tag:theconversation.com,2011:/columns/elizabeth-webster-118733Transforming the Australian economy – The Conversation2017-11-23T05:35:12Ztag:theconversation.com,2011:article/871022017-11-23T05:35:12Z2017-11-23T05:35:12ZNo, we aren’t running out of new ideas<figure><img src="https://images.theconversation.com/files/194748/original/file-20171115-19814-1c2p6w0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Is the rapid increase in research actually paying off?</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>We’ve <a href="http://www.nber.org/papers/w18315">picked all the low hanging fruit</a> when it comes to new ideas, and the world is set for more parsimonious times. This is the idea put forward in a <a href="http://www.nber.org/papers/w23782">recent research paper</a> by Nicholas Bloom, John Van Reenen and their co-authors.</p>
<p>The paper argues that productivity growth has been low or declining since the 1940s, despite an increase in the number of researchers. The idea is that a rising number of researchers should lead to an acceleration of productivity. A proven good idea can potentially be applied to the whole production system and so a rise in researchers should increase this effect.</p>
<p>This message should be taken seriously but not simplistically.</p>
<p>First, let’s consider the assertion that productivity growth has been declining. In the paper, the data presented is on “<a href="http://www.people.hbs.edu/dcomin/def.pdf">total factor productivity</a>” growth. This is a rather convoluted measure of goods and services produced per worker. </p>
<p>Economists tend not to use simple measures (such as GDP per worker) to illustrate productivity, as this would also count other inputs into the production process (such as factories). Accordingly, they subtract these assets from output to get a measure of output per worker in a complicated statistical procedure. This measure is called total factor productivity.</p>
<p>But really this elaborate measure is making two wrongs equal a right. Measures of assets are based on archaic accounting standards which are incomplete.</p>
<p>It is not surprising therefore to get estimates of total factor productivity that throw up strange results such as unexplained falls in productivity. As a measure of long-run output per worker, this measure is too massaged to be convincing.</p>
<h2>Trend productivity growth = 2.6% per annum</h2>
<p>A clearer measure is the amount of goods and services available to householders per hour worked.</p>
<p>Below I have estimated this ratio for the largest 21 OECD countries combined, since 1952. It reveals a flat trend rate of growth in productivity of about 2.6% per annum. Although this understates true productivity because indexes of price aren’t very good at representing changes in product quality (think of how much better computers have gotten over time).</p>
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<img alt="" src="https://images.theconversation.com/files/194741/original/file-20171115-11252-16qw3ka.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/194741/original/file-20171115-11252-16qw3ka.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=413&fit=crop&dpr=1 600w, https://images.theconversation.com/files/194741/original/file-20171115-11252-16qw3ka.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=413&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/194741/original/file-20171115-11252-16qw3ka.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=413&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/194741/original/file-20171115-11252-16qw3ka.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=519&fit=crop&dpr=1 754w, https://images.theconversation.com/files/194741/original/file-20171115-11252-16qw3ka.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=519&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/194741/original/file-20171115-11252-16qw3ka.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=519&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Author estimates.</span>
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</figure>
<p>There has been a steady increase in the number of researchers since 1996. But in the past 30+ years, there has been <a href="http://www.swinburne.edu.au/media/swinburneeduau/research/research-centres/cti/reports/does-innovation-make-sme-firms-more-productive-palangkaraya-spurling-webster-2015.pdf">consistent empirical evidence</a> that higher research and development causes firms, industries and countries to experience faster rates of growth. </p>
<p>Governments have responded with incentives to do more research and development, and the number of research and development workers as a percentage of the population has risen. But why hasn’t output per worker accelerated?</p>
<p>Without more consideration, it is a big stretch to go from lower than expected growth in per capita output to “we are running out of ideas”.</p>
<h2>There may be other limits on growth</h2>
<p>What if, the bottleneck – if we want to call it that – to faster growth is not the generation of new ideas (only some of which comes from research and development workers in any case), but from the ability to successfully translate those ideas into reality? </p>
<p>We know that there tends to be many more ideas than are actually implemented. However, many ideas that are technically feasible are not cost effective; are out-competed by better ideas or simply are not invested in. </p>
<p>There is a <a href="http://www.uxteam.com/blog/every-dollar-invested-in-ease-of-use-returns-10-to-100-dollars/">saying</a> that for every $1 spent on research, you need to spend $10 on development and $100 on translation. </p>
<p>The issue may not be that spending on research and development is becoming less productive, but that the economy is missing important complementary investments into research translation and change management.</p>
<p>Alternatively, it may be lack of risk-loving investors.</p>
<h2>Most productivity gains are from catch-up to the frontier</h2>
<p>We <a href="http://acola.org.au/wp/PDF/SAF10/Webster.pdf">know</a> that most productivity gains come from new-to-the-firm innovation – laggard firms catching up to those pushing the envelope. A policy focus at this end is needed.</p>
<p>It’s not easy to know what ideas will continue and transform economies and what ones will peter out. Recent examples of scientific progress, including genetic engineering, artificial intelligence, 3-D printing, augmented reality and robotics, may have enormous economic impact. </p>
<p>They may be the transformations we need to manufacture all our material needs with only 2% of our workforce, to cure or prevent diseases, to provide carbon-free energy, or mitigate political events that destroy lives and livelihoods. It is a bit trite to say our forebears invented electricity, the steam engine and the internet – what did we invent last week?</p>
<p>For a more optimist view of the future read <a href="http://voxeu.org/article/secular-stagnation-not-your-life">Joel Mokyr</a>.</p><img src="https://counter.theconversation.com/content/87102/count.gif" alt="The Conversation" width="1" height="1" />
<h4 class="border">Disclosure</h4><p class="fine-print"><em><span>Beth Webster receives funding from The ARC and the Commonwealth and Victorian Governments. </span></em></p>Academics argue that increasing amounts of R&D isn’t translating into greater productivity. But the problem may lay elsewhere in the economy.Beth Webster, Director, Centre for Transformative Innovation, Swinburne University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/780262017-05-29T06:51:17Z2017-05-29T06:51:17ZWhy the KPIs on university engagement need more thought<figure><img src="https://images.theconversation.com/files/171292/original/file-20170529-25261-1b8y79p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">If the government wants to encourage universities to translate their research to a wider audience, they should explicitly pay for it.</span> <span class="attribution"><span class="source">www.shutterstock.com</span></span></figcaption></figure><p>In March 2018, all Australian universities will be submitting key performance indicators (KPIs) on their engagement and impact to the Australian Research Council. These measure how well universities engage with the non-academic community and what impact they have had on society over the last five years. </p>
