Often in a recession, there is a shakeout of businesses that cannot quite cut it. Unemployment rises as marginal businesses fail and capital is redeployed to firms that can succeed. Eventually, the recovery sets in and expanding firms take on more labour. The shock is sharp and unpleasant, but as productive firms push on into profit, the economy heads upwards again.
The financial crash of 2008 was different. Historically low interest rates enabled firms to survive that would otherwise have gone out of business. These “zombie” businesses have kept unemployment down, which is good for those in jobs, but at a cost of falling productivity. The UK has not produced the productivity gains that would have boosted real wages and increased living standards.
Easy credit and quantitative easing have prevented the recession from turning into a major depression, such as that which blighted the US economy in the 1930s. Now something else is needed to kick-start productivity and growth, and a large part of the answer is investment and innovation.
Investment can be made attractive through tax allowances and offsets, and can, to some extent, be encouraged by making it more worthwhile. Innovation, however, is different. There is something more magic about it, more mysterious. What inspires and impels people to innovate? In Britain’s Industrial Revolution there developed a culture of innovation, now well-documented. Similar conditions had existed in other countries at other times, but none developed the self-sustaining and self-accelerating growth that Britain used to create the modern world.
The difference was cultural. In Britain, people became part of a culture of improvement and innovation. Innovation became not only respectable but fashionable. Many of the inventive pioneers did it not for financial gain, but for the acclaim of their peers and the desire to leave the world better than they had found it.
Learning from its past, Britain can now take measures to give innovation and innovators a higher status. This can be done by, for example, reserving a section of the Royal Honours lists for innovators, so they win their share of titles and medals and are honoured at annual dinners at the Palace.
More to the point, we could augment the 1,000 visas we allocate each year to people of exceptional talent by adding a further 1,000 visas to approved innovators. This would require applicants to produce evidence (possibly a contingent promise of funding from a venture capitalist) and perhaps submit to an interview, maybe by video link.
If they satisfied a panel including innovators that they merited admission, they should be granted “Innovator visas”, initially for a five-year period, but extendable if they managed to prove their worth within that time. This would make it easier for companies to hire innovators from abroad and form hubs.
The hubs themselves are an important part of the process of attracting the the right people. Innovators feed off and motivate each other. Communities such as Silicon Valley provide a magnet for talent, as well as the resources to foster it. This is not something that civil servants can direct; it has to be organic. But likely areas could be identified and supported with improved transport links and with premises made available on attractive terms to potential innovators.
Areas around some of the Northern universities might be likely candidates in view of the excellent scientific and technological research already emanating from many of them. Research grants could be co-ordinated and directed towards them. Help from business leaders might be made available to see start-ups through the pitfalls of early development.
A promising lead might follow the example of the “sandbox” sectors in financial technology innovation, in which a lighter regulatory rein is confined to developing companies wanting to test new ideas. They are treated as special cases, without regulation being relaxed for the entire sector. This could be extended to innovation in general.
If “sandbox” areas were created to make life easier for innovative companies, it would be important to ask the firms themselves which regulations were unnecessarily burdensome and constituted a real problem to development. These would quite probably include local planning laws and employment laws, in addition to excessive and inappropriate health and safety rules.
There is more. The Adam Smith Institute has just published a series of such proposals to help the UK to be at the forefront of the new world economy. By making Britain attractive to innovation and innovators it can stake its claim to be a world leader, just as it was in the first Industrial Revolution. In a global, post-Brexit world, if Britain can develop its own innovators and attract those from overseas, it will earn its place among the countries that will shape tomorrow.
A full copy of Dr Madsen Pirie’s discussion paper, Advancing Innovation, can be found here.
