More Hayek, less Schumpeter in European digital policies

The Google probe seems to prove that the EU is way too focused on fighting old wars. However, if it wants to put in place a system where innovation thrives it must care less for the existing IT industry and do more for those that do not exist yet.

Already during the early 1990s – in the Bangemann Report – the information and communication technologies (ICTs) have been politically understood as a strategic development priority of the European Union.

ICTs were high on the agenda of the Lisbon Strategy whose goal was “to make Europe the most competitive and dynamic knowledge based economy in the world”.

In the Europe 2020 Strategy, the Digital Agenda for Europe is one of the seven flagship projects. Its overall aim is “to deliver sustainable economic and social benefits from a digital single market based on fast and ultra fast internet and interoperable applications.”

 

 

Schumpeter: Profit is result of innovation

European policies in the field of innovation are based on the Schumpeterian assumption that innovation is the key driver of economic growth and entrepreneurial profit. The latter is a politically wise compromise between the leftist idea that profit is result of worker exploitation and right-wing argument that profit is the result of voluntary and mutually beneficial transactions between two parties.

Joseph Schumpeter believed that investing in knowledge and innovation pays off. Therefore, public policies should create incentives for the enterprises to innovate and more should be invested in knowledge, innovation and any digital-related activity. Such idea in Europe enjoys large support.

The resulting policies include funding or subsidising research and innovation through Framework programs such as Horizon 2020, tax breaks for firms that innovate as well as protecting innovation through copyright protection, patent law etc.

A kind of protection are also the regulatory and competition procedures that the EU has been regularly filing against high-tech companies that seemed too powerful at the time.

 

 

Hayek: Open innovation to everyone

Schumpeter was not alone in believing in the power of innovation. Another Austrian economist understood the importance of innovation but identified a complementary issue – that the challenges are numerous, that ideas in a society may be dispersed and that as many as possible should get the opportunity to innovate, not only those that are already doing it.

This idea – that the knowledge is “in the open” – became fashionable with the emergence of the internet, the open systems, the open source software, the open scientific publishing and the open innovation. But it was there since the 1930s under the general label of open society.

Hayek would understand how important it is to build infrastructures that give opportunity to innovate, do not monopolize innovation, do not limit innovation to existing players and allow innovative companies and business models to emerge, grow and succeed.

He would understand that excessive copyright and intellectual property protection harms innovation. While it is to some extent an incentive for innovation, when applied too strongly, these protections make patent portfolios a tool for limiting competition.

 

 

Scientific excellence, business impotence

When one compares the high quality of European education systems and excellent science on the one hand and the digital industry’s impotence on the other, the explanation is exactly in the balance between Hayekian and Schumpeterian view on innovation.

The innovation and entrepreneurial system in the US is open to new entrants. Many Europeans are going across the Atlantic with their ideas. The start-up culture is flourishing in the Silicon Valley and is well supported by the legal, business and financial mechanisms.

On the other hand Europe is unable to create a company that could compete with IBM, Microsoft, Apple, Google or Facebook. What the EU seems to be capable of doing is just binging them to court. Whichever company happens to be the biggest has problems with the EU competition officers. In this respect Google is the new Microsoft.

But Microsoft and its media Player, Internet Explorer and Windows operating system were not dethroned because of the regulatory actions of the European politicians who are always eager to justify their existence by doing something “for the people”, “for European industry” and “against multinationals”.

 

 

Too slow to innovate, too slow to legislate

It is simply in the competitive nature of the digital economy that the playing field is levelled every few years. And a company can come from anywhere and become a major player.

Microsoft did that to IBM with personal computer operating system and desktop applications that included the infamous Media Player and Internet Explorer. Google changed internet search and advertising. Apple redefined the mobile phone. Facebook invented the social media as we know it.

Unfortunately it is not entirely true that these companies come from anywhere. They do not come from Europe. And no matter how hard the EU makes life harder for them … the next Google will not come from Europe because of that.

Media Player was succeeded by iTunes. Internet Explorer was not succeeded by Opera but by Chrome and Firefox. Actually what the EU tried so hard to regulate is today a commodity nobody cares about.

Browsers and media players are a thing of the past, apps are in fashion today. It is very likely that when the EU is done with picking on Google, we will be finding our stuff on the Internet through recommendations on social networks such as Facebook. And Facebook will be made obsolete by something like Snapchat.

Here’s why the EU seems to be fighting old wars. A lot of civil servants will have something to do and a lot of lawyers will make money in such legal procedures. Eventually the consumer will be better off too. But because there will be other companies innovating, not because of any legal action.

 

 

More Hayek, less Schumpeter

Competition in the digital world is fierce. It is made worse by the fact that every few years the whole scene is disrupted by something totally new. The EU should focus on putting in place a system where such innovation would thrive in Europe and will be brought to market and to Wall Street from Europe.

To do so it must care less for the existing IT industry and the existing big science that takes advantage of the EU programmes. It should do more for those that do not exist yet, that do not have lobbyists in Brussels and who are not the usual suspects for getting public research money.

It should unify and relax intellectual property regulation. It should do more for business start-ups and SMEs in science and innovation. Not to mention the common digital market. In short, there should be less Schumpeter and more Hayek in the European innovation and digital policies.

Or, in the words of the Bangemann report:

“Actions must be taken at the European level and by Member States to strike down entrenched positions which put Europe at a competitive disadvantage: it means fostering an entrepreneurial mentality to enable the emergence of new dynamic sectors of the economy; it means developing a common regulatory approach to bring forth a competitive, Europe-wide, market for information services; it does NOT mean more public money, financial assistance, subsidies, dirigisme, or protectionism”.

What is depressing is that this report is more than twenty years old.