<p>An aim to encourage research to have more impact on society is good, but not all impacts need be measured. </p>
<p>The Australian Government is now reviewing the guidelines for these KPIs. Now is the time to get it right.</p>
<h2>Why do we use KPIs?</h2>
<p>There are certain times when it’s appropriate for governments to impose KPIs on external organisations. </p>
<p>In the private sector there’s a market that shows when businesses have made the goods in the quantity and quality that the consumer wants. Unfettered purchase is proof enough that the right product has been delivered at lowest cost. However, this automatic system of proof, breaks down when the purchaser is not the consumer. </p>
<p>The separation between the purchaser and consumer is common in government services for a number of reasons. For example in many services, such as library services or rubbish collection, the government purchases the services of workers and materials but the residents consume the services. </p>
<p>The unhappy consumer has no recourse other than to complain (whereas in the private sector they could take their money to another provider). To avoid this ad hoc complaints-based system, and to mimic the best features of the market, the government may set KPIs (such as books borrowed or spilt rubbish) to ensure the producer is acting in the consumers’ best interests. </p>
<p>In the university sector the student is, for many courses, both the purchaser and the consumer of teaching services (hence KPIs probably not needed), but this is generally not the case for research.</p>
<p>The purchaser of research is often a government and the consumer is society. Taxpayer funds are handed out to academics based on the judgement of expert committees. </p>
<p>To date, aside from mechanically monitoring “progress”, there has been little oversight by the Government on how well these funds are used and what their effect has been. Has society-at-large benefited? No one has yet <a href="http://webcache.googleusercontent.com/search?q=cache:HO93KmtgxbIJ:www.oecd.org/science/inno/40858284.pdf+&cd=7&hl=en&ct=clnk&gl=au">been able to answer this</a>.</p>
<p>Although achieving societal impact is rarely promised in grant applications, KPIs are a good way to start changing university research culture. Marks out of 10 is something academics understand.</p>
<h2>Who sets the KPI?</h2>
<p>Not all university research uses public funds. Some research is bought directly by the consumer (public organisations or businesses), as collaborative or contract research. </p>
<p>This form of research doesn’t need an artificial government-driven KPI. Similarly, governments may allocate funds via a matching model, so their portion is at least driven by one consumer (the industry collaborator). </p>
<p>Other research is funded through philanthropic bodies or universities’ own endowments. Again, the researcher here is answerable to the trust fund rules, not the Government. </p>
<p>However, there remain considerable research funds (<a href="https://www.google.com.au/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0ahUKEwi_yYuZkZTUAhWGnZQKHV6GD9gQFggoMAA&url=https%3A%2F%2Fwww.canberra.edu.au%2Fresearch%2Ffaculty-research-centres%2Fedinstitute%2Fdocuments%2FHigherEd_FundingReviewReport1.pdf&usg=AFQjCNF6b3RPQO7nRWOFO5l_245H-lYGzw&sig2=nwYs8zfK1ANDF2KRbmisIQ">perhaps half</a>) that are provided through the Government that demand some form of public accountability. If not to improve the allocative efficiency and change academics’ behaviour, but also to assure the public that their taxes are used for community benefit. Therefore KPIs have a role for this portion of research.</p>
<h2>How KPIs could be changed</h2>
<p>If the Government wants to encourage universities to translate their research, they should explicitly pay for it. Engagement and impact are expensive activities and to date, academics who have contributed, have often done so in contradiction to the push by their heads of department to only publish in research journals.</p>
<p>The KPIs should be relative to the quantity of research funding received from the Government. </p>
<p>There’s a well-known dictum that says, whenever a measure becomes a performance metric, it <a href="https://books.google.com.au/books?hl=en&lr=&id=j5pg-t113aoC&oi=fnd&pg=PA221&dq=Goodhart,+C.A.E.+1975.+%E2%80%98Problems+of+Monetary+Management:+The+U.K.+Experience%E2%80%99,+Papers+in+Monetary+Economics,+Reserve+Bank+of+Australia&ots=Cb9NA94RlG&sig=BkMDQ8H8dZOJc6bhqYgLb9U23oE">ceases to be a good measure</a>.</p>
<p>When it comes to universities collaborating with businesses, there is some use and abuse of patent applications as an indicator of reaching KPIs. For example, a KPI introduced in China based on patents has meant that the <a href="http://www.sciencedirect.com/science/article/pii/S0165176516304475">quality of patent applications is lower.</a></p>
<p>There are good arguments why the business (not the university) should own the patent arising from a collaboration. The owner has residual control rights which are important when unforeseeable contingencies are likely to arise. If these contingencies are largely commercial, then the best party to control residual rights is the commercial entity. </p>
<p>And if all this is correct, then university patent applications should not be a metric at all. A patent KPI could reduce research translation and make universities’ IP departments even more difficult for industry to deal with.</p>
<h2>The findings on university support may be sobering</h2>
<p>If these KPIs aim to find out how the university as an organisation has encouraged their staff to engage and deliver impact, the results might be sobering. Apart from providing a desk, computer and the imprimatur of an academic title, it would be interesting to see what additional support most universities offer.</p>
<p>It’s my guess that, that most non-academic staff are spending their time responding to bureaucratic requests from the Government, other compliance agencies and international ratings bodies (or finance, HR, legal etc matters). Few are probably assigned to aid engagement and impact.</p><img src="https://counter.theconversation.com/content/78026/count.gif" alt="The Conversation" width="1" height="1" />
<h4 class="border">Disclosure</h4><p class="fine-print"><em><span>Beth Webster receives funding from the ARC, Commonwealth and Victorian Governments. </span></em></p>In March 2018, all Australian universities will be submitting key performance indicators (KPIs) on their engagement and impact to the Australian Research Council. These measure how well universities engage…Beth Webster, Director, Centre for Transformative Innovation, Swinburne University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/771782017-05-22T06:24:40Z2017-05-22T06:24:40ZAustralian copyright laws have questionable benefits<p>As the Australian Copyright Agency comes under pressure for <a href="http://www.smh.com.au/federal-politics/political-news/copyright-agency-diverts-funds-meant-for-authors-to-15m-fighting-fund-20170420-gvol0w.html">appearing to use member royalties to enshrine self-serving copyright laws</a>, it’s time to question the purpose of copyright. Some argue current laws ensure artists are fairly paid and make more local content. The evidence doesn’t support this idea.</p>
<p>Copyright is primarily concerned with creative works.</p>
<p>Exploitation of copyright occurs when the author of a creative work excludes all others from reproducing or otherwise using their work for up to 70 years after their death, unless they, the authors, agree to authorise any such use (i.e. pay a fee or a royalty under voluntary or compulsory licences).</p>
