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Tag: policy

Notes on innovation

The harder competition gets, the more people drop out. For a society, it would be great to maximize progress through competition but minimize crime through social welfare. But what is needed to accomplish that?

First, there has to be strong enough incentives for people to dedicate their lives for pursue of innovations, and a back-up system when they are not able to succeed(1). Other parameters are trade and education; trade is relevant because it indirectly funds the society, and education is an antecedent for competitiveness in trade. Competitiveness is not a static state, but constantly changing. Its dynamic nature arises from a discrepancy between internal and external competitive variables(2). As such, change is a parameter for an innovation theory. Vigorous change is needed from a society at all times to keep up with an innovation environment(3).

Vigorous change is needed to keep up with an innovation environment

Moreover, you have a social dimension: expectations, beliefs, motivations… People should be driven to study the right(4) topics, start trade-oriented companies, and pay taxes(5). The latter part is important – there needs to be a culture of doing, not a culture of whining, for a high degree of innovation take place. Therefore, another part is political action — if it takes the form of change agent, internal structures that form an obstacle for innovations will be renewed efficiently. If the political action yields to status quo, other parameters are likely to suffer and the society loses its competitiveness.

If political action takes the form of change agent, internal structures that form an obstacle for innovations will be renewed efficiently

Educational cartels, for example, prevent re-education of people when job market demand shifts. Another example is fight against Uber which has shown transportation cartel’s legislative dominance in many markets. But there are many more cartels which are equally harmful for innovation. Just as the state should not protect supply-side labor markets by bringing about cartels, it should abolish subventions and state picking the winners(6) – this applies to innovation funding, in particular. Even when a natural market is lacking funding for startups and innovation, the state should not assume that it is likely to discover winners — it should either back all wannabe innovations or none. This is because most innovations fail in spite of their theoretical promise, so it is probable that the state also fails in distinguishing winners from losers(7).

Lastly, I would like to stress the point of proactive culture and the role media in creating it. Diffusion of pro-innovation culture takes place through media which shape the beliefs of people. Who are the role models? Whom do the youngster aspire to be? Who are looked up to? Are these people innovators or not? In shaping that social dimension into a pro-innovation mindset, the media play a key role. Information channels frame a collective mindset which results in action – what is stated as real, will become real. In a situation where negative news sell or are distributed more often than positive ones, the thinking of people errs to that side.

Innovation must be a religion of sorts

The solution to this problem is open — control of media is not advocated, changing people’s preference of all things nasty cannot be changed as it would imply changing the human nature which can never happen. Yet, the culture of doing is essential precondition for an innovation-friendly, progressive and competitive society — something that many European countries have lost in this day and age. Innovation must be pervasive – it must be a religion of sorts, a dominant thought paradigm. As it now stands, innovation and progress are nowhere near this position neither in the public discourse or in the minds of the people, apart from a select few.


(1) The issue with a back-up system is, though, that it might act as a disincentive for not “trying hard enough” — if you know you will be fine anyway, you might not give the extra effort needed to win in competition. As in trade it’s incentive systems that compete against one another, a country may gain advantage/disadvantage as a result.

(2) By no means it’s only price — price is included, especially for commodities, but in innovation the “secret sauce” tends to be somewhere else.

(3) The issue with constant change, from a political perspective, is that it introduces unpredictability which is generally considered negative — in the economy, people should be able to trust that the contracts are reliable and relatively fixed. If they are not, their usefulness erodes. On the other hand, the upside of removing barriers for innovation can counter this effect.

(4) “Right” means they are in demand – i.e., immediately useful and applicable in labor markets. The more this is not the case, the more a society wastes resources: capital and human capital.

(5) Paying taxes is an irrational choice if one is given a choice. Therefore, global agreements on tax evasion — both corporate and individuals — should be a priority. But they need to be truly global or otherwise there is zero effect.

(6) The issue here is problem of the commons dictated by extreme capitalism. A capitalist will not consider harming the environment unless it is of immediate consequence to his business. This would imply “nature” needs an active player to defend its positions, manifested in intervention by the state — how much and how, are questions that will not be optimal due to inefficiency of political decision making. Some positive examples, like electric cars in Norway, do exist.

(7) In fact, even the markets fail at this — most angel and VC investments are not successful. But let the private people lose their money, instead of making bureaucrats who have no skin in the game to make the choice which innovations are backed.

Broken Window Fallacy — Still Relevant?

Do we need more broken windows?

There is a fallacy within broken window fallacy.

I will now explain this argument.

Essentially, the fallacy (by the classic French economist Frederick Bastiat) argues that “breaking windows”, although brings work for window repairers and thus adds to economic activity, is sub-optimal because of the opportunity cost of using the work to build (or buy) something new.

But, this means there indeed is alternative job for the window repairer, or that the labor COULD be used more efficiently elsewhere (e.g., producing innovations). In the early days, where productivity was the bottle-neck for economic growth, this might have been the case.

But nowadays, I think the modern job market dynamics do not categorically support the broken window fallacy — it’s getting increasingly difficult to create products that add genuine value and not only rely on exploiting market inefficiencies (which, arguably, could be a form of value) or persuading consumers to buy for the sake of owning the new shiny thing (which is often misunderstood as marketing’s core value added).

