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Ravi Gurumurthy: Hello and welcome to The Mission. This is the podcast to listen to if you’re interested in mission driven innovation. My name is Ravi Gurumurthy and I’m the Chief Executive of Nesta, the innovation foundation. And on this podcast we’re going to be talking to practitioners, academics and policymakers about how to tackle society’s intractable challenges.

Today our mission is tackling the UK’s stagnant productivity and with me to discuss it is John Van Reenen, Professor of Economics at LSE. John, welcome.

John Van Reenen: Hi Ravi. Nice to be here.

RG: Thanks for joining us. Can we just start by setting the scene and defining productivity for us and say a little bit about why it matters. I often hear people say well, how can you define productivity in a service-based economy when, you know, we shouldn’t measure progress in education by the number of kids in a classroom, we should be defining it based on other measures. So tell us a bit about how you define it and also why it matters.

JVR: Sure. Well, just to say, I mean I certainly agree that productivity isn’t the only thing which matters, there’s lots of other things. But at its basic level, productivity is trying to say well, given all the inputs, the effort you make to create some good or service, how much output do you get from all those inputs. So it’s the kind of output relative to inputs, so you could think of this as a measure of efficiency if you like. The practical way that people often do that, say, try to look at the economy as a whole, would be to try and look at the size of the economy as measured by something like gross domestic product or gross national product, that’s the kind of size of our national income, divided by the input. So the most important input is people, labour input, so that the basic measure of labour productivity would be something like GDP per hour worked, so for all the hours worked how much output comes out of that, that would be a basic measure. And then more sophisticated measures would also try to take into account other things like how much capital is being used, how many buildings, you know, machines, robots and so on. And, you know, then that’s a more sophisticated measure of productivity taking into account the non-human inputs as well as the human inputs. Economists sometimes call that the horrible term, total factor productivity, but you know, that’s basically what it is, it’s trying to kind of say well, when you take into account all the inputs how much output do you get. Of course, that’s the aggregate and we could also talk about how you try to measure that at say, the firm level or at the level of a school or a hospital or other kinds of things where the idea would be the same but the implementation might be somewhat different. The reason why it matters is that if we think about that kind of, you know, macro-economic, countrywide definition of productivity and in particular the kind of growth of that thing over time. So, you know, one of the startling facts in the world, I’d say, is that most of human history productivity growth, the growth of that efficiency has been zero or very, very small. But then around, you know, 250 years ago when the Industrial Revolution happened, we got a sudden increase of productivity. There was this kind of, sometimes people call this a hockey stick, you know, the flat part of the hockey stick, if it’s lying on its side, is quite flat, and then suddenly it took off. First of all in England at the end of the kind of 18th century or so, and then subsequently the Industrial Revolution spread to the rest of the world. So we had this kind of real increase of productivity growth and in Britain, for example, you know, productivity growth has been going on at, say, about 2% a year for, you know, maybe a century or a century and a half. And the reason why that’s important is that if you look at people’s income, people’s wages, then that tends over the long run to follow productivity growth. And it makes sense because, you know, in order to get higher wages you need the economy to be getting bigger. It you just increase wages without the economy getting bigger, without productivity getting bigger, sooner or later that’s just going to lead to kind of higher inflation. So people’s wage increases, their income increases have to follow or be in large part determined by kind of productivity increases. So, you know, the famous statement by, I think it was Paul Krugman who’s a Nobel Laureate – more famous now for his ‘New York Times’ articles – is that productivity isn’t everything but in the long run it’s almost everything.

RG: And you mentioned the wage growth. Does productivity have any link to wage inequality and how that’s widened?

JVR: That’s a great question. I mean there’s no consensus on that. I say there is a consensus on, you know, wage growth and productivity growth tend to over the long run go together – not perfectly and we can discuss that – but certainly there’s some correlation. In terms of wage inequality I don’t think there’s any strong empirical correlation one way or the other in the sense that you can have productivity growth which is consistent with increasing inequality, and that’s certainly happened say, since 1980 and in the US and the UK and many other Anglo-Saxon countries, or it can be consistent with decreasing inequality. That happened, say, if you look at the 25 years, quarter of a century after the end of the Second World War, you had healthy productivity growth but you had stable or even decreasing inequality in many countries. And indeed, if you look across countries, some of the, you know, very high productivity countries in the world, like Sweden or Norway or some of the Scandinavian countries, have relatively low levels of inequality. So I don’t think there’s any necessary connection between them. My personal view, if you wanted that, is that there’s probably, you know, an inverted U, a hump-shape relationship in the sense that, you know, very low levels of inequality. So for example, you know, think of the kind of communist Soviet Union type of system where you basically try and pay everybody the same amount of wages and get rid of inequality, as least wages equality – you get inequalities and politics and other things – that tends to be bad for productivity growth because you take away incentives for people to innovate or invest. On the other side, if you let inequality get completely out of control, it gets too high, then that’s also bad for productivity growth because it means that – hopefully we’ll talk about this – many of the, you know, very talented people who happen to be poor aren’t able to use their talents in order to create new jobs, new firms, new innovations. So I’d say that, you know, there’s a kind of a sweet spot where inequality is not too high and not too low, which is probably the best level for kind of overall productivity growth.