<p>On the <a href="https://www.theguardian.com/business/2009/nov/23/musicindustry-law">pro-copyright</a> side, we have the global movie and music industry, many IP lawyers and prominent authors. </p>
<p>Opposing copyright, we have <a href="https://carlsonschool.umn.edu/faculty/joel-waldfogel">academics</a>, <a href="http://www.epip2015.org/waldfogel-and-org-economists/">economists</a> and other <a href="http://www.pc.gov.au/inquiries/completed/intellectual-property#report">public policy analysts</a>. </p>
<h2>Does copyright encourage more creative work?</h2>
<p>The intention of copyright laws is <a href="http://www.copyright.org.au/acc_prod/ACC/Home/ACC/Home.aspx?hkey=24823bbe-5416-41b0-b9b1-0f5f6672fc31">to encourage people to create cultural products</a> such as books, songs, movies and fine art etc. The argument goes that if the authors of these works (or their owners) can charge royalties to those who enjoy these works, then more people will decide to work as authors. </p>
<p>The author gets an income and can therefore spend more time creating works.</p>
<p>However, there are strong arguments that copyright may have gone too far. Royalties only go to a small amount of people, and they mostly prop up the incomes of “rent seekers”. Rent seeking is when income from copyright just makes existing creators wealthier and does not encourage more people to become creators.</p>
<p>The contra-copyright group see <a href="http://www.pc.gov.au/__data/assets/pdf_file/0008/194651/sub064a-intellectual-property.pdf">some</a> <a href="http://www.pc.gov.au/__data/assets/pdf_file/0006/195009/sub108-intellectual-property.pdf">advantage</a> from copyright lasting a few decades, but not the current system, which grants copyright for life plus 70 years after death (there are some exceptions). </p>
<p>Royalties should not be paid beyond the point at which the income stream has an effect on decisions to create more now. Existing copyright laws (which can give control for over 100 years) are merely lining the pockets of movie houses and the heirs of dead authors, without having any effect on the current group of artists.</p>
<h2>Australian culture will falter without copyright</h2>
<p>The <a href="http://www.pc.gov.au/__data/assets/pdf_file/0005/194351/sub010-intellectual-property.pdf">next argument in favour of copyright</a> is that the true value of copyright is the ability for the owner to control the use of their work through licensing. </p>
<p>Given the ubiquity of the internet, it is now very easy to copy works and local authors will not be able to make a living from their work. </p>
<p>Hence, any time or effort they put into creations will be in their spare time after working elsewhere. Enabling authors to receive some royalties goes some way towards providing them with independent income.</p>
<p>But the contra-copyright group <a href="http://www.journals.uchicago.edu/doi/full/10.1086/663157">say</a> the fact that most royalties go to very few authors, or <a href="http://www.swinburne.edu.au/media/swinburneeduau/research/research-centres/cti/reports/thomson-webster-trade-in-ideas-march-2014.pdf">go overseas</a> to the big music and movies houses and publishers, means copyright does little for emerging and local artists. </p>
<p>In fact, the best way to encourage the local cultural sector might be to offer stipends or grants directly to local artists. </p>
<p>It is not to use copyright to overcharge the ordinary householder; prosecute those who illegally download movies; or to waste the time of students and school teachers filling in royalty forms.</p>
<h2>A right to control your creation?</h2>
<p>Another <a href="http://www.pc.gov.au/__data/assets/pdf_file/0018/200925/subdr343-intellectual-property.pdf">pro-copyright argument</a> is that copyright is needed to ensure authors are credited for, and control, their work. This is also known as “<a href="https://www.copyright.com.au/about-copyright/moral-rights/">moral rights</a>”, and creates the obligation to attribute creators and treat their work with respect.</p>
<p>But we could question whether this is the role of copyright. Gifting moral rights does not necessarily mean the artist should be able to decide who can read or watch his or her work for the purpose of genuine enjoyment.</p>
<h2>Authors should be paid for their contribution to society</h2>
<p>The <a href="http://www.pc.gov.au/__data/assets/pdf_file/0018/200925/subdr343-intellectual-property.pdf">pro-copyright group</a> claim that royalties are justified on fairness grounds. People should be rewarded according to their contribution to society and as royalties are linked to use (reading or watching), it is a clever way to link contributions. </p>
<p>However, in terms of value to society, a case can be made that primary school teachers, civil engineers or surgeons should be paid more. And as copyright only delivers a living wage to very few artists, we can question whether the current laws are a fair system.</p>
<h2>Fair use</h2>
<p>The <a href="http://www.pc.gov.au/inquiries/completed/intellectual-property#report">Productivity Commission</a> recently agreed with the Australian government to reform the education statutory licensing scheme, but commented that this decision was missing a recommendation to move to a “fair use” system of copyright exceptions. </p>
<p><a href="https://www.alrc.gov.au/publications/6-new-fair-dealing-exception/differences-between-new-fair-dealing-and-fair-use">Fair use</a> allows for certain circumstances where people can use copyrighted material without the copyright holder’s permission.</p>
<p>Australia does not have a fair use exception. It only has a more limited “fair dealing” exception which means we can only avoid permission for uses that are on a list. </p>
<p>A fair use system would allow users such as schools and universities to use works in some situations without paying any royalties. Maybe, we should limit copyright to 20 years and increase our stipends to local artists instead.</p><img src="https://counter.theconversation.com/content/77178/count.gif" alt="The Conversation" width="1" height="1" />
<h4 class="border">Disclosure</h4><p class="fine-print"><em><span>Beth Webster receives funding from the ARC, Commonwealth and Victorian Governments. She is currently president of the European Policy for Intellectual Property association.</span></em></p>It’s questionable whether current copyright laws actually support artists or more local content.Beth Webster, Director, Centre for Transformative Innovation, Swinburne University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/764442017-04-20T05:24:21Z2017-04-20T05:24:21ZLet’s stop kicking the innovation football around<figure><img src="https://images.theconversation.com/files/166019/original/file-20170420-2418-1egc1qr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">If we want to stop kicking the innovation football back and forth – we need to move industry policy to a more prominent place in the political agenda.</span> <span class="attribution"><span class="source">www.shutterstock.com</span></span></figcaption></figure><p>The federal government spends over <a href="https://industry.gov.au/innovation/reportsandstudies/Pages/SRIBudget.aspx">A$10 billion</a> plus a year on industry policies but we have little idea how effective they have been. Programs are regularly dropped before we even know if they work.</p>
<p>Think of the fate of <a href="http://www.theaustralian.com.au/business/at-a-loss-as-grant-is-axed/news-story/67d365d7d9fd12451873a1303df3f557">Commercial Ready</a>, <a href="http://www.business.vic.gov.au/support-for-your-business/grants-and-assistance">innovation vouchers</a>, <a href="https://www.business.gov.au/assistance/entrepreneurs-programme-summary">Researchers-in-business</a>, and <a href="https://www.business.gov.au/assistance/entrepreneurs-programme-summary">Enterprise Connect</a>. These programs disappeared or were downgraded with little resistance despite their (anecdotal) popularity. </p>
