From stagnation to innovation

If alien anthropologists tasked with studying humanity were to have arrived on Earth during the end of the 19th century there are a few findings they would no doubt have reported back to their extraterrestrial home. One of the most remarkable would be that, after hundreds of years of relative global technological stagnation, the people from a small island in the North Atlantic had unleashed a historic wave of innovation and growth. Today, the situation is very different. In recent decades, many developed economies have endured a long period of lacklustre growth and productivity improvement described by economist Tyler Cowen as the ‘ Great Stagnation ’. According to Cowen, the US (and by implication other Western countries) plucked the low-hanging fruit available – including free land; undereducated children and underemployed women; and a host of technological breakthroughs – to leave us stuck in a world where innovation is far harder. Cowen has also argued that the forces opposed to it are far stronger – not least the group referred to in another of his books as ‘The Complacent Class’, who protect their privileges at the cost of wider progress.  Intuitively, this argument makes sense. Between 1880 and 1970, a range of life-changing inventions, innovations, and industries emerged: the car, the aeroplane, nuclear power, space flight, the radio, the pharmaceutical industry and the computer. Someone born in 1900 who died in 1970 passed away in a completely different world than the one they were born in. Someone born in 1950 who dies tomorrow will have lived through some technological change – the internet being the most obvious example – but they will not have experienced the same number of revolutionary inventions as their parents or grandparents. This stagnation, when coupled with the UK’s poor GDP growth figures, is poised to leave the UK’s young people with dismal prospects. The current generation of young people may well be the first in many years to not know what it is like to experience significant economic growth or seismic technological revolution. So what can we do about it? A hostile environment for innovation  From a bird’s eye view, it might appear as if the British government is seizing the opportunities of Brexit and committed to a technology policy strategy that will make the UK a global technology governance leader. However, a sea-level view of the situation paints a bleaker picture, with the Government prioritising rhetoric over action and delivering legislation that is often at odds with a pro-growth and pro-innovation agenda. What do I mean? The last few decades are full of bold government plans and strategies such as the National Data Strategy, the Innovation Strategy, the Digital Strategy, an AI Strategy, an AI White Paper, a Centre for Connected and Autonomous Vehicles, a Technology Code of Practice and much more. Successive governments have also introduced a range of technology-specific legislation: in the last few years the Government has proposed the Data Reform Bill, the Digital Markets, Competition and Consumer Bill (DMCC) and the Online Safety Act. All of this activity may look like evidence of tech-friendly, innovation inspired governance. However, the reality is that the Government and regulators too often send a strong signal to technology entrepreneurs, investors and businesses that they ought to look beyond the UK’s borders for opportunities. For example, there are all kinds of flaws with both the Online Safety Act and the DMCC: as the Centre for Policy Studies has warned, they are over-ambitious, with a poor understanding of the fast-paced technology sector and a flippant disregard for free speech and privacy. They also separately threaten technology firms with fines of up to 10% of annual global turnover – hardly the greatest inducement for them to invest and operate on these shores. The DMCC would empower the Digital Markets Unit (DMU) in the Competition and Markets Authority (CMA) with more authority to scrutinise a wide range of products and services, such as those developed by Google, Amazon and social media sites. If it passes, these companies and many others will have to consider costs associated with DMU oversight and developing products specifically for the British market.3 Nor is it realistic to expect a quango inside a regulator to adequately oversee all of the diverse, large and dynamic markets affected by digital products.  Meanwhile, the Online Safety Act gives Ofcom the authority to regulate a vast array of online services such as social media companies and search engines. Supporters of the Act argue that it will help address a range of online harms. Yet it has been criticised by a diverse group of policy analysts, academics, industry professionals and politicians as a threat to free speech and privacy. Encrypted messaging services Signal and WhatsApp suggested that they would leave the UK if the Act passed without significant amendment. They received reassurances, but no actual change to the legislation, and could leave the UK if officials exercise some of the powers granted in the Act. That services used by millions of British residents could be unavailable thanks to overbearing and ill-considered legislation is an own goal from a Government that has demonstrated a willingness to handle the social issues associated with online speech with the blunt instruments of regulation and regulators.  Unfortunately, these pieces of legislation reflect an attitude that has come to dominate government: to regulate technology via broad mandates and broad legislation while empowering regulators. Indeed, the CMA is one of the British institutions that has been sending some of the strongest anti-technology signals, objecting to two major acquisitions (Meta’s acquisition of Giphy and Microsoft’s acquisition of Activision Blizzard) involving American technology companies. How does this affect young people? Because without the innovation that the digital sector can bring, their lives will be worse and poorer – and it will be far harder to deliver the productivity growth that frees them from the spending trap. How government can foster innovation  Stagnation is not inevitable, but it will continue absent specific bold policy reforms. Some of these reforms will be more difficult to implement than others, but they should be at the forefront of any policy agenda that aims to deliver innovation and growth. These reforms can be broken into four categories: mindset, talent, funding, and permission. Mindset   Technology policy in the UK faces a number of problems that require fundamental rethinking of regulation and law. One of the main problems is that the Government continues to treat ‘technology’ as something that fits neatly into a ministerial portfolio. It is an improvement that science and technology now has its own department, rather than digital being bundled in with opera, sport and media oversight. But technology needs to be part of everything the Government does. Civil servants and ministers based in the Department of Transport, for example, are best placed to consider how AI and autonomous vehicles will affect buses, trains and cars. The Ministry of Justice is best-placed to consider how AI should be used in sentencing guidelines and how pre-AI law should inform decisions about new crimes (e.g. hacking into an autonomous vehicle). Talent  One of the best ways to boost UK innovation would be to encourage smart people from all over the world to come to the UK to live close to each other. It is not surprising that explosions in innovations of all kinds tend to happen in cities. Not only do cities allow for more opportunities for collaboration, they also allow for increased competition. The Government should be intently focused on ensuring that talent from all over the world can come and live in the UK in affordable and desirable homes. Two of the biggest barriers to British cities being home to a 21st century technology revolution are immigration restrictions and lack of housing. The talent necessary for technological innovation is highly educated and highly mobile. Someone qualified to work on AI, robotics or nanotechnology can shop their talents all over the world in many countries and can demand comparatively high salaries. Unfortunately, London often does not look as attractive as many American, Asian, and European technology hubs. The Government is aware that for the UK to be a tech superpower British companies need to hire international talent. There are currently a number of visa options available to foreign workers wishing to work in the British technology industry. These can be divided into two categories: 1) employer-sponsored visas and 2) individual-sponsored visas. The employer-sponsored visas, such as the Skilled Worker and Senior or Specialist Worker visa, do have their advantages (e.g. clear points criteria and relatively easy application process), but they impose costs that some businesses find prohibitive. Individual-sponsored visas save businesses money, but many workers will find themselves unable to apply for one of these visas due to their education and income requirements. For example, the High Potential Individual Visa is a visa open to graduates from a list of 50 of the best universities around the world. It is valid for two years (three if the applicant has a PhD or other doctoral qualification).8 The Government could improve this visa to attract more international talent by increasing the number of universities to 200. If it were to extend the length of stays from two years to five and expand the list of qualifying universities, the British technology sector would be able to attract many more workers without imposing some of the current costs associated with employer-sponsored visas.  