1. The Future of Innovation
  2. The Future of Innovation: Is This the End of Permissionless Innovation?
  3. The Future of Innovation: Can European-Style Industrial Policies Create Tech Supremacy?
  4. Innovation Is a Geographically Localized and Temporary Phenomenon
  5. The Future of Innovation: Should the U.S. Copy China’s Industrial Policy?

Innovation policy in the United States evolved significantly under the Trump administration and appears poised to continue changing under the incoming Biden administration. To counter the economic and geopolitical threat of China, both administrations have supported public investments in research and development of emerging technologies and emphasized the need to strengthen domestic industries. We have also seen an increase in the government’s attempt to influence the development of emerging technologies deemed “critical” to America’s economic and national security interests.

In addition, the emergence of the European Union as the leading privacy and competition regulator of the American tech sector, as well as fears of abuse of America’s social platforms by Russia and China, has led U.S. policymakers and the American public to call for adoption of Europe’s regulatory paradigm in this country. This had led some observers to declare that the era of “permissionless innovation” has ended in the United States.

To discuss these issues, the Mercatus Center hosted a conversation between Adam Thierer, Mercatus senior research fellow and author of Permissionless Innovation: The Continuing Case for Comprehensive Technological Freedom, and Matt Ridley, best-selling author of numerous books, including his latest, How Innovation Works: And Why It Flourishes in Freedom. Below is a condensed version of their conversation, edited for clarity and conciseness. The full transcript and audio are available here, and the video is available here.

ADAM THIERER: I actually want to work my way backwards a bit in your new book How Innovation Works and go to the very end. There’s a group of people who believe in innovation but believe it only comes about because governments take an active hand in steering it, directing it, making sure it comes into being. We call it industrial policy in policy debates, but you use a different phrase for the belief that innovation is the product of intelligent government design, calling it the myth of “innovation creationism.” What’s wrong with the idea of innovation creationism?

MATT RIDLEY: We’ve seen a revival in recent years, as you say, of the theory that innovation only really happens because the government makes it happen. The prime example of this, which has some truth to it, is that things like the internet and GPS and a lot of the electronics we have today are only possible because the U.S. Defense Department, in collaboration with Stanford University and other organizations, made it happen. It wouldn’t have happened otherwise.

My problem with that argument is that, first of all, it confuses innovation with invention. Coming up with the first prototype of something is not the same as developing it in a way that it’s reliable, affordable and available to everybody. And if you take the internet, DARPA [Defense Advanced Research Projects Agency] developed some of the original ideas, but Corning developed the fiber-optic glass that it runs on. There’s lots of people who’ve contributed, and actually the vast majority of them have been in the private sector. And in fact, most of the internet has invented itself. We’ve invented it as we’ve gone along.

Most of the examples you get given about industrial policy and the state creating innovation turn out to be spinoffs, not dividends. I mean, DARPA was not trying to invent the internet; it happened to invent it along the way. If the state is the only source of innovation, then how can we explain railways, steel, chemicals, textiles, all the other industries that showed incredible innovation in the 19th century when the state spent money on national defense and debt repayments and nothing else, frankly?

The U.S. and the U.K. are countries which spent least on public research and development before World War I, and they were the most innovative countries. Then there are classic examples, like the fact that the U.S. subsidized an airplane inventor with an enormous amount of money—Samuel Langley in 1903—and his machine was a total flop, quite literally. It fell in the Potomac River after 20 yards. But they didn’t spend any money on the Wright brothers from Ohio, who did succeed 10 days later.

Samuel Langley received $50,000 in support from the U.S. Army to construct his “Aerodrome.” In 1903, it crashed into the Potomac River. Source: Wikimedia Commons.

Japan is another good example, and the Soviet Union. The Soviet Union did have directed, top-down, state-organized innovation, and all it came up with was Sputnik. It didn’t come up with any consumer goods of any use to anybody, whereas Japan came up with an enormous amount of consumer electronics, while spending less on public research and development than most other countries. It was nearly all private-sector spending and funding, and so on.