RG: Now you’ve said in the UK historically we’ve grown at about 2%, or productivity growth has been about 2%, since the financial crash it’s really stagnated at about .3% and that means, you know, the average worker would be £5,000 better off if productivity had been at pre-crash levels, but this isn’t just a UK phenomenon is it? Basically this is a story about lots of advanced countries being in the same boat. So how would you tease out the UK specific issues, and there are specific issues, particularly given our relative under-performance compared with the US and France and Germany, how would you tease out those UK specific factors from the more global factors that have affected all countries?

JVR: Yeah, that’s a great question. I don’t think we know all the answers to that. But I think you’re absolutely right to frame it, this slow productivity growth, in the context of a global slowdown and I think, you know, that’s happened at different paces in different countries, but I think it’s very important, you know, not to be too parochial – we’re always beating ourself up in the UK over this – but to see that this is part of a, you know, a more general phenomena, which I think it’s worth talking about that. If you want to, widen…

RG: Yeah.

JVR: ...widen this to a more general thing. But I can talk about some of the UK specific things first. And I should also say that, you know, this is not a new problem. So we often call the UK productivity slowdown as the puzzle, but you know, the level of UK productivity already was lower than it was, say, in France and Germany and the US, even before the global financial crisis, so it’s not like this is a new problem, but it’s certainly got worse. So I think there’s a number of reasons, we don’t understand all these fully, but I’d say that one factor – this is a more optimistic thing, it’s probably to do with measurement – so the question is, you know, are we, you know – and I think you brought this up earlier – are we really measuring productivity correctly and are we measuring it worse than we were before. And I think that, you know, there are very serious measurement problems. If you think about labour productivity, GDP is, as we know, a hard thing to measure and especially in a service-based economy where many things are free, many things are in the public sector, many things are to do with intangible capital. So it’s very hard to actually measure GDP and get the kind of correct measure of that. It’s also, you know, even the labour input can often be difficult, so you want to measure it with hours and in say, the gig economy, measuring accurately how many hours people are working, or people are working from home like we are now in COVID, how exactly many hours are they working. So there is a challenge there and, of course, that’s true for all countries and it was true before the global financial crisis, but you might think there’s some particular issues in the UK as we are a very service-based economy and there’s evidence that the level of intangible capital that we have in the UK is relatively high. So intangible capital I mean things, things which are not, you know, forms of investment which are not just, you know, machines and buildings and plant, but investments in design, investments in brands, investments in management, investments in R&D innovation. So, you know, Britain’s a very big service economy, a lot of those things are service based, that could be a factor. So I think there is a measurement issue, but my gut instinct is that’s only a, you know, small part of it because I think, number one, these measurement problems are true in every country and they were there before the financial crisis as well, and as you said, there’s been a big fall of it. So I think that probably plays some part, but you know, that’s only one part of the equation.

The second part, I’d say, which, you know, in terms of understanding the, you know, UK’s problem is that broadly what you could, one of the things that stands out in the UK is that we, you know, we tend to have relatively low levels of investment. So in terms of the kind of, you know, the kind of even the physical forms of capital that we often focus on, our levels of investment are relatively low compared to the rest of the OECD. So, for example, if you look at, say, between 1995 and 2018 growth fixed capital formation, something like 17% of GDP in the UK compared to 21% in Germany and 22% in France and 24% of the OECD as a whole. So historically and also since the financial crisis we have tended to do less investment, so of course that’s a very important part of growth.

RG: Just on that specifically, has that got some relevance to your previous answer about the fact that we’re an economy that’s service based with a heavy dependency on intangibles, because presumably it’s harder to capture the benefits of that investment if there are big spillovers. So what’s the sort of rationale for why we’ve got lower levels of investment compared to other countries?

