Innovation policy in a networked crisis: Between Schumpeter and Keynes

NESTA’s Sami Mahroum: create “venturesome demand”.

Although Drayson called the fund a high-tech start-up fund, a lot of vagueness remains around what exactly the fund will do. To be sure, the question of where and on what to spend public money has become a matter of international dispute and disagreement lately – witness the UK-Germany dispute over public spending in Brussels early on this month.  

Both the UK and the US governments have now adopted Keynesian economics. This stipulates a strong role for the state in stimulating the economy during recessions by injecting massive amounts of cash into the economic system through both "bail out” and “stimuli” packages. The broad objective is to stimulate demand, create employment and prevent the economy from contracting.  

But in a world economy that is globally networked, Keynesian economics presents governments with more confusions than solutions. A recent NESTA paper entitled Attacking the Recession called the current global economic crisis the “world’s first networked recession”. Networks are another word for what the business world calls “supply chains” or “value chains”, and these are where demand and supply meet and create value.

It’s all integrated

The geography of supply chains has become more transnational than ever and for any supply chain the beneficiaries are likely to be spread across many countries. This level of global economic integration makes the application of Keynesian economics very challenging. The main challenge arises from the blurring geographies of supply and demand.  Just where does the supply and demand for a product or service begin and end?  

This is accentuated in the case of Germany.  To stimulate demand a la Keynesian, the German government has to spend money overseas, as it is there where much of the demand for its products and services lie.  China is arguably in a similar position if not worse; it is an export oriented economy overly dependent on foreign investment and consumption.

A Schumpeterian slip

But globalisation is not the only challenge facing Keynesian economics policy today. Over the past 10 to 15 years, most science, technology and innovation policies in OECD countries have been guided by Schumpeterian principles. Unlike Keynesian economics, these see government’s primarily role in providing the support and creating the conditions for economic stimulus through supply-side factors (seed capital, human capital, and capital investments). And yet amid so much talk about pulling the economy out of recession by influencing demand-side factors (such as consumption and investment), the creation of the billion pound fund to support the next wave of “creative destruction” comes like a Schumpeterian slip in a John Maynard Keynes classroom.

While John Maynard Keynes focus was on igniting short-term business cycles that can drive an economy out of a recession, Joseph Schumpeter‘s focus was on long-term business cycles generated through successive waves of “creative destruction” and ignited by not the state but by innovative entrepreneurs.  

The innovation policy community across much of the OECD has yet to make the shift to Keynesian economics thinking. This is where the proposed £1 billion fund becomes a tricky issue. Should the fund provide support for entrepreneurs with business plans expected to yield results in the long term (5+ years)? Or should it only support entrepreneurs with more short-term or immediate plans to enter the market?

Will the UK government, through the £1 billion start-up fund, find itself struggling with how to use what is essentially a Schumpeterian policy instrument to achieve a Keynesian objective? In other words, how to wed supply-side (Schumpeterian) economics with demand-side (Keynesian) economics in innovation policy.

In his excellent book The Venturesome Economy, Columbia University professor Amar Bhidé provides a possible answer. Bhidé sees “venturesome consumption” as a main tool for creating economic value.  This is the type of consumption geared towards value creation and not towards wasteful consumption. It is consumption within supply-chains, more B2B consumption and less B2C.

In practical terms this means that the £1 billion start-up fund should be aimed at supporting entrepreneurs with more immediate plans to bring a new or improved product or service into the market. The fund should exclude entrepreneurs with long-term objectives who are seeking to commercialise new discoveries, inventions, or university research.

This is not to say that such entrepreneurs should not be supported. They should be, but not through this particular fund, which is in principle aimed at creating solutions for short-term problems. The fund should seek to create “venturesome demand” that would provide stimuli to new and existing supply chains.

Across much of OECD countries innovation policy has yet to evolve to deal with the complexities of the new world innovation order. National innovation systems are dead, and for long they have been replaced by networked innovation systems that criss-cross national boundaries and overlap territories. Many of the factors supporting innovation in one country will be dependent on factors in another country. A nationalistic approach to innovation policy is doomed to failure.