People who believe in industrial policy are pro-innovation. So in that sense, they’re on the same side of the argument as us. But in another sense, they, in my view, really don’t get the degree to which innovation is a bottom-up phenomenon. The new industrial policy fans, of which there are many in Britain in the Conservative government—but I think there are some in the Biden administration too—are making a mistake if they think that the way to make innovation happen is to order it to happen. That doesn’t leave room for luck, serendipity, trial and error. The trouble with picking winners is that losers are good at picking governments.

THIERER: Yeah, that’s right. You mentioned the Biden administration, the incoming administration here in the United States, and of course many European governments favoring various types of industrial policy. But it strikes me that there’s very few things as nonpartisan as the lovefest around industrial policy. The Trump administration had proposed a doubling of government spending on artificial intelligence and quantum computing in an effort to “be more like China.” There was even talk about very heavy-handed centralized direction, including the idea of a plan that was floated to nationalize 5G networks in the U.S.

Certainly the China model is really interesting in terms of innovation. Some people have called it “techno-authoritarian,” but other people have noted that it has elements of more entrepreneurial spontaneity at the margins. How do you explain the innovations we’ve seen coming out of China in recent decades? And what are the lessons, if any, from the Chinese model for European and U.S. governments?

RIDLEY: China has become a very innovative economy. If you look at what they do with digital payments for consumer goods, it’s way ahead of what we do here in the West. Those who claim that’s because it’s an authoritarian state with no freedom, which decides what technologies to invest in, I think are misreading China badly.

I think what happened in China after the fall of Mao Zedong and under Deng Xiaoping’s compromise was that it did not become at all politically free. If you’re an entrepreneur trying to start a political party, well, good luck to you—you’re not going to succeed. But if you’re an entrepreneur deciding to start a business to make a new gadget or widget, then yes, actually, you are quite free.

There are many fewer bureaucratic obstacles of the kind you face in the West: beadles and bureaucrats who have to come and go over your plans and say, “Well, no, you can’t do it here; you’ve got to do it there. And you can’t do it this way; you’ve got to do it that way. And we’re going to take two years to make a decision,” and all that kind of stuff. Now, a lot of that is designed to make us safe, and some of it’s necessary. But in your terminology, innovation in China has been surprisingly permissionless for the last 30 or 40 years.

Now I think that’s changing. As I read the Xi regime, it is no longer prepared to accept economic freedom, let alone political freedom. It is increasingly trying to decide what entrepreneurs will or won’t do, what they can or can’t do, what they can or can’t say—which is just as important.

THIERER: In fact, just last week there was a report of the Chinese government stopping Jack Ma, the nation’s richest man, from going forward with an IPO for his tech company. So there are strings attached with these grandiose industrial policy schemes of a more authoritarian nature, even if they are permissionless at the margin. That seems to be changing as well.

But I want to switch gears and get back to the various types of people and groups that are opposed to technological change more generally. It’s so interesting to me that after all of these years of fighting about it, there are still so many fans of the precautionary principle. And it strikes me that a real serious deficiency of the precautionary principle is, it does not allow for error, for failure. It tries to preemptively stop that, and in doing so really stifles the creativity and learning we get that goes along with trial-and-error experimentation.

RIDLEY: Yeah, the European Union has formally adopted the precautionary principle into its Lisbon Treaty, saying that basically every policy must be tested against the precautionary principle. And in principle that’s fine, if you’re just saying “Let’s be better safe than sorry,” but it’s not been interpreted that way.

The precautionary principle as interpreted in the European Union very much says, “We would like you to imagine all possible things that might go wrong with this technology. We would like you to ignore all possible good things that might come with this technology, and we would like you to ignore the disadvantages of an existing technology. And when you’ve done that calculation, tell us whether you think we should go ahead with this technology.”

That’s utterly biasing the conclusion you come to because you’re saying we only want to think about the downsides, and we don’t want to think about the downsides of what we’re doing at the moment. So to give you an example, organic farmers in the European Union are allowed to use copper hydroxide as a pesticide under a special derogation. This is a highly toxic chemical, very dangerous to human beings. Organic farmers are not allowed to use (genetically modified) Bt crops; these are crops into which a gene has been engineered that is lethal to insects.

