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From the Desk of the Executive Director

Ken Phillips is co-founder and Executive Director of Independent Contractors of Australia. He is a published authority on independent contractor issues and directs research on related commercial and trade practices issues. Through his numerous articles in newspapers and think-tank and academic journals, Ken is known for approaching issues from outside normal perspectives and is frequently sought out for media comment.

Ignoring the economics of innovation

Wednesday, January 12, 2011

Across the globe massive debt burdens are suppressing economic activity. The US, EU and Japan are struggling to stimulate growth with limited success. With a rising reservoir of self-employed workers, shouldn't governments devote more of their efforts to encouraging entrepreneurship and innovation as a way of stimulating their economies?

There's a straightforward reason why innovation should take centre stage of economic thinking and policy. Innovation created by entrepreneurs is the process by which economic development happens, a reality widely understood and accepted by economists.

Austrian-born economist Joseph Schumpeter is possibly the most famous proponent of this correlation---so famous in fact the Economist named its business management column after him, citing his contribution to innovation. Back in 1934 he put the thesis that market economies are a process of creative destruction, explaining that prevailing market arrangements are challenged by new ideas pushed by entrepreneurs. Established economic practices decline or die because of replacement innovations crafted by entrepreneurs and this constant churn of 'new' killing off 'old' is how economic development happens.

In Australia, look no further than the retailers' GST battle with their online competitors to see this process in action. The threat posed by internet retailers to the old guard is a classic example of innovation. Move up or be moved over.

Governments have tried to promote innovation. For the last 30-40 years it's been a political and academic buzzword. Politicians and government bureaucrats have allocated huge sums of money to innovation creation programs. Education institutions have departments that 'teach' innovation and entrepreneurship. But it appears it's all been useless.

According to two leading academics in the field, Simon Bridge and Ken O'Neill from Ireland's Ulster University, there's absolutely no evidence that any of the programs or approaches have produced any increase in innovation. The two men are whistleblowers, after spending much of their academic careers studying innovation and advising governments on the issue they've declared prevailing programs are 'duds'.

So if innovation is pivotal to the economic development of struggling countries, what are governments to do to encourage it given that previous efforts to do so have failed?

One problem is that entrepreneurs are misunderstood. Schumpeter said that entrepreneurs are rare because few people have the capacity, persistence or courage to overcome conformity. His observations were made in Europe in the early 20th century when class structures were enforced in empires controlled by monarchies---pressure to conform was rigid, often brutal. The rarity of entrepreneurs was a valid observation at the time because the instinct was suppressed.

But the rise of self-employment gives us some evidence that the entrepreneurial spirit is eternal. On average 20 per cent of workforces in developed economies are self-employed. This is a huge change in global workforce structures from 30 years ago.

What's obvious from research is that this one in five workers have rejected to conform to existing employment systems and structures. For self-employed people their principle motivation is that they wish to be their own boss and to steer their own path. These people are not intimidated into conformity.

These are the entrepreneurial seeds found in all societies. It's a massive body of people looking to do things differently. These people are the growers of innovation.

Unfortunately governments are institutionally fearful of and antagonistic toward self-employed people. Governments talk of supporting small business people but cannot stop themselves from institutionally discriminating against them. This in part reflects Schumpeter's assessment that entrepreneurship is rare and their acceptance does not come easily.

It's natural to focus on high-flying entrepreneurs. Think of Steve Jobs, Bill Gates and the latest wonder kid, Mark Zuckerberg. These are the billionaire entrepreneurs who started from nothing but became big. Government understands big---little is a nuisance.

But what governments need to understand is that the sum of millions of little entrepreneurs will always drive larger economic development than the (welcome and needed) achievements of a few hugely successful entrepreneurs. Fortunately self-employment has grown despite government opposition to it, demonstrating the resilience of the innovation instinct.

Here's the challenge. Governments must institutionally gear for mass cultures of entrepreneurship without fearing it or suppressing it. If economic development is approached from this perspective new pathways to innovation should be possible.

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