Of course, even if the government expands the pool of potential workers it will be left with the problem of housing. In order for the UK to be an attractive venue for qualified technology workers there must be attractive and affordable places for such workers to live. The UK is home to some of the world’s most elite academic institutions and financial centres. Yet housing in and around cities such as London, Oxford and Cambridge is very limited and housing prices are high. More houses around these cities and others in the UK would allow for technology workers to live in affordable houses close to one another, rivalling cities such as Boston and San Francisco in density of technology and academic talent. Unfortunately, it is unlikely that any British city will experience the significant growth in housing necessary for the UK to establish itself as a global magnet for high-skilled, innovative technology workers. Funding   It is at first glance reassuring to hear that the UK technology sector is the third-highest valued in the world (behind the US and China) and that there are more tech unicorns (companies worth more than $1bn) in the UK than any country in Europe. However, these facts obscure the fact that the British technology sector is not doing as well as it could in terms of technology funding. Although the figures reflect the fact that some technology companies in the UK do enjoy high valuations, it is important to consider that many British technology companies sell up to Asian and American companies. As start-up investor and the former chief executive of Oxford Science Enterprises Alexis Dormandy said, the UK is the world’s low-cost ‘technology sweetie shop’ . While it is by no means bad news that the UK is home to many high-valued technology companies, the Government should remember that it will be difficult for the UK to establish itself as a global leader in technology innovation if its successful firms are bought by foreign companies. Fortunately, there are reforms that can ensure that British technology firms enjoy more investment and funding. One of the low-hanging policy fruits that would encourage such investment is pension reform. UK pension schemes are comparatively risk averse. This is in part thanks to reforms to UK pensions made in the wake of the untimely death of Robert Maxwell. After his death, it emerged that the newspaper mogul had been engaging in pension fraud.  As a result, the government implemented new regulations and laws that included many incentives for companies to close defined-benefit schemes and to divest from equities.12 Thanks in part to this so-called ‘Maxwell Effect’ , British residents are stuck in a pension regime that is very protective and risk averse.13 In 2021, only 26.4% of British pension fund assets were invested in equities, a drop of almost 30% from 2001. This compares to 40.6% of Canadian pension fund assets and 47% of Australian pension fund assets. The result, according to chair of biotech company Immunocore Sir John Bell, is that ‘trillions of pounds sitting in pension funds that are not being used to invest in companies, drive growth or do a whole range of things that the economic viability of the country depends on’. Given the untapped investment opportunities in British pensions, the government should prioritise pension reform. The UK’s technology unicorns have already experienced a significant decline in venture capital funding . Absent reforms aimed at increasing investment, the UK could lose its standing as the third largest technology investor in the world.  Permission  Even if British entrepreneurs, businesses, and labs have the means to hire from a global talent pool, enjoy more investment in new ideas, and host workers attracted by British housing, they still need permission from the Government to launch their new ideas. Unfortunately, the regulatory state hinders many new products and services making it to market. There are a number of reforms the government can make to ensure that entrepreneurs and businesses feel confident that they have permission to try new products and services in the UK. The CPS will shortly be bringing out a major paper examining the shape of the regulatory state. But one of its key recommendations is that there should be a designated minister with the same authority to query and veto new regulations as the Chancellor has over new spending. The minister would be responsible for three main objectives: 1) A review of existing regulation. Such a review would include a cost analysis as well as recommendations on which existing regulations were worth repealing, keeping or amending. 2) Oversee revisions to regulatory objectives. The new minister would task each regulatory body to complete a policy document outlining the safety standards it aimed to impose and the harms it sought to mitigate. 3) Identify the mostly costly retained EU law and prioritise it for swift repeal or amendment. Previous attempts to legislate sunsetting retained EU law have failed. Tasking a minister with overseeing retained EU law would be a welcome alternative to legislation. Conclusion  Thanks to a succession of governments that have failed to follow up pro-technology rhetoric with robust policy actions, there is a risk that the UK’s youth will grow up in a country bogged down in technological stagnation. Fortunately, it is not too late for the current government to change course and to implement policies that would make the UK one of the most technology-friendly countries in the world. Absent these policies, the UK risks losing out in a world that will increasingly reward governments that can harness the tech-fueled, global and dynamic economy that will define the 21st century. Click here to subscribe to our daily briefing  – the best pieces from CapX and across the web. CapX depends on the generosity of its readers. If you value what we do, please consider making a donation.