That technology has been used around the world. It’s been used in many different crops. Pretty well all the cotton we wear has already been treated with it. Many of the meals we eat have already had Bt in them. Bt is an enzyme that is totally harmless to everything except insects because it only attacks a metabolism that’s found in insects. It’s a wholly safe technology.

But because it’s new, it’s banned in the European Union because it’s possible to imagine that in some future scenario, in some way we don’t know, that might turn out to be dangerous. Whereas copper hydroxide, which we know is dangerous, is fine. We’ll go ahead and use it. I mean, this is the madness that comes with excessive use of the precautionary principle. As my friend Ron Bailey has put it, the precautionary principle as interpreted essentially says, never do anything for the first time.

THIERER: The problem with the precautionary principle at its core seems to be that there is a misunderstanding that without risk, there can be no reward. Thomas Aquinas said if the sole goal of a captain was to make sure his ship never sank, he’d never leave port. But of course, that’s not the only goal of a captain. They have other goals, and they brave the high seas because there’s benefits associated with doing so even though there is risk entailed in the process of going out.

One of the things I’ve written about in my work, and you have as well, is how Europe missed the digital revolution. That’s unfortunate because it’s not like there’s a shortage of entrepreneurial minds and people in Europe. But the innovators—and especially the investors—came mostly to the United States and also to China because of a precautionary cast to European technology policy. Do you think that’s right?

RIDLEY: Yes, I do. I think it’s one of the reasons why Europe has failed to spawn any digital giants. I mean, there’s plenty of small companies in Europe doing digital things. But China shows that it can be done. You don’t have to be in California to start an equivalent to Amazon and Google. You’ve got Alibaba and Tencent and so on in China, too. And yet Europe has failed to produce those. And it is a glaring failure on the part of Europe. The closest it came, arguably, was Nokia. Nokia became the dominant firm in the mobile phone market by a mile. It was spending more on R&D than the rest of the mobile phone industry combined, and then it fell from grace.

What went wrong with Nokia was partly that Europe had imposed a 2G standard on the continent for mobile telephony, which was good for voice but bad for data. And when the world started moving towards data, it was harder for European companies to shift. Nokia got bureaucratic and slow and didn’t want to cannibalize its own dominance of voice. It thought if it produced phones that handled data well, then that would be a threat to its existing dominant market share in voice. Like a lot of us, it didn’t see the iPhone coming.

THIERER: Yeah, it’s funny you mention Nokia because I remember there was a famous magazine cover featuring the chairman of Nokia with a headline that said something like, “Can the mobile giant Nokia be stopped?”

Forbes magazine cover, November 12, 2007

So it’s another sign—and you talk about this in the book—that Schumpeterian change, creative destruction, is still alive and well. But there are many people trying to throw up barriers to creative destruction. This is something that we at the Mercatus Center spend a lot of time focusing on, the barriers to innovation, whether it’s occupational licensing laws that aren’t necessary or other types of impediments to growth and innovation.

What are some of the simple lessons from your work that public policymakers could take away and act upon to advance the cause of innovation?

RIDLEY: I think the main thing that policymakers need to think about is removing barriers to innovation rather than creating incentives to innovation. There’s tons of grants and subsidies out there for innovators, but a lot of them are poorly targeted and end up rewarding politically connected entrepreneurs rather than genuinely promising ones.

Much more important for me is to remove the obstacles that get in the way of innovation. You mentioned occupational licensing, but also copyrights and patents, which are ludicrously strong, I think, and regulations generally that stop you doing something new.

Just think about nuclear power, for example. It’s basically stuck with the 1950s technology, and it never changes. Why? Because if you want to build a new nuclear power station with a totally new design, you will have to get that new design licensed. And once you do, you’re not allowed to change your mind halfway through without going back to the regulator and basically starting all over again.

Nuclear power station, Fla., USA. Source: peeterv/Getty Images.

The line I like to give to governments is that it’s not that regulators say no; it’s that they take ages to say yes. Genetically modified crops are not banned in the European Union. But if you come up with a blight-resistant potato with GM technology, it takes you eight years to get a decision out of the European Commission. No wonder by that stage you’ve given up and moved your entire research to America. That’s the reality. Quick decision-making by regulators would be a huge help.

