrieking to the left of us that it is only government that really innovates — Apple didn’t create the iPhone, y’know? — yet this is just evidence that if she had gone to a university that teaches economics — The New School, where she did go, does not — then she’d know more economics than she does. 

The economist who did the real work on innovation is William Baumol. This is the same guy whose work on productivity tells us that the NHS will eventually eat the entire economy. If we’re to believe him on the point that the NHS needs a 4 per cent real rise in budget every year — and we probably should, too — then we should probably believe him on this other point of his.

It’s the pressure of competition from other people who are doing things in new ways, using things in a new manner, which drives that process along

There are two different things here: invention — the making of a new thing — and innovation — using a thing in a new manner. Invention is something done as well, or as badly, by government as anyone else. Sure, government was at least heavily involved in the creation of touch screens but it is also true that Bell Labs invented the transistor. Innovation though — that’s something governments are incredibly bad at. It’s the pressure of competition from other people who are doing things in new ways, using things in a new manner, which drives that process along. Those Trabbies made in Zwickau were still using two stroke engines in 1991 when the rest of the world had moved to four stroke even for lawnmowers and motorbikes let alone cars. Absence of the red in tooth and claw is what causes that absence of innovation. We could even take a more bloodthirsty example, that drone competition between Ukraine and Russia is driving innovation in killing methods faster than peace managed it in the 80 years since WWII. We might not think of war as being free market but it’s certainly a competition.

Let us accept that government invented — or perhaps financed the inventor of — the touch screen. That still doesn’t explain Apple. One reason is that there were at least two touch screens invented. One was the touch screen that Apple used, the other was the touch screen the British government financed. As The Register has detailed — here and here — that one we financed Andrew Fentem into inventing worked and could have been used. It was the British government’s, ahem, aid in innovation that ensured that it was not. Because the bureaucracy simply would not move at faster than bureaucratic speed in negotiations with anyone about the actual use of the new thing. So, okay, government aided in the creation of the new thing, but it also killed, just by being governmental, the use of the thing to do something new. Invention and innovation are different things, d’ye see, with different structures and set-ups better at each.

Apple did invent the iPhone because Apple put that touch screen to that new use. Or, if we want to be picky we could say that Apple innovated the iPhone. Innovation being that different thing and innovation being what does, in fact, make the world richer. We could have a vast repository of new things and they’d make us no richer unless people actually used them to do new things, or old things in new ways. It’s innovation that matters for living standards, not invention. At which point it’s fun to note that no government, anywhere, has innovated a touch screen phone nor even a fondleslab. Not one single one. It’s Apple that did the innovation — the thing that matters. 

This does mean that Gordon Brown is correct — more innovation, we’d be richer. It’s his idea of more government that is the error, not his aim. 

We can move away from a contested case like touch screens if we like and concentrate on the idea that more government — nationalisation of a process — just does mean less, worse and more expensive. Take the idea of apprenticeships. This is the idea that those unblessed with Oxbridge intellects might be trained to do some rude mechanical thing for a few years before being let loose on the economy. Hands on training, working with those who know what they’re doing and picking up the details that way. England has had such systems organised since at least the 14th century and the formalisation was into the City and Guilds system in 1878. It all worked pretty damn well and not just because it gave us the set up for Wilt teaching Gas One and Meat Two at Fenlands. 

This was, of course, just too archaic for George Osborne who nationalised the whole thing with the Apprenticeship Levy. Large employers now pay a tax (0.5 per cent of the wage bill) into government, the bureaucracy, which then organises the training of the rude mechanicals. Alan Milburn has a report out telling us that since then, over this past decade, the number of apprenticeships has halved. His answer is therefore there must be a national pre-apprentice scheme which really does sound like doubling down on error. But we do have our proof that nationalisation means less, worse and more expensive. As if rail, water, steel and the rest weren’t enough.   

It’s not just wholly possible, it’s wholly sensible to insist that we should have a mixed economy. There are some things better done by government, centrally and with the power of compulsion, other things best left to that chaos of markets. I’m certainly very cool with the centralisation, monopoly of, say, military power, because I’ve read my 15th century history. No one did enjoy that free market competition of armies we call the Wars of the Roses all that much. But that very concept of mixed means that we need to use whichever side works best for the specific problem under consideration. 

Invention? Sure, OK, government or market, each equally good, or perhaps bad — after all, invention is difficult so maybe bad is the right description. Innovation, no this is a market thing, not a government one. So, government butts out and we all get that £5,000 a year richer as more innovation happens. For nationalisation of what markets do better means less, worse and more expensive.

We’ve just been told that Victorian government was by those who worked few hours and drank to what we would today call excessive standards. They did indeed run a quarter of the world and a third of the population while only waking up for long enough to fall drunk into their soup. We had quite a lot of innovation back then and absolutely none of it was done by national government nor that elite that made up national government. Even that City and Guilds was the Corporation of the City of London and the Livery Companies, drains were the City Corporations and so on. Nearly all of these were composed of the rude mechanicals made good, not the central government elite. All the industrial innovation was done by those who would not even have been offered a drink by the political elite let alone asked to share a bowl of soup to snooze into.

Now, okay, given the mores of the modern world, we’re not going to be able to return to that golden age of government by lazy drunks. But could we at least get rational about when government works and when it does not? And, you know, only use it to solve the problems it does solve? Rather than employing it to make less, worse and more expensive?