<p>Now there is another government inquiry into what to do with the A$10 billion. Consultants, <a href="http://www.howardpartners.com.au/">John Howard Partners</a>, on behalf of <a href="https://industry.gov.au/Innovation-and-Science-Australia/Pages/default.aspx">Innovation and Science Australia</a>, are touring the country seeking views from interested parties about what can be done. </p>
<p>This follows a number of other inquiries from the last decade: <a href="https://industry.gov.au/innovation/InnovationPolicy/Pages/ReviewoftheNationalInnovationSystem.aspx">the Terry Cutler review</a> of the innovation system, the <a href="http://www.voced.edu.au/content/ngv%3A17206">Roy Green review</a> of the textile, clothing and footware industries; the <a href="https://industry.gov.au/industry/IndustrySectors/automotive/Documents/ReviewofAustraliasAutomotiveIndustry.pdf">Steve Bracks’ review</a> of the car industry and a series of Securing Australia’s Future reviews, to name a few. The conversation is good – building broad agreement is useful. But it’s also time to step up and commit to a clear and steady course of action. </p>
<h2>We need stable policies</h2>
<p>We need to stay with policies that are known to be effective and stop treating innovation programs as this week’s fashion. </p>
<p>The problem is the continuous change in industry programs, so much so that those who study them can barely recall their history. One way to counter this is to put responsibility for innovation programs under a statutory body similar to the Australian Research Council, the National Health and Medical Research Council (NHMRC) and the rural research and development corporations. </p>
<p>Statutory independence - being able to enact legislation by law on behalf of the government - would give programs the permanence and stability that will allow businesses to know they exist; know where they are; know how they operate; and know who to contact. </p>
<p><a href="http://onlinelibrary.wiley.com/doi/10.1111/1759-3441.12001/full">Recently my colleague, Russell Thomson, and I surveyed businesses</a> about their knowledge of government industry assistance programs. The results were sobering. Few large firms had heard of most government incentive schemes and among small to medium enterprises the knowledge was even more scant. </p>
<h2>Changing programs and implications for productivity</h2>
<p>If business don’t know about programs relevant to them, then the programs are not going to be effective. Re-naming or scrapping the last minister’s program has become a sport in the industry portfolio. </p>
<p>It’s hard to find a government program, other than the research and development tax concession, that has survived for more than eight years without being abolished, macerated or re-badged. </p>
<p>Although knowledge about the existence of programs is arguably as important as their content, we can improve on both fronts. We know that Australia invests very little in its innovation eco-system <a href="https://acola.org.au/wp/project-4/">compared with other advanced and advancing economies</a> . </p>
<p>Some of the most successful programs in the USA have been in existence since the 1980s. Part of Australia’s lack of adherence to a consistent industry policy is our easy dependence on selling iron ore and coal to Asia. Relying on this narrow export base is high risk.</p>
<p>Developing world competitive industries are not overnight creations. Our mining and education exports took decades or longer to develop. </p>
<p>They were built on a whole platform of supporting industries from the finance, research and development, supplier and logistics sectors. They do not arise from a single good idea or bright entrepreneur. </p>
<h2>Other advancing economies have eco-systems for innovation</h2>
<p>Much industry policy in Australia is dominated by archaic economic textbook thinking that sounds good in theory, but is not followed in practice by the most successful economies. These theories assume business will be rational and correctly predict the future, but that doesn’t always happen.</p>
<p>Examples of the best practise in industry policy include: the USA, which has poured considerable funds into <a href="marianamazzucato.com%20%5BPDF%5D%20RE-IGNITING%20PUBLIC%20AND%20PRIVATE%20INVESTMENTS%20IN%20INNOVATION">risky high-tech companies</a>, Germany with its a large and generous industry philanthropic culture (for example, the trusts of business people such as Dieter Schwarz) and the substantial <a href="https://ec.europa.eu/programmes/horizon2020/">EU Horizon 2020 program</a> supports collaboration, funding for innovation (e.g. the Risk-Sharing Finance Facility) and backs research on public sector and social innovation. </p>
<p>Leadership is needed to set up a statuary body. But if we want to stop kicking the innovation football back and forth; if we want to be serious about moving to the frontier of industry – we need to move industry policy to a more prominent place in the political agenda.</p><img src="https://counter.theconversation.com/content/76444/count.gif" alt="The Conversation" width="1" height="1" />
<h4 class="border">Disclosure</h4><p class="fine-print"><em><span>Beth Webster receives funding from the ARC and Victorian Government. </span></em></p>The federal government spends over A$10 billion plus a year on industry policies but we have little idea how effective they have been. Programs are regularly dropped before we even know if they work. Think…Beth Webster, Director, Centre for Transformative Innovation, Swinburne University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/750472017-03-23T03:45:46Z2017-03-23T03:45:46ZNational Science Statement does little to bring industry and researchers together<p>The Australian Government released a <a href="http://www.science.gov.au/scienceGov/NationalScienceStatement/index.html">National Science Statement</a> yesterday – the punchline being it will announce a new plan sometime this year. Aside from appointing a very able, experienced and articulate Chief Scientist (Dr Alan Finkel), we have seen in recent years remarkably little in the form of actual policies to transform Australian businesses and bring them up to world standard.</p>
<p>So let us remind ourselves why we should care about our government’s science and innovation polices. Thermal coal, one of our major exports, is heading for obscurity. Iron ore, our main export, could well be under threat from the emergence of new materials such as carbon fibre which is lighter and five times stronger. When the cost of the new inputs (solar, batteries, carbon fibre) become cheaper than our “old economy” inputs (and the trends are there), we will see an acceleration in decline for our exports.</p>
<p>So what are we Australians doing about it? We know that it can take up to 20 years to create the web of interrelated businesses and research bodies needed to underpin a successful export sector. If we want to avoid this predictable crisis, we should be acting now.</p>
<h2>Status report</h2>
<p>The National Science Statement summarises the issues well. Australia has:</p>
<ul>
<li>An above average standard research sector, and leads globally in certain areas of science and technology</li>
<li>State-of-the-art research infrastructure</li>
<li>A high-quality education system</li>
<li><a href="http://www.sciencedirect.com/science/article/pii/S0048733312002235">A poor record of collaboration</a> between industry and the research sectors</li>
<li>A poor record of benefiting from the translation of research ideas into use.</li>
</ul>
<p>Given the statement is not going to tell us, in concrete terms, what the government is going to do, here are a few suggestions.</p>