THIERER: Intellectual property continues to be a controversial subject among people who generally defend innovation. It is something the government does, and it’s a role that many people do defend. I want to ask you about your views on intellectual property, but also infant industry protection as something government should do to try to help domestic innovators take root.

RIDLEY: On the whole, I think most infant industry recommendations are wrong. You’re better off sharing and learning from others. If you look at the experiences of countries like India, which said, “Actually, we’re better off doing our own and keeping out competitors,” you end up with Campa Cola, which is a disastrous imitation of Coca-Cola. That’s the worry.

And yes, the United States was very, very protective of its early industries, in the hope that other people didn’t pinch the best ideas. But I’m not convinced that that was the reason it became a successful country.

It’s a similar argument about intellectual property. You can see the argument for some intellectual property that, if an inventor is to invent something, he can’t just have everyone rip him off immediately. But actually in practice, empirically, around the world in different industries at different times, the evidence that giving someone a monopoly reward for inventing something helps to stimulate innovation is very poor indeed. Countries that strengthen their intellectual property don’t see more innovation. Industries that weaken their intellectual property, like the music industry recently, don’t see less innovation. And when patents expire, or copyrights expire, you get a ferment of innovation.

I’m with Alex Tabarrok that we need to find a happy medium between too much and too little intellectual property. About seven or eight years ago, when I first joined the House of Lords, I walked into the chamber for pretty well the first time, and they were debating an intellectual property bill, which was extending copyright to 75 years after the death of the author. Well, that’s great for me. Or rather, it’s not. It’s great for my grandchildren. But I thought, “Well, hang on. What’s this for? Why are we doing this?”

Then I looked into it. It turned out we were doing it because the copyright on Mickey Mouse was due to expire, and the Disney Corporation had gone around the world lobbying governments saying, “Please extend copyright to 75 years after the death of the author.”

THIERER: It is an interesting debate. And in terms of other ways that governments can incentivize innovation, it’s something I’m dealing with right now in the context of artificial intelligence, where governments are talking about just showering technologies and innovators with lots of money. But one overlooked factor that governments have used through the year, or tool, is prizes.

The late Bill Niskanen, who was the chief economist at Cato, whom I worked with years ago, used to talk about how governments should reconsider the use of maybe prizes as an incentivizing mechanism, without resorting to full-blown intellectual property, copyright or patent protection.

RIDLEY: I’m becoming an increasing fan of this. I only mention it briefly in my book, but actually, I think this is the way to go. Instead of giving grants and subsidies, which end up going to the most politically connected but don’t end up picking the winner sometimes—they often end up picking the loser.

And instead of intellectual property, which puts a fence around and stops further innovation, you dangle a prize in front of people. You say, “Look, if you solve this problem, if you invent a vaccine for pneumococcus, we will reward you. It won’t be a cash prize but an advance market commitment. Every time you sell vaccine doses, we will make sure you receive more money than the people buying the vaccine can afford because we’ll make up the difference. It’ll be available cheap, but you’ll get a good reward.” Advance market commitments are a really smart way of rewarding innovation without preventing further innovation by other competitors.

THIERER: Yeah, I like that too. Here in the United States, the DARPA Grand Challenge for autonomous vehicles yielded a lot of really interesting innovation in the 2000s. And the people that were involved in that competition went on to be some of the people that are now today founding autonomous vehicle systems and companies.

RIDLEY: And SpaceX is another example. Grand challenges are the way to go, I think. The U.K. started it 300 years ago with the Longitude Prize, and that’s a very nice example because it was supposed to be won by an astronomer or a mathematician. Instead a humble clockmaker named John Harrison won it, and everyone was furious. “We can’t give the prize to him. He’s just a clockmaker.” The answer came from an unexpected direction, so prizes make room for serendipity.

This article is the first in an ongoing series on the future of innovation. The second piece in the series is an essay by Adam Thierer on the future of permissionless innovation. The third article examines technological innovation in Europe. The fourth article is a piece by Matt Ridley on the changing geography of innovation.

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