Why "innovation" won't fix our economy but plays a core role in its future

Australian public policy is seemingly at a crossroads in terms of economic priorities.

The language of innovation must come in from the cold and fiscal repair must not be the only economic imperative. This is the task awaiting Australia’s new Minister for Industry, Innovation and Science Minister, the highly-regarded economist Arthur Sinodinos, and should be a key feature of the Prime Minister’s address to the National Press Club.

While there have been some federal efforts made to engineer a ‘pivot’ in economic narrative to that of an ‘ideas boom’, and state and territory governments have been rolling out an innovation agenda, sceptics remain dubious — casting this focus on economic innovation, entrepreneurship and startups as either a fad, mere rhetoric, just a ‘nice-to-have’, and mutually exclusive to the task of budget repair.

While certainly a pivot in narrative is not itself the creation of a new knowledge economy, we must have no illusions about its urgency, and the profound transformation in our economy to which it points.

Standing on the precipice between two growth cycles

Trend economic growth rates have been declining since the long wave economic cycle which began Post War.

As we look around us, we see the old industries of mass production and heavy manufacturing being decimated. From cars to clothes, from lawyers to farming to mining, the assets that marked out Australia’s economic success are perilously placed and increasingly eroded.

There is an economic revolution underway that is eating away at our traditional industries as consumers demand ever more tailored and personalised offerings. Technology and the dispersion of information into the hands of citizens are shattering information asymmetries and transforming what consumers want, when they want it, and who they want it from.

Mobile devices are giving birth to the internet of not just things but of everything. And big data, analytics and the power of artificial intelligence are promising an era of augmented human intelligence.

Our economy is trying to adapt to how consumers are expressing themselves and how producers are seeing themselves. Peers are rivalling hierarchies. Co-design is preferred to supply-mandated mass production.

Consumers are being blurred with producers. Open sourcing is challenging expert provision. Markets are being redefined not just in terms of competition but also cooperation.

So the key economic task is how we haul ourselves from the eroding ground of past economic growth and onto a new growth path which will bring the jobs, value, prosperity and wellbeing of tomorrow.

Entrepreneur as path breaker

And it is here that the true economic role of innovation, of creativity and of ideas comes to the fore. Entrepreneurs build from niches and quirks of the current economy — seeing new products, new offerings, new possibilities.

Where others see risk, they see opportunity. Where the status quo weighs heavily on most, for the innovator it is the very impulse for different ideas, approaches and models.

Disrupters and entrepreneurs are the means by which the gap between the old economy and the new can be bridged. This is not a ‘nice-to-have’ — this is essential to the growth and the health of our economy.

“Where the status quo weighs heavily on most, for the innovator it is the very impulse for different ideas, approaches and models.”

The lesson of ‘platforms’ — such as Facebook, eBay, AirB&B and local Australian heroes 99Designs, realestate.com.au, and RedBalloon — is that the dynamics of the innovation economy are markedly different than its more traditional elements.

These dynamics are creating ‘blurry markets’ in which the traditional economic distinctions — consumers vs producers, products vs services, competition vs cooperation – are becoming far less distinct.

The sharing economy is ‘blurring the edges of ownership’, and the costs of capital involved in sharing information, of interacting with consumers, and of creating products and services, are plummeting. And all of this is forcing a rethink of even the most basic of economic measures, GDP included.

In this world — and contrary to the innovation sceptic — ‘fixing the budget’ is not the one and only issue of economic policy. The risk of the innovation sceptic is that the fiscal tail comes to wag the economic dog.

And to foster innovation as a pathway to economic growth, we must recognise that innovation doesn’t just happen; we have a hand in creating it. The intellect and ingenuity of our people must be unleashed, and context, culture and ‘ecosystem’ matter — both to motivate people to create and to maximise the probability of success.

Of course, it’s not all roses

Entrepreneurship and startups come with risks, and our markets have not always been good at pricing that risk or accurately valuing these firms. Nor will innovation and entrepreneurship alone fix everything that’s wrong with the economy.

Innovation isn’t everything, but it is core to our economic future. It isn’t just about startups but also large incumbent businesses.

And when we treat it as such we may have to ask ourselves hard questions about strategy (innovation is hard to mandate, how can it be fostered?), education (what kinds of creative and social talents, alongside STEM skills, will students need to succeed in the emerging digitised and customer-focused economy?), regulation (what kind of protections are needed to cope with the growing ‘informalisation’ of the employment market?), about failure and success (why in sport does hard-fought failure bring respect, but in business, derision?) or indeed about the new nature of the markets (when platforms and data are open, where do the gains from competition run out, and those from collaboration begin?).

It’s time for a proper debate about the role of innovation as a core economic issue: not a fad, not a side issue, and beyond rhetoric. It is a debate we avoid at our economic peril.

Dr Pradeep Philip is a member of the Melbourne School of Government Advisory Board and Principal of Ergo Consilium, and Dr Vishaal Kishore is Professor of Innovation and Public Policy at RMIT and Principal Fellow at the University of Melbourne’s Melbourne School of Government.

This article was originally published on The Mandarin.

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