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Against innovation mercantilism

By Jason Potts - posted Wednesday, 3 February 2016

The biggest solvable problem in the world today, and so the greatest opportunity we face as global citizens-more consequential than climate change, global pandemics, hunger and poverty, the quest for sustainable energy, clean air and water, or species extinction-is our lack of global governing institutions for innovation.

Yes. You read that right. The lack of global innovation policy is the single biggest problem in the modern world. If we solve that collective action problem, a whole lot of other problems fall into line.

I want to defend this claim with an analogy, and by drawing upon research by the Information Technology & Innovation Foundation, a Washington DC think tank, which released a new report last week that measured and ranked how individual countries' innovation policies contribute to or detract from global innovation.


The analogy is that global innovation is to the 21st century what global trade was to the 20th. Namely, a really difficult collective action problem in producing a global public good, that once solved ushered in a global epoch of prosperity.

In the 1930s, the world economy was mostly poor, and each nation was mostly isolated, with a few troubled exceptions. From WWII to the present, the global population increased from 3 to 7 billion, and global wealth per capita increased at least four fold in real terms. In the past two decades, one billion people have been lifted out of poverty. What changed?

Many things, obviously, but a constant throughout that period was the GATT, now the WTO, a global governance institution that brokered and negotiated, in excruciating and boring detail, the global stand-down in mercantilism. In terms of its effect, this turned out phenomenally well. The result was modern global prosperity.

Global innovation is the same problem as global trade. It is a global collective action problem, where each nation faces strong incentives to behave parochially and to protect domestic interests, but where we are all better off avoiding global innovation mercantilism.

We currently live in a world where innovation mercantilism is seemingly publicly acceptable. We need to stop living in that world.

Once upon a time, trade mercantilism was acceptable. In the early-mid 20th century, right-thinking people wanted Australia to develop its own economy, and they eschewed trade, except as exports. They were mercantilists. That turned out to be wrong, as Adam Smith long ago explained.


These days, modern mercantilism does not wear a trade hat; it wears an innovation hat. This happens when countries enact barriers that preclude other nations from exporting their innovations so as to protect their own innovators. For example, local content rules are often used in this way, as are skilled migration restrictions through occupational licensing. Another way innovation mercantilism happens is when exporting is viewed as the only way to disseminate innovation, specifically excluding open access models of information and knowledge sharing. An example is data localization policies, which Australia has enacted in relation to health data.

But this perspective is wrong by the same economic logic. It is important to understand why that is so.

Many problems in the world arise when other people do things that the rest of us wish they wouldn't. So the solution always looks like restriction and control. But giving people better options, i.e. more choices, usually solves these same problems. Most people aren't sociopaths; most people are just constrained. Innovation is the mechanism that creates better options, that lifts those constraints.

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About the Author

Jason Potts is a Professor of Economics at RMIT University, as well as an Adjunct Associate Professor in the School of Economics at the University of Queensland, and an Adjunct Fellow at the Institute of Public Affairs. He was the 2000 winner of the International Joseph A Schumpeter Prize, has published over 60 articles and six books. He is currently an editor of Journal of Institutional Economics, and Innovation: Management, Practice and Policy.

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Creative Commons LicenseThis work is licensed under a Creative Commons License.

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