JVR: Well, there’s several reasons. One – and this is a broad statement, I think, about my view of how the UK tends to work – in Britain we tend to be bad at the kind of long-run investments. We, you know, we have a lot of focus on often, you know, short-run efficiency things, but in terms of making more long-run investments, say especially around investments in infrastructure, innovation, human capital, training, we often tend to be rather poor at those type of investments. And I think that one of the things that was very noticeable is in terms of, you know, think about public infrastructure where the public sector comes in very importantly, you know, when we get into a crisis that’s often the very first thing that we tend to cut. So you saw when we moved very quickly towards austerity after the global financial crisis, a lot of the cutbacks, you know, were in public investment initially and those things actually are, if you think about transportation, think about energy, those are actually very important, have very important long-run types of pay-offs. I think part of the problem is that in the public sector these kind of long-run investments, you know, got cut back very quickly, we’ve also had this historical problem making those investments. And part of that I think is due to, you know, we have a very adversarial political system compared to, say, you know, many continental European countries, so we tend to kind of, you know, switch round very quickly from one policy to another, we don’t have the same, some of the more consensual-based decision making on say, these long-run investments. So think about the time it’s taken to make a decision over Heathrow’s new runway, for example. So I think part of it is the kind of public sector, but part of it’s the private sector as well because I think that, you know, there’s been many studies looking at the kind of short-termism in some investment decisions in the private sector and I think that although often it’s, you know, the UK has very deep financial markets – another one of the reasons why we got hit perhaps more strongly by the global financial crisis because of the, you know, reliance of our economy on finance – but I think there’s a kind of deeper problem that, you know, we don’t seem to be so good at making these kind of long-run kind of commitments to investment even in the private sector, there’s a kind of short-termist focus on the next set of quarterly results, if you’re a public sector company, maybe the banks are, and the other financial institutions, are often focussed too much on lending for, you know, for buying and selling houses or short-run M&A activity, rather than more long-run type of investments which may have a longer pay-off in the future. So I think there’s a kind of long, a short-termist, a short-termism problem which runs throughout the UK, both in the kind of public and the kind of private side, which, you know, I think needs some kind of policy, policy response.

RG: Oh, and when I think about some of your own work on management, for instance, and how management practices are very divergent and perhaps are a big reason why the US does so well compared to other countries, but also a reason why the UK does less well, I’m just trying to connect that explanation with the argument you’ve just made about investment, because to me, I’m just not necessarily convinced that management practices are the thing that is shaped by investment. What’s the connection between, say, these different factors?

JVR: Well, I mean management is extremely important, so that’s been, you know, it’s kind of not being used by any business person, but, you know, for economists the problem has always been, in terms of understanding management as, you know, it’s very hard to measure management and there’s lots of case studies. So, you know, one of the things I’ve been involved with a lot over the last, you know 15 years or so with, you know, my former students – Nick Bloom in Stanford and Raffaella Sadun in Harvard – is trying to get better measures in management. And one of the things which has come out of that is that across the world management is very important for understanding levels of productivity and say, the UK compared to the US and maybe compared to Germany, does suffer from a management deficit and this helps explain some of the productivity gap between Britain and countries like the US and Germany.

RG: How big would you, if you’re going to try and put some sense of scale on this, you know, how big a difference does it make?

JVR: Well, say, compared to the US, I think we, you know, again there’s a lot of uncertainty of the exact numbers, but across the world as a whole, I think these management practices account for about a third of these unexplained productivity differences, and for the UK about 40-45%, so a big chunk of that, I’d say, is related to management. But getting back to your question over, I mean that’s the levels comparison and the question is, can management help explain the change, say, in Britain of productivity over time or other countries over time, and that’s a much, that’s a much bigger, you know, that doesn’t necessarily follow because it may, you know, management might explain why there’s a gap, but not why that gap is getting bigger, which is the kind of puzzle that you challenged me with. As I say, we don’t know this because it’s, again, we don’t have good measures of how these things have changed over time very accurately across different countries over this, you know, over the last ten years or so. But my gut instinct is it does have some role to play in investment in the following sense, which is what you asked me. So, one of the things that we have learnt when you have a blast of new technologies, I think we’re living in a period, and especially, I spent four years in MIT and I was often in Stanford working with my other colleagues who were there. You know, you walk around the corridors in MIT and there’s kind of amazing innovations coming out everywhere, whether it’s, you know, from driverless cars or new forms of gene therapy or artificial intelligence or robotics, so there’s this explosion of innovation and yet, as we’ve just described, you don’t see this in the productivity numbers. And I think – there’s again, lots of reasons for it – but one of the reasons that we’ve learnt from previous, you know, big blasts of new technologies such as electricity in the 19th century or computers in the 1980s is that there’s often a long lag between these new innovations and how they get translated into productivity. And management is actually a critical part which kind of intermediates between these new innovations coming out and then how they get actually implemented on the ground level. Because you can have, you know, amazing technologies but if you can’t adapt your organisations to make best use of them, then you can spend billions on lots of fancy new systems without increasing productivity. Now, I spent a year working in the National Health Service in the 2000s when there was a massive push to use more information communication technology and, you know, I think the results were very disappointing and I think part, one of the reasons for that is that there was a lot of problems with the degree of flexibility that different organisations had, the quality of management in those organisations to really make best use of that. You need to make a lot of changes, it’s not just about plonking the new technology into your existing system, you often have to change the whole way you organise things, you have to take on new people with new skills, retrain other people who haven’t got the skills, you have to often change the power structure in your organisation. You know, often when you have a new technology you have to actually give more decision making power to people down the frontline to deal with the new uncertainty this has created. And so I think that the fact that Britain has had the skill and management deficit may be one of the reasons why, you know, we haven’t been able to make as much use of some of these new technologies as other countries have. Now that’s speculation because, you know, we don’t have the quality of evidence, specially with the technologies coming along in the last few years, to corroborate that. But in, you know, when we looked at the impact of information technology, you know, as I said, back in the kind of eighties and nineties, using UK data and data from other countries, we found exactly this type of thing. It did seem to be the US companies were much more effective in using information technology and, you know, that was related to the kind of management practices. So, you know, for example, there was a productivity boom, in fact, in the US, between 1995 and 2003, productivity growth more or less doubled, and a lot of that was related to the use and production of, you know, new information technologies and the companies which actually made best use of that were the ones which, you know, actually had more flexible organisations and better management. So I do think that management is important but, you know, we need a lot more, you know, research on that to see whether it’s a critical part of, you know, Britain’s productivity puzzle.