<p>But first, a few facts. Commonwealth government R&D expenditure per resident was in 2014-2015 (latest data) the lowest it has been since the Australian Bureau of Statistics has been collecting the data (1992-1993). It peaked in 2006-2007 and has fallen continuously since then. The status for State and Territory spending is even more acute. It peaked in 1998-1999 and has never recovered. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/162282/original/image-20170323-4974-1vk3f2p.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/162282/original/image-20170323-4974-1vk3f2p.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=368&fit=crop&dpr=1 600w, https://images.theconversation.com/files/162282/original/image-20170323-4974-1vk3f2p.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=368&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/162282/original/image-20170323-4974-1vk3f2p.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=368&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/162282/original/image-20170323-4974-1vk3f2p.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=463&fit=crop&dpr=1 754w, https://images.theconversation.com/files/162282/original/image-20170323-4974-1vk3f2p.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=463&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/162282/original/image-20170323-4974-1vk3f2p.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=463&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">ABS</span></span>
</figcaption>
</figure>
<p>R&D support is not the only way public policy can help create new industries however. There are a plethora of industry and innovation-related programs that are designed to de-risk frontier industries and products in the private sector. </p>
<p>However, the percentage of Australian businesses receiving public support for innovation at 7%, is currently the <a href="https://industry.gov.au/Office-of-the-Chief-Economist/Publications/Pages/Australian-Innovation-System.aspx#">lowest in the OECD</a>. The average for the OECD is about 25%. So there is no joy here either.</p>
<h2>What do Australian governments and universities need to do?</h2>
<p><strong>Hire and retain the best people</strong></p>
<p>Translation and engagement is <a href="http://onlinelibrary.wiley.com/doi/10.1111/1759-3441.12130/abstract">largely driven by</a> the capabilities, preferences and motivations of the individual researchers. One of the most important decisions a university or research institute can make is to hire and retain these individuals. Excellent translators develop trust and relationships with appropriate people; communicate in a manner that speaks to the industry audience; understand the needs and constraints of the industry partner; understand how industry partners make decisions; who to talk to; what level of evidence is required; what is their risk/reward profile. </p>
<p><strong>Create the space for people to meet</strong></p>
<p>Universities, government and research institute policies can have a moderating influence by creating the space for people to meet and affecting workplace culture and peer learning. To some extent this issue is being addressed by the Commonwealth Government’s assessment of the level and quality of research engagement and impact by Australian universities. This should be completed in March 2018, but more can be done.</p>
<p><strong>Plan long-term</strong></p>
<p>Other than the obvious step of bringing Australia’s level of public investment in innovation programs up to the OECD average, Australian programs can be improved in obvious ways. For many decades they have been bedevilled by capricious changes to such an extent that programs come and go with <a href="http://onlinelibrary.wiley.com/doi/10.1111/1759-3441.12001/abstract">limited industry familiarity.</a></p>
<p>If businesses do not know about a program, then it will not be effective. Many programs do not advance beyond pilot stage; they are not objectively and independently evaluated; and they tend to be run in an overly bureaucratic manner. If they are not evaluated, how does a government know if they work? If they are not evaluated, is the government really serious about transforming the Australian economy?</p>
<p><strong>Evaluate whether programs are working</strong></p>
<p>There are many programs aimed to address the translation of science issue that have come and gone without so much as a cursory look at their effectiveness (innovation vouchers, Enterprise Connect, Commercial Read, among others). There are other longstanding programs that have never been under the evaluators’ microscope (CRCs, ARC linkage programs). By evaluation, I do not mean surveys of grateful recipients of government largess, but a scientific evaluation that constructs a control group and uses externally verified data.</p>
<p>These suggestions are not rocket science or outlandish measures. They are well established principles in health, medicine and education.</p>
<p>Finally, a government wanting to improve collaboration broadly across the economy should of course set an example of being a good collaborator themselves. Culture is set from the top. However, the government record on this is patchy. Certain agencies have been excellent collaborators (the Victorian Government, IP Australia, the Australian Department of Industry) but others seem to think it’s something someone else does. </p>
<p><em>The graph in this piece was updated after publication to correct an error in the dollars per resident figures.</em></p><img src="https://counter.theconversation.com/content/75047/count.gif" alt="The Conversation" width="1" height="1" />
<h4 class="border">Disclosure</h4><p class="fine-print"><em><span>Beth Webster receives funding from the ARC, the Victorian Government and IP Australia.</span></em></p>R&D support is not the only way public policy can help create new industries.Beth Webster, Director, Centre for Transformative Innovation, Swinburne University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/706572016-12-20T06:16:08Z2016-12-20T06:16:08ZBudget deficit hoo-ha is about 0.5% of GDP<p>It’s hard to see what all the fuss is about. Australia’s GDP is roughly A$1,600 billion and the proposed budget deficit is about A$35 billion. So the net injection of demand into the economy by the government is less than 2.2% per year. Can someone tell me where the inflation threat is from this?</p>
<p>In fact, for real GDP to grow by 2% in 2016-17 (as is forecast) we will probably need a net injection of demand of this order. </p>
<h2>Government should not behave like a household</h2>
<p>National governments do not, and should not, behave like a private household. They do not have to balance their budget. Their responsibility is to maintain full employment and keep inflation in check. Balancing a budget is not a goal and is actually irresponsible if it leads to <a href="https://theconversation.com/flat-earth-economists-lead-the-hysteria-over-budget-deficits-60788">depressed growth and the loss of jobs.</a> Commentators who criticise the government for not having a credible pathway to budget surplus should explain themselves. What is intrinsically valuable about a surplus?</p>
<h2>Government debt can be monetised</h2>
<p>Government debt can be monetised. It does not necessarily lead to government debt which must be repaid by future generations. People who claim that all deficits create debt that need to be paid back belong to the pre-Keynesian era of economists who led the world to the Great Depression. </p>
<p>Germany like most other western nations, suffered the effects of the Great Depression with unemployment soaring after the 1929 Wall Street crash. The German government responded with fiscal tightening. The unemployment rate reached nearly 30% in 1932, bolstering support for the Nazi and Communist parties. The rest is <a href="https://ideas.repec.org/p/cep/cepdps/dp1149.html">history.</a> </p>
<p>In the US, the New Deal (massive public works) was drawing the economy out of depression when President Roosevelt attempted to balance the budget in 1937. US unemployment remained over 10% thereafter and <a href="http://www.gleebooks.com.au/business-and-computers/Business/keynes-mutiny-the">did not fall until WWII</a>. </p>
<h2>The US lesson</h2>
