Europe’s Choice on Innovation

by on December 3, 2014 · 0 comments

Writing last week in The Wall Street Journal, Matt Moffett noted how many European countries continue to struggle with chronic unemployment and general economic malaise.  (“New Entrepreneurs Find Pain in Spain“) It’s a dismal but highly instructive tale about how much policy incentives matter when it comes to innovation and job creation–especially the sort of entrepreneurial activity from small start-ups that is so essential for economic growth. Here’s the key takeaway:

Scarce capital, dense bureaucracy, a culture deeply averse to risk and a cratered consumer market all suppress startups in Europe. The Global Entrepreneurship Monitor, a survey of startup activity, found the percentage of the adult population involved in early stage entrepreneurial activity last year was just 5% in Germany, 4.6% in France and 3.4% in Italy. That compares with 12.7% in the U.S. Even once they are established, European businesses are, on average, smaller and slower growing than those in the U.S.  The problems of entrepreneurs are one reason Europe’s economy continues to struggle after six years of crisis. The European Union this month cut its growth forecasts for the region for this year and next, citing weaker than expected performance in the eurozone’s biggest economies, Germany, France and Italy. This week, the Organization for Economic Cooperation and Development delivered its own pessimistic appraisal, with chief economist Catherine Mann saying, “The eurozone is the locus of the weakness in the global economy.”

Europe’s unemployment crisis may be eroding a deeply ingrained fear of failure that is a bigger impediment to entrepreneurship on the Continent than in other regions, according to academic surveys. “Fear of failure is less of an issue because the whole country is a failure, and most of us are out of business or have a hard time paying our bills,” said Nick Drandakis of Athens, who in 2011 founded Taxibeat, an app that provides passenger ratings on taxi drivers.

I found Moffett’s article interesting because I write a lot about entrepreneurialism, innovation, long-term economic growth, and the public policies that facilitate all these things. This has also been the subject of an excellent Cato Institute online forum about “Reviving Economic Growth,” which asked leading economists and policy experts to answer the following question: “If you could wave a magic wand and make one or two policy or institutional changes to brighten the U.S. economy’s long-term growth prospects, what would you change and why?”

Many of the entries in that forum dealt with the importance of removing barriers to new start-ups so that entrepreneurs can help spark new innovations and spur economic growth. My entry, which was entitled, “Embracing a Culture of Permissionless Innovation,” kicked off with a quote from the great Joel Mokyr: “Why does economic growth… occur in some societies and not in others?” I noted that “debate has raged among generations of economists, historians, and business theorists about that question and the specific forces and policies that prompt long-term growth.” Generally speaking, however, there actually exists a great deal of consensus about the importance of small business entrepreneurship and the need for openness to change if an economy is going to grow. (See the studies from Ian Hathaway and Robert E. Litan that I cite in my essay among many others.)

Which brings us back to the situation in Europe. It seems clear that strong cultural and legal impediments to change exist in many European countries and that they discourage risk-taking and prevent the formation of new ventures. Many of us here in the United States worry about similar impediments and their impact on entrepreneurialism, but as those statistics in Moffett’s article make clear, the situation in Europe is far more grim. While some European policymakers seem willing to acknowledge that the deck has been stacked against innovators across the continent, few seem willing to embrace a comprehensive liberalization agenda to begin clearing away the legal and regulatory impediments that are negatively affecting startups and creating economic stagnation there. The primary reason for that goes back to the values and attitudes problem that Moffett highlighted in his article: When a country or continent’s culture is so deeply averse to risk and the possibility of disruptions or failures, then the exact sort of risk-taking that is so essential to economic growth will become increasingly difficult.

This was the focus of my Cato essay and it is what I meant by embracing a culture of permissionless innovation. As I noted in my essay, “many scholars and policymakers [often] speak of innovation policy as if it is simply a Goldilocks-like formula that entails tweaking various policy dials to get innovation just right,” which leads them to propose an endless litany of programs and policies to jump-start innovation and economic growth. But this puts the cart before the horse. Getting values right first is what really matters. Here is how I put it in my essay:

For innovation and growth to blossom, entrepreneurs need a clear green light from policymakers that signals a general acceptance of risk-taking—especially risk-taking that challenges existing business models and traditional ways of doing things. We can think of this disposition as permissionless innovation and if there was one thing every policymaker could do to help advance long-term growth, it is to first commit themselves to advancing this ethic and making it the lodestar for all their future policy pronouncements and decisions.

While there are limits to how much policymakers can influence these attitudes and values, any serious effort to foster the positive factors that give rise to expanded entrepreneurial opportunities must begin with an appreciation of how growth-oriented innovation policy begins with the proper policy disposition toward risk-taking and the possibility of significant economic and cultural disruption. As I put it in my recent book on the importance Permissionless Innovation as a vision for innovation and growth, “living in constant fear of worst-case scenarios—and premising public policy upon them—means that best-case scenarios will never come about. When public policy is shaped by precautionary principle reasoning, it poses a serious threat to technological progress, economic entrepreneurialism, social adaptation, and long-run prosperity.”

But let’s be clear about what the “permissionless innovation” vision is all about, because it is not the same as anarchy. As I noted in the Cato essay:

Permissionless innovation is not an absolutist position that rejects any role for government. Rather, it is an aspirational goal that stresses the benefit of “innovation allowed” as the default position to begin policy debates. It switches the burden of proof to those who favor preemptive regulation and asks them to explain why ongoing trial-and-error experimentation with new technologies or business models should be disallowed.

Again, it’s about getting attitudes and incentives right. Specifically, it’s about being willing to embrace risk-taking and even failure, because that is the only way you get growth. As the old adage goes, “Nothing ventured, nothing gained.”  And our recent experience with the Internet and the Information Revolution offers the perfect case study of why getting values right and embracing a culture of permissionless innovation matters so much. As I noted in my Cato essay,

permissionless innovation powered the explosive growth of the Internet and America’s information technology sectors (computing, software, Internet services, etc.) over the past two decades. Those sectors have ushered in a generation of innovations and innovators that are now the envy of the world. This happened because the default position for the digital economy was permissionless innovation. No one had to ask anyone for the right to develop these new technologies and platforms.

The U.S. got policy right by getting our values right first. Thanks to a series of very smart pronouncements and decisions in the early and mid-1990s (all detailed in my essay and this Medium essay), digital age entrepreneurs were given a clear green light to take risks without fear of a political backlash.

Unfortunately for European innovators, a different message was sent from the start, with layers of “data directives” and other red tape encumbering new ventures. As a result, it’s hard today to name many innovators in this arena which originated in Europe. Instead, Europe’s household Internet names are mostly American companies. Europe is hoping to reverse that with the rise of the Internet of Things, since many European companies appear poised to become global leaders on that front. For that happen, however, the continent’s attitudes toward risk-taking will have to evolve to accommodate these highly disruptive technologies.

In particular, the Internet of Things will raise a variety of privacy and security-related concern (see my new 93-page paper on this), as well as economic-related fears associated with automation and job disruption. These are serious issues that deserve serious consideration and constructive solutions. But if Europe decides to put the Internet of Things revolution on hold in an attempt to preemptively plan for every theoretical downside, then they will miss the boat again and potentially lose many of the amazing benefits that will accompany these new innovations. Again, if you live in fear of the future, then an innovative future won’t happen. And looking backwards and holding onto the past is no way to grow an economy or achieve long-term prosperity.

Previous post:

Next post: