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energy R&D by oil importing nations following oil price
shocks in the 1970s. As oil prices fell through the late 1980s,
interest in energy innovation subsided. By 2000, public
spending on energy R&D had declined to 5-10% of its 1980s
peak as a share of GDP 60 . Because innovation investments
can take decades to deliver, and require continuity over
time so knowledge and expertise can accumulate, a steady
commitment to innovation is likely to produce substantially
better outcomes per dollar.
Monetary rewards — a type of external incentive
— may displace other motivations and norms in the
innovation chain. Internal motivations, like the desire
for knowledge and discovery, play a large role in some
parts of the innovation chain. These intrinsic or internal
motivations can be “crowded out” by the imposition of
external incentives 61 . External incentives may be particularly
poorly suited to creative endeavours like scientific research.
In particular, they can displace the “soft” institutions that
drive basic research — the bedrock of trust and institutional
norms, such as academic freedom, openness and knowledgesharing
— with a more opportunistic culture 62 . This may
explain why institutional incentive structures affect basic
research outcomes, as discussed in the previous section.
Better understanding of psychology and behaviour
can itself lead to valuable institutional innovations.
Individual choices — including critically important choices
around savings, insurance, healthcare and education —
can be powerfully shaped by seemingly non-rational
psychological factors, with often immense welfare
implications 63 . Behavioural economists (like those in the UK’s
Behavioural Insights Team) use psychological research to
design simple and low-cost interventions to spur sometimes
dramatic changes in behaviour, which can provide rich and
important examples of innovation:
• making organ donor programs opt-out instead of opt-in
(which should have no effect in the standard economic
view) 64 ;
• changing the wording on tax payment forms to prime
social norms 65 ; or
• regulating the possible structures of credit card and
banking fees in order to prevent predatory practices 66 .
One of the most important insights concerns the value
of experimental policy design, where randomized control
trials are used to identify the most effective approaches 67 .
Given the importance of incentives, social norms, and
other complex behavioural factors for innovation decisions,
innovation policymaking should become behaviourally
literate.
(iv) Governments
Governments have a critical and multifaceted role
to play in innovation, especially at the medium and
macro scale. Among other things, there is a strong case
for governments to: shape the formation of human capital
through education and training 68 ; carry out and finance
basic research in universities and research centres; support
institutions to link universities and research institutes with
Psychological factors
shape the decisions
people make about
innovation.
industry; uphold an efficient, effective and appropriately
constrained intellectual property regime 69 ; and provide
targeted support for innovative activity, both its supply (e.g.
grants and loans for demonstration and deployment of new
technologies) and demand (public procurement, fiscal policy,
regulations/standards, fostering new social norms/values) 70 .
However, governments are ill suited to intervening
in the micro-details of innovation processes, and
should avoid being excessively prescriptive. For
example, specifying outcomes that researchers are to
achieve is usually inappropriate given the impossibility of
predicting them. Similarly, constraining researchers within
rigid timeframes, or within incentive systems that demand
“breakthrough” outcomes or commercialization, is likely
to impair researcher creativity. Once the innovation
infrastructure has been provided, and, broad national
priorities set, innovators should be allowed substantial
leeway to pursue the questions they believe to be important
in the ways they see fit 71 .
Governments have an especially important role
to play in carrying out and financing basic research
and development. Due to the public goods aspects of
basic research, and governments’ high capacity to tolerate
uncertainty and delayed returns on investment, governments
are uniquely suited to carrying out (e.g. through government
research institutes) and financing (e.g. in universities) basic
research. In the UK, the foremost funders of basic research
are the seven Research Councils, which draw around £4.5
billion, or approximately 0.2% of annual GDP, in annual
government funding. The rate of social return to R&D is
extremely challenging to calculate, but importantly, research
typically finds extremely high rates across a variety of
industries—e.g. from 35-100% is typical 72 . This suggests there
is considerable scope to increase basic research spending
and reap large rewards.
Government funding of innovation can usefully
extend beyond “letting a thousand flowers bloom”, and
governments have actively shaped the development of
many of today’s most important technologies. In many
areas it is sensible for governments to focus on facilitating
innovation by others. This includes looking to foster
outcomes rather than details of methods or technologies
and avoiding “picking winners” in the form of specific firms
and sectors as much as possible, and taking care to avoid
government failure. Yet sometimes it is impossible to avoid
making judgements about innovation support priorities
(e.g. in areas of national priority where the private sector
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