<p>According to economics professor <a href="http://onlinelibrary.wiley.com/doi/10.1111/1467-923X.12231/abstract">Stephanie Kelton</a>, the 2009 Obama “stimulus bill” provided infrastructure investment, direct aid to state and local governments and tax breaks for students, homeowners and companies. These fiscal measures succeeded in preventing another Great Depression and creating an estimated 1.6 million jobs per year between 2009 and 2012. </p>
<h2>Limits to cutting interest rates</h2>
<p>There is a limit to how much economic stimulus we can get out of cutting interest rates. Aside from the fact that they are already low, and there is a limit to further interest rate cuts. Business will not borrow unless they are confident about future demand for their products. No matter how cheap it is to borrow, you are not going the invest in expanding production, hiring more workers or even investing in new ideas, if the consumer is not there to buy your products. And the consumer will not be there if they do not have a job. </p>
<p>Without a fiscal stimulus, backed by a monetised government deficit, we will experience rising unemployment and subsequently further cuts in consumer spending. A downward spiral will set in as lower growth reduces taxes and incomes and further weakens consumer spending. </p>
<h2>Economic commentators please explain yourselves</h2>
<p>Instead of sagely repeating hollow myths about government budget deficits, could economic commentators please explain: why we must reduce the deficit, and why a return to long run surplus is desirable?</p><img src="https://counter.theconversation.com/content/70657/count.gif" alt="The Conversation" width="1" height="1" />
<h4 class="border">Disclosure</h4><p class="fine-print"><em><span>Beth Webster receives funding from the ARC. </span></em></p>National governments do not, and should not, behave like a private household.Beth Webster, Director, Centre for Transformative Innovation, Swinburne University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/677692016-10-27T02:32:32Z2016-10-27T02:32:32ZDo we thank science for all our prosperity?<p>It is easy to see the benefits from the advances we have made in physics, chemistry, engineering, computer science and the life sciences. Without these impressive leaps in understanding, we would not have lifesaving drugs; computers, wifi; modern transport and the warm, safe houses that are essential to our contemporary lifestyle. </p>
<p>Ask anyone to list the world’s top inventions and you are sure to get a list of gadgets and materials. The benefits are immediately tangible and directly traceable.</p>
<h2>What about the social sciences?</h2>
<p>Less heralded are the benefits to society derived from the ideas of the social sciences and humanities. Anecdotally, we can see that when they are good, they are very good. </p>
<p><a href="https://books.google.co.in/books/about/How_The_West_Grew_Rich.html?id=TeZYymHZJd0C">Financial innovations</a> in the form of marine insurance, for example, made the great 17th century European voyages of trade to India and beyond possible. The invention of the joint stock company funded the railways.</p>
<p>Without the theory of British economist John Maynard Keynes, the financial crisis of 2008 would have deepened into a 1930s-style depression. <a href="https://www.melbourneinstitute.com/miaesr/publications/books/Policy_Providers.html">Economics has brought us the theory and translation</a> behind Medicare; HECS, the income contingent student loans scheme and <a href="https://crawford.anu.edu.au/people/academic/bruce-chapman">Bruce Chapman</a>) and the National Disability Insurance Scheme (the <a href="http://www.pc.gov.au/inquiries/completed/disability-support/report">Productivity Commission</a> and others). </p>
<p>In most cases, reforms to social institutions do not occur without shifts in public attitudes about human rights, entrenched poverty, business models and social responsibility. Policy makers rely on the eloquence and clinching logic of philosophers from law (<a href="http://www.julianburnside.com.au/">Julian Burnside</a>, <a href="http://www.michaelkirby.com.au/">Michael Kirby</a> and others) and the other humanities to lever these changes through.</p>
<h2>Innovation is a team sport</h2>
<p>Innovation is a human activity. It is rare to find a lone genius, and, even if one existed, they would be unlikely to make a big impact because human interaction is needed to transform these ideas into widespread use. </p>
<p>Yet our understanding of how we can engineer change and societal betterment is largely unscientific and is based on anecdotes, intuition and prejudice. We throw dollars at nascent ideas with only a rudimentary consideration of the human context in which the research will be undertaken.</p>
<p>There are researchers who are undertaking objective, robust studies on what makes research successful: how do research teams transcend national boundaries (<a href="http://sites.gsu.edu/pstephan/journal-articles/">Paula Stefan</a>); how do networks of researchers optimally interact (<a href="http://www.swinburne.edu.au/business-law/staff/profile/index.php?id=dlusher">Dean Lusher</a>); what is the trade-off in research between breadth and depth of skill (<a href="http://www.kellogg.northwestern.edu/faculty/directory/jones_benjamin_f.aspx#research">Ben Jones</a>); and how do breakthrough inventions arise (<a href="http://bruegel.org/author/reinhilde-veugelers/">Reinhilde Veugelers</a>)? But funding for these studies is minuscule compared with the billions of dollars spent worldwide in research for the physical sciences.</p>
<h2>Physical sciences still seen as the main game</h2>
<p>The explicit assumption in almost all research funding bodies is that the physical sciences are the main game - serious men’s work - and the HASS (humanities, arts and social sciences) is the fluffy stuff we need to keep the “girls” happy. </p>
<p><a href="https://www.atse.org.au/content/publications/reports/industry-innovation/research-engagement-for-australia.aspx">Three quarters</a> of Australian Research Council funds go to the science and engineering disciplines and only one in ten Centre of Excellence grants are given to the HASS community. </p>
<p>University rules about what constitutes good research are dominated by what is normal in the natural sciences. Professors have “labs” with a few post-docs and a dozen PhD students. This is not the model that works for the HASS disciplines, but the HASS are constantly having to fight against this assumed model of “gold standard” research. International rankings are based on hi-cite definitions and Web of Science databases that assume the normal physical science mode of operation is the best.</p>
<h2>Where should we spend our marginal dollar?</h2>
<p>It is a question of where is the best place to spend our marginal dollar. Consider the last million dollars of our national research budget. Should we spend it on the physical sciences or on the social sciences and humanities? Where are the barriers to change that are stalling improvements to our society? </p>
<p>I would argue that changing community understanding on how a carbon tax operates (i.e. by changing householder and business behaviour) would have had a bigger effect on Australian carbon emissions than another study on the engineering of photovoltaics.</p><img src="https://counter.theconversation.com/content/67769/count.gif" alt="The Conversation" width="1" height="1" />
<h4 class="border">Disclosure</h4><p class="fine-print"><em><span>Beth Webster receives funding from the ARC, Commonwealth and Victorian Governments. </span></em></p>It is easy to see the benefits from the advances we have made in physics, chemistry, engineering, computer science and the life sciences. Without these impressive leaps in understanding, we would not have…Beth Webster, Director, Centre for Transformative Innovation, Swinburne University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/640052016-08-16T08:04:40Z2016-08-16T08:04:40ZSo what do we really know about entrepreneurship?<p>The first thing is that the term entrepreneurship means different things to different people. So the starting point of any discussion is to agree not to use the term. People often mean start-ups – new businesses – when they use the ‘e’ word. So let’s look at the evidence on the importance of start-ups to the economy. </p>