As of now, we’d need some more broken windows to stimulate the economy and get the money circulating.

Productivity is no longer the bottleneck for growth — there is over-supply in both material produce and human labor — generating demand is now the primary economic problem. Marketers would recognize this as the shift from production orientation to sales-orientation and finally to customer orientation. We need a similar shift in the scale of the economy.

But how to accomplish that?

A good start, from policy perspective, are infrastructure projects that produce not only jobs but enable the platform effect, i.e. possibility to “innovate on top of” as per the classic definition of platforms. Any investments that enable the creation of economic activity, either by moving or connecting people, or by removing barriers such as Uber-prohibitive taxi cartels, or by making licenses and software tools and equipment accessible and affordable for all (also in terms of skills, viz. education), or by supporting incubators and access to early-stage funding, are positive ways to enable the creation of innovations.

Consider Finland — I live in Turku which is about two hours train ride from Helsinki. Turku is a big city (in Finnish standards) but in terms of job opportunities it pales in comparison to Helsinki (which is the capital). So, lately there has been talks of a “one hour train” between Turku and Helsinki. As stated previously, building this would not only increase employment but also provide a platform externality since more people would be able to live in Turku and work in Helsinki. Instead of investing the money which Finland is borrowing at an increasing rate to unemployment benefits, it should go to employing people on e.g. infrastructure projects like this.

Now consider Europe; following the same logic, we should focus on large-scale infrastructure projects like improving railroad connections between Asia and Europe, roads, hospitals, telecommunications, etc. Instead, much time is spent arguing on either minor details or managing whatever “threats” (refugees, euro-crisis) the continent is facing. Dealing with threats is important sure, but the policies cannot only be reactive — without a foresight and building concrete things, there will be no better tomorrow.

Anyway, transportation, communications technology, better housing and health-care — I’m counting those as infrastructure services that benefit the economy both short- and long-term. And repairing any of them does not fall under broken window fallacy — quite the opposite.

The author works as a researcher at the Turku School of Economics.

Why human services are needed for world peace

The bot can be boss, as long as we have jobs.

Why are human services the future of our economy? (And, therefore, an absolute requirement for world peace [1].)

For three reasons:

  1. They do not pollute or waste material resources (or tend to do so with significantly less degree than material consumption)
  2. Exponential growth of population absolutely requires more human labor (supply and demand of labor)
  3. There’s no limit to service creation, but by type and nature they are infinite (because people’s needs are infinite and ever-changing)

Consequently, critical, absolutely critical measures are needed in the Western economies to enable true service economy.

Here are some ideas:

  • Taxation of human labor (VAT of services) must be drastically cut.
  • Side-costs of employing people (instead of machines) must be drastically cut.
  • Any technological solutions (e.g., platforms) increasing the match between supply and demand of human labor must be endorsed, and respectively all barriers such as cartels, removed.

Human services are the key to sustainable and socially balanced consumption – I look at Finland back in the 1950s; we were a real service economy. Today, every job possible has been replaced either by automation or by self-service (which companies call “customer participation”). We’re a digital self-service economy, not a service economy anymore.

I long for the days when we had bellboys, cleaning ladies, office clerks, research assistants and other support staff — they are important jobs which nowadays are no more. Self-service and efficiency are in fact the enemies of employment. We must consider if we want a society optimized for efficiency or one optimized for well-being (I’m starting to sound like, Bernie Sanders; which might not be a bad thing as such, but the argument has a deeper rationale in it).

Maximum efficiency is not maximum employment, far from it.

Regarding Silicon Valley and startups, there should be a counter-movement against efficiency. So far, software has been eating the world, and the world — at least in terms of job market — is becoming increasingly less. Granted, many new job types have been created to compensate for the loss, but much more is needed to fill the gap software is leaving. I think there needs to be a call for new type of startups, ones that empower human work. If you think about it, there already exists some good examples – Uber, Taskrabbit, Fiverr, Upwork are some of them. But all too often the core value proposition of a startup is based on its ability to reduce “waste” – that is, human labor.

I do not think there is any limit to creation of human services. People are never completely satisfied, and their new needs spawn new services, which in turn require new services, and so on and on. In fact, the only limit to consumption of services is one’s time and cognitive abilities! This is good and well, even hopeful if we think of the big picture. But I do think an environment needs to be created where incentives for providing human services match those of machine services, or at least approach that much more than what it currently does.

This is an issue that definitely needs to be addressed with real structural reforms in the society; as of yet, I haven’t seen ANY of that — not even discussion — in Finland. It’s as if the world was moving but the politicians were asleep, stuck in some old glory days. But in the end we all want the same thing – we want those old days BACK, when everyone had a job. It’s just that we cannot do it without adjusting the policies — radically — to the radical change of productivity which has taken place in the past decades.

It’s like another candidate — not Sanders — says: We gotta start winning again.

End notes

[1] The premise here is that the well-being of a middle class is required for a balanced and peaceful society. In contrast, the crumbling middle class will cause social unrest and wide dissatisfaction which will channel out in political radicalism, scapegoat seeking, and even wars between nations. Jobs are not just jobs, they are vehicle for peace.

The author has taught services marketing at the Turku School of Economics.