Lecture 9: Government policy and innovation in the economy
The current government places a huge emphasis on the potential value from more innovation
across all sectors of the British economy. This is because of the economic gains that follow:
Improvements in the competitiveness of UK producers in home and overseas markets.
Innovation helps to protect and develop comparative advantage.
Higher productivity will keep down unit labour costs against the challenge of low-cost
competition from emerging market economies.
Innovation is a potential source of higher long-term trend growth – indeed supply creates
its own demand (“Say’s Law‖) and can give businesses much higher rates of return on
their investment than an expansion of their existing capacity and product range.
Innovation can also create many thousands of new jobs even though some jobs may be
lost because of the adoption of labour-saving technology. The new jobs emerge in
training & other services together with the demand for labour that comes from expanding
output to supply an expansion to new markets.
There might also be significant social benefits (positive externalities) from innovative
behaviour – for example the delivery of new health treatments or innovations that provide
safer forms of transport.
Government policy and innovation
Supply-side strategies are usually linked directly with attempts to promote more innovative
behaviour. Indeed the focus of government policy is firmly focused on improvements in the
microeconomics of markets. Consider this extract from a recent speech by Gordon Brown
―If the past century of economic policymaking has taught us anything, it is that achieving strong
long term growth often has less to do with macroeconomic policies that with good
microeconomics, including fostering competitive markets that reward innovation and restricting
government to only a limited role.‖ Which policies might encourage more innovation?