Innovation requires a free hand

Medieval Chinese rulers favoured certain industries over others and they suppressed any new enterprise. When the Australian Science Minister, Kim Carr, announced his innovation review, the first thing I thought of was the Victoria and Albert design museum in London - not just because the V&A is a monument to innovation, but also because the museum contains valuable lessons for any erstwhile government minister.

Let me explain. The grand entrance of the V&A leads first to the medieval Asian galleries filled with exquisite pottery, ornate jewellery and an astonishing array of technology.

Go a bit further and you come to a collection of European artefacts from the Middle Ages - rough hewn wooden crosses lashed together with leather twine, simple cooking implements and no technology worth the name.

The contrast could not be greater. In the 1400s, when most Europeans were subsistence farmers, China was on the verge of industrialising.

They had already invented paper, explosives, clocks, moveable type, compasses and they were masters of ship design. Chinese farmers used hydraulics, their veterinarians successfully treated farm animals, and their crops were enhanced with artificial fertilisers.

Despite their impressive head start, by 1600 the Chinese had fallen scientifically and economically behind Europe. By 1800, the economic gulf between China and Europe was huge, and the Chinese have not yet caught up.

No great cataclysm can be blamed for this change of fortune. The Chinese fell behind because they lacked a system for innovation.

Innovation has two main ingredients - a good idea and a way to bring that idea to the market. The Chinese certainly had plenty of brilliant ideas but they were unable to develop them into commercial products.

Medieval Chinese rulers favoured certain industries over others and they suppressed any new enterprise that might threaten their hegemony.

They were less interested in economic progress than in maintaining the social status quo. For example, in the 15th century, to avoid the contamination of foreign ideas, they forbade trading with distant lands thus rendering their superior shipbuilding useless.

Innovation needs an openness to change; it also requires private property rights. In medieval China, state ownership meant that inventors could not realise any value from their inventions.

In modern times, a similar situation existed in the United States.

It's hard to believe but until fairly recently scientists and their universities were not permitted to profit from discoveries they made while supported by federal research grants. The result was that few discoveries were commercialised and the public did not benefit from the research their tax dollars supported.

In 1980, the US government gave universities ownership of their discoveries. The result was an innovation explosion - new products, new industries and increased prosperity.

The forthcoming innovation review is an opportunity to do things differently.

In the past, industry reviews have led to taxpayer "support" for certain "priorities" through bounties, tariffs and research grants. Sometimes this worked but more often it didn't.

It is difficult to pick winners and governments do not have crystal balls. More often than not, the industries favoured with government assistance became dependent on handouts and never achieved international competitiveness (there are many depressing Australian examples).

This time could be different. We have had considerable experience of innovation and we know that, like the medieval Chinese, government involvement is more likely to inhibit innovation than to assist.

Silicon Valley in California was not the brainchild of a government review nor was the high technology area around Cambridge in the UK.

The Formula 1 racing industry in the UK (worth $15 billion per year) grew up without government involvement as did all of the new Web2 businesses (Google, You-Tube, the Apple Music Store).

The iPod, large-screen plasma televisions, the BlackBerry and most other consumer goods seem to have found their way to market without government help.

This does not mean that the government has no role to play. Basic research will not be conducted without taxpayer assistance. Thus, an effective innovation policy has to include funding for basic research.

The government can also provide a foundation on which inventors and entrepreneurs can build their ideas into businesses.

This foundation consists of a tax system that encourages investors to risk their capital in research and development and a patent regime that allows inventors to realise the value of their intellectual property.

Funding universities adequately is also an important aspect of innovation. Australian universities are the source of many new inventions but they find it difficult to compete internationally.

It is a common occurrence for leading Australian academics to leave home for positions overseas because our universities cannot match the salaries and conditions offered by universities in other countries.

Perhaps government's most important job is maintaining a competitive environment.

Competition is the best (perhaps the only) way to encourage sustainable innovation. For most governments, this is the hardest job of all. Advisers believe they can engineer better outcomes than a freely competitive market.

But what a visit to the V&A shows us is that innovation does not require government to act as co-ordinator.

It requires openness to change, free trade, property rights, a favourable tax regime and a level playing field.

Market forces will take care of the rest.

Steven Schwartz is the vice-chancellor of Macquarie University in Australia.

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