<p><strong>Most startups die young</strong></p>
<p>Most start-ups, about 50 %, <a href="http://www.industry.gov.au/Office-of-the-Chief-Economist/Research-Papers/Pages/The-employment-dynamics-of-Australian-entrepreneurship.aspx">die within 5 years</a> . Most start-ups never grow; never employ anyone, other than the owner; have low sales and low productivity. This feature of start-ups is common to all the developed countries where the evidence has been scrutinised. Survey work by <a href="https://weatherhead.case.edu/faculty/scott-shane">Scott Shane</a>, who is visiting the Wade Institute this week, shows that bulk of people who start a business do so for the pleasure of working for themselves. They do not want to grow and they do not have the ambition to make it happen.</p>
<p><strong>We really mean the hi-risk hi-tech ones</strong></p>
<p>But one suspects that this is not what most politicians mean by the entrepreneurial economy. They mean the next Bill Gates or Steve Jobs. The people who drive hi-tech, hi-risk companies which live beyond the first few years and grow explosively via internal innovation and business takeover. It is however, notoriously hard to systematically identify the factors that create these people. It is easy to reverse the pathway of successes, but harder to recall the pathway of equally deserving colleagues who failed. </p>
<p><strong>How much is due to genes?</strong></p>
<p>We know that location has something to do with success. All major episodes of innovation have occurred in clusters – from the industrial revolution in N England and Scotland to Silicon Valley today. But <a href="http://blog.case.edu/case-news/2006/04/13/much_of_entrepreneurial_drive_is_genetic_new_study_finds">research by Shane</a> on 1200 identical twins in the UK, has revealed that genetic factors associated with the lead founder play a part. Some people are just born with the personal qualities that make successful hi-risk innovation business people. Doggedness, determination, a thick skin and ambition. </p>
<p><strong>Personal traits matter</strong></p>
<p>A quick glance at the Olympic events makes it abundantly clear that you need to be born with certain physical qualities to even put you within medal contention – long arms and legs seem to matter for most events. Does this also apply to other activities? It does make one wonder how far we should screen and encourage people for different occupations based on their personal characteristics. Related work in Australia by <a href="https://www.melbourneinstitute.com/downloads/hilda/Bibliography/Conference_Papers/Junankar_Antagonistic_Manager_ANU_RSE_2010_Seminars.pdf">Ham, Junankar and Wells</a>, uses the household panel survey (<a href="https://www.melbourneinstitute.com/hilda/">HILDA</a>) and found that average marginal effect of parental status on occupational choice is small but the effect of the personality trait ‘conscientiousness’ is large and similar in impact as educational attainment.</p>
<p>Should public policy use this information to identify people with the greatest potential to become the next mega-business innovator? Or should we leave it up to the market to do the sorting for us? (Leaving aside the issue of how much do the rest of us benefit from the presence of these stars in our economy). It’s the old struggle between equity and growth. These are some of the issues, uncomfortable as they may be, that we are confronting.</p><img src="https://counter.theconversation.com/content/64005/count.gif" alt="The Conversation" width="1" height="1" />
<h4 class="border">Disclosure</h4><p class="fine-print"><em><span>Beth Webster receives funding from the ARC, the Commonwealth and Victorian Governments. </span></em></p>The first thing is that the term entrepreneurship means different things to different people. So the starting point of any discussion is to agree not to use the term. People often mean start-ups – new…Beth Webster, Director, Centre for Transformative Innovation, Swinburne University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/632512016-07-28T22:38:03Z2016-07-28T22:38:03ZReport on industry assistance needs to go beyond just reporting costs<p>The recently released Productivity Commission (PC) <a href="http://www.pc.gov.au/research/ongoing/trade-assistance">Trade & Assistance Review</a> is a competent and thorough estimate of the costs of industry assistance. But missing, as always, are estimates of their benefits. </p>
<p>To be fair, the report leaves open the possibility that programs <em>do</em> have benefits. But the subtext is very much that assistance is a cost.</p>
<h2>Text book theories fail scrutiny</h2>
<p>Industry assistance to businesses is a difficult terrain. Most graduates who have studied a modicum of economics have been schooled in the textbook prediction that giving an advantage to one business, by say preferential purchasing or subsidies, will encourage it to become lazy and inefficient. A short step before joining the gravy train demanding ongoing deals and preferences. </p>
<p>The argument is that if your business has credible long-term prospects, then the finance sector will see this and be willing to invest in your business. Therefore, you do not need subsidies or preference deals from the Australian tax payer. At best, Australians are paying above world price; at worst it is industry welfare.</p>
<p>The bottom line from these economic theories is that rational businesses left to their own devices in a competitive market will produce the best and most efficient of economic outcomes. However, as more data about businesses and markets becomes available, it is becoming apparent that this free-market route has not been taken by some of the most successful economic zones in the world. </p>
<h2>Successful overseas industrial models</h2>
<p>The Swedish model has been based on long-term collaboration between public agencies and major firms; the Japanese model has relied on technology procurement within state-led public–private networks; and the US model has been partly built on defence-led <a href="https://www.scribd.com/doc/316566027/Book-Public-Technology-Procurement">technology procurement programmes</a>. </p>
<p>Sticky intellectual property policies have been mooted as a significant factor in encouraging multinationals to set up R&D facilities in Israel. Some of the current Australian industry assistance mimics these overseas programs – embedding skills training, technology demonstration and commercialisation. </p>
<p>Overseas there is a considerable amount of case studies and econometric analyses on these programs and policies. Not so here. Australia is still living the dream of the 1970s economic textbooks. We do not regularly evaluate our assistance programs in the standard scientific way. They are not taken seriously by central government agencies.</p>
<h2>Why are these 1970s models so appealing?</h2>
<p>To be sure, not all industrial programs and policies do improve business productivity. But at present we really do not know which one’s work because we have not put most programs to the empirical test.</p>
<p>The deductive textbook models have considerable appeal. They illustrate – very neatly – how regulations and barriers to competition will lead to overly high prices and monopoly profits.</p>
<p>To present the essential argument in a crisp way, they assume away uncertainty and ignore the role of know-how, reputation, connections and tacit knowledge in business performance. This is quite acceptable for a model of price behaviour. </p>
<p>However, the mistake economists made in the 1970s, (and some apparently still do today), is thinking that a model of pricing can be also used to explain investment (and its twin innovation) or the process of winning customers and sales.</p>
