Silicon fantasies



The Australian, December 1, 2015

Labor has plans for a new tier of welfare to assist a recently discovered pocket of need – businesses that struggle to persuade private investors to take their innovations seriously.

Bill Shorten claims that pumping a lazy half a billion into business start-ups will “capture the wave of digital change that is washing through the whole world.” Labor calls it co-investment. Others might call its an expensive, one-way ticket to la-la land since it rests on the ridiculous premise that innovation can be unleashed by government decree.

“How much is going to cost?” Shorten was asked at a recent press conference. “And how are you going to fund it?”

Shorten stared reproachfully at the impudent hack. “We cannot afford not to be in the game of innovation.”

We have learned to be wary of things politicians claim we cannot afford not to do. It is how we got saddled with a National Broadband Network destined to give us extremely expensive broadband and piecemeal renewable energy that gives us the highest electricity prices in the world.

It is particularly unnerving when the announcement of the-thing-we-cannot-afford-not-to-do is announced in the manner of a Soviet Kommissar setting pig iron production targets for 1932. Start-ups will create 500,000 new jobs and 100,000 positions in the IT industry. Really? Does Shorten actually know this, or is it just another great big number casually plucked from the air?

The turn-of-the century dot-com mania taught us that fortunes are lost in the digital economy more easily than they are gained. The risks of gambling with taxpayers’ money should never be forgotten.

Scarcity of capital for start-ups is not, as Labor supposes, a sign of market failure but of its genius. Competition for funds is the most efficient mechanism yet discovered for separating good ideas from bad. Investors who stake their own livelihood on ideas have a sharper eye for opportunity and a better nose for a dud than bureaucrats who trade taxpayers’ money.

Seldom has the idea that government knows best seemed quite so old-fashioned. Innovation in the digital era comes from the bottom up. It favours the principles of liberalism. Individual freedom, personal initiative, opportunity and light touch regulation encourage innovation; the heavy hand of government kills it stone dead.

Indeed the first question to be answered in an announcement of innovation policy is why we need one at all. The notion that government should be the catalyst for innovation is a political conceit. Institutions can create an environment conducive to innovation but it cannot make it happen. As Douglas Carswell wrote in The End of Politics and the Birth of iDemocracy, the political class suffers from excessive faith in deliberate design. “They consistently underrate the merits of spontaneous, organic arrangements, and fail to recognize that the best plan is often not to have one,” he writes.

No one familiar with Australian economic history should ever fall into that trap. The remarkable growth in national prosperity over 200 years was achieved largely by tinkering. A pioneering nation where labour is short produces a strong imperative to invent new products and processes.

Australians became world leaders in the wool trade by re-engineering the sheep, developing the mechanical shears and turning bullock carts, wool stores and clippers into a slick and efficient supply train. By the end of the 19th century, we were a leading world supplier of wheat thanks to our innovative use of superphosphate and our inventions in mechanical harvesting.

Today’s resource economy thrives as much on ingenuity as it does on abundant supply. At $44 a tonne, an iron-ore supplier like Fortescue Metals would be out of business were it not for its investment in wet ore processing that allows it to better separate ore from useless sediment, substantially reducing the cost of transportation.

Fantasies about creating the next Silicon Valley miss the point; innovation frequently occurs in established industries reinforcing existing advantage. More than 6,5000 Australian mining inventions were filed for patent between 1994 and 2011. And, as with Fortescue, necessity is the mother of invention. To drive innovation, governments must scrap protection and promote competition, internationally and domestically, in the public and private sector.

Edmund Phelps, the 2006 Nobel Laureate in Economics, identifies the dynamism created by millions of minds empowered to conceive, develop and market innumerable new products and processes as the driving force of modern economies. The phenomena he describes as “mass flourishing” began in Britain two centuries ago and spread quickly in Australia where economic freedom, individuality and self-expression were valued. Innovation did not come from exogenous forces such as government handouts. It was both indigenous and spontaneous, born of business needs.

Governments can’t create mass flourishing but poorly designed institutions weaken the dynamism that powers a creative economy. “High dynamism,” Phelps writes, “requires entrepreneurs driven by their desire to make their mark; people in venture investing, willing to act on a hunch, and many end users — consumers or producers — with the willingness to pioneer the adoption of a new product or method whose expected value is not knowable beforehand. This requires drives such as aspiration, curiosity, and self-expression.”

If Phelps is right history is moving inexorably away from central planning towards the world of mutual cooperation and spontaneous order envisaged by Adam Smith in The Wealth of Nations. Phelps view marries perfectly with that of Robert Menzies articulated in The Forgotten People. The intelligent ambition of a sober and dynamic middle class, says Menzies, provides “the motive force of progress”.

A political party that can’t break its addiction to central planning will increasingly find itself on the wrong side of history. The digital world works on Hayekian principles of decentralisation and democratised knowledge. Samsung and Apple provide the hardware; others work out what to do with it.

If Labor had been put in charge of developing the iPhone, one suspects we’d still be waiting. Have you any idea how many bureaucrats it takes to develop an app?