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.