<h2>Economic theory struggles to explain firm-level investment</h2>
<p>Economic theory struggles to explain firm-level investment. Either it is ad hoc (such as game theory) or relates only to the macro-economy. </p>
<p>Many theories assume investment comprises only physical inputs such as plant and equipment, despite the wide-spread acknowledgement that intangible assets such as computerised information, innovative property (including R&D) and economic competencies (including firm-specific human capital and organisational capital) are about <a href="http://www.pc.gov.au/research/supporting/intangible-investment-sectoral-estimates">one third of all business assets</a>). </p>
<h2>We discover what works before we know why it works</h2>
<p>Whereas economic theory has hit an impasse, applied economics and management science have charged forward. As is often the case in new technologies, we discover what works before we know why it works. </p>
<p><a href="http://www.sciencedirect.com/science/handbooks/22108807/1">Overseas evidence is quite compelling</a> and consistent: networks, clusters and collaborations matter. What we need is domestic evidence, and, more nuanced evidence on what Australian programs work; which ones should be extended or improved and which ones should be scrapped.</p><img src="https://counter.theconversation.com/content/63251/count.gif" alt="The Conversation" width="1" height="1" />
<h4 class="border">Disclosure</h4><p class="fine-print"><em><span>Beth Webster receives funding from the ARC, the Victorian and Commonwealth governments. </span></em></p>The recently released Productivity Commission (PC) Trade & Assistance Review is a competent and thorough estimate of the costs of industry assistance. But missing, as always, are estimates of their…Beth Webster, Director, Centre for Transformative Innovation, Swinburne University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/607882016-06-09T03:28:55Z2016-06-09T03:28:55ZFlat-earth economists lead the hysteria over budget deficits<p>Back in the good old days of the 19th century when market economies oscillated between boom and prolonged recession, economists believed that nations were like households. They had to balance their budgets. If they spent more in one year they would have to save more the next to pay off the debt. Sound advice for a household. But not so for an economy as a whole.</p>
<p><strong>Welcome to the Keynesian revolution</strong></p>
<p>Keynes proved this in 1936, and subsequently governments followed this theory to get their economies out of depression and onto the long economic boom that lasted until the mid-1970s. </p>
<p>What essentially did Keynes, and his doppelgänger Kalecki, argue? Let’s use a very simplified model to illustrate the point. Say there are two types of people who are active in the market economy: employees and investors. The investors own the assets of the business in which the employees work. </p>
<p>Altogether the businesses in a country produce $100 of goods and services in a year. If they could sell these goods and services, then say for illustrative reasons, that $70 would go to the employees as wages and salaries and $30 goes to the investors as a profit (return on their capital). </p>
<p>Now the businesses can only sell their goods and services if people with incomes (the same employees and investors) spend $100 buying these goods and services. No business keeps producing things that are not bought. The employees may be happy to spend their $70 on goods and services. But the investors will only spend their $30 if they can feel confident that they will get their $30 back plus a return for risk. This return may be 5% or more depending on the economic climate. Suppose the optimistic investors, in the first year, spend their $30 of dividends (or profits) on the goods and services. But at the end of the year, the business only makes $100 of sales and the investors only get back $30 (as $70 goes to employees). Not a good investment. Rate of return = zero.</p>
<p>So what do investors do? In the next year, they only spend $20 on investment goods and services. But then the combined purchasing power of employees and investors is $70+$20 = $90. The business cannot sell all their product ($100). With only $90 in income they pay wages of $70, leaving $20 for the return to investors, but in addition, they cut back on production and retrench staff in the following year. Investors also cut back on spending as they also got a rate of return below what they feel reasonable given the risk of investing. It is safer to leave the money as cash in the bank or under the bed. And so the economy enters a downward spiral. Investors cut back, businesses sack staff and unemployment rises.</p>
<p><strong>Downward spiral</strong></p>
<p>What stops this downward spiral? There needs to be an external injection of spending into the system. This is the essential Keynesian message. By external, we mean something that does not originate from employees (householders) or the investment community. It has to come from either the government in the form of
<em>perpetual</em> budget deficits or perpetual exports.</p>
<p>Clearly from the point of view of the world as a whole, exports cannot be the source. Some countries, for some of the time, can get income stimulus from exports (i.e. China for the last 30 years) but this is at the expense of other economies. At the end of the day, the stimulus to incomes has to come from governments who control the money supply and can thus spend without having to borrow. Essentially, they can monetise the debt. They do not have to pay this debt back – it is spending financed by central banks. The point is that if the government adds to spending (and production) without extracting an income for itself, it allows investors to realise the minimum rate of profit necessary for them to invest again.</p>
<p>This is what occurred for the 25 years following WWII. So what stopped it?</p>
<p><strong>Inflation</strong></p>
<p>Inflation. Inflation instigated by a series of oil price shocks but then prolonged by excessive government spending in the US to finance the Vietnam war. Governments in the late 1970s and 1980s reacted to inflation by drastically cutting spending. But the rate of inflation did not fall until the price of oil fell in the 1990s and China flooded the world with cheap manufactured goods. Certainly, if an expansion of the money supply is excessive we will get inflation. But taken to an extreme in the other direction, we get low growth and unemployment. </p>
<p>Where do you think we are in 2016? With 700,000 official unemployed, close to another 700,000 under-employed, and an inflation rate below 2%, I would say we are swung too far to the parsimonious side. It is all about balance. It should not be about blind and mechanical fear mongering about government budget deficits. The current political debate is on level with a Tony-Abbott-climate-change debate. Misguided, low brow and damaging to the well-being of many people.</p>
<p><strong>Productivity growth</strong></p>
<p>And incidentally, for those wondering, productivity growth will not break the deficient-demand impasse described above. Productivity growth would have to achieve a consistent rate of over 5% per annum to fill the void in spending. Given the historic rate has been about 1%, I would not count on it.</p><img src="https://counter.theconversation.com/content/60788/count.gif" alt="The Conversation" width="1" height="1" />
<h4 class="border">Disclosure</h4><p class="fine-print"><em><span>Beth Webster receives funding from the ARC. </span></em></p>Back in the good old days of the 19th century when market economies oscillated between boom and prolonged recession, economists believed that nations were like households. They had to balance their budgets…Beth Webster, Director, Centre for Transformative Innovation, Swinburne University of TechnologyLicensed as Creative Commons – attribution, no derivatives.