RG: And when you think about those sort of fourth industrial revolution technologies that you started to mention and the difficulty in getting those to penetrate through the economy quickly and how we accelerate that, what role do you think there is for the state in speeding that up? Because in many of these areas there are big regulatory barriers, there are probably big market failures, and I think of, say, climate change and energy where I think the state of the European Union actually has played a big role in turbo-charging the move towards more efficient vehicles or more renewable power. So to what extent do you think the state has a significant role in accelerating the adoption of those technologies?

JVR: Oh, it has an extremely important role. So, you know, the number of them, you started mentioning some of them, which I think is particularly important. So, you know, I mean there’s lots of different dimensions of this. Let’s start with where you started. So, you know, climate change is clearly, you know, the mission, the big challenge of our age. So, you know, after COVID, hopefully we get through this, then clearly climate change is what we have to deal with. So that’s a major, you know, a major issue to deal with. The market by itself is not going to deal with that, because as we know, every country left to its own devices will free-ride off the efforts of others. So in order to deal with climate change you need to actually have state intervention in many countries. So in order to do that, you know, we need to try to get the incentives right to get the diffusion of new technology. And there’s lots of ways to do that, you know, I think if we thought about climate change in general there’s, you know, one part of it which is trying to, you know, discourage people using fossil fuels. A very good way to push that is to think about things like, you know, carbon pricing and taxes to increase. And that will also have a positive effect on innovation as well, so it will encourage firms to develop new cleaner technologies because by reducing the demand for the old dirty technologies, you increase the incentive the firms have to actually create new technology. So the state can have an impact by, you know, pricing, through carbon pricing, but it can have also a direct impact by setting standards, by regulation, by creating, you know, a way of encouraging people to, you know, do more, do more things which is going to help reduce carbon emission, therefore help climate change. So I think, you know, at both of those levels, and of course there’s a direct R&D subsidy type of thing that the state has to do in order to help generate those new things, so the carbon pricing will help, the regulation will help, but ultimately you also need to do a lot of kind of direct investments and direct encouragement of research and development to deal with those problems. So that’s the kind of, there’s missions: climate change, health is another big mission, other environmental missions, defence related missions. But then I think there’s also a set of things which are also more general type of ways in which governments can encourage the, you know, adoption of better technologies and that’s to do with thinking about how it kind of organises markets in such a way that gives good incentives for the speeding up of the type of, of different forms of technologies, or indeed management practices. So it, you know, by that I mean things like, for example, thinking about product market competition. So, you know, a lot of evidence suggests that if you have more competitive markets, that gives strong incentives to improve efficiency. If you know, you know, if you’re in a kind of very monopolistic market, then it’s easy to have the quiet life, whereas if you face a lot of competition or unless you get more efficient, you’re going to be pushed out of business. So competition gives good incentives to do that.

RG: How does that relate to the kind of winner takes all digital world where it’s very, very easy for big monopolies to emerge and again, sort of what is the right- do you think the state should be more active or the European Union be more active in breaking those up?

JVR: The principle is that, you know, competition is important to stimulate innovation, it’s important to stimulate productivity growth, you know, both through giving the right incentives and also by weeding out some of the less efficient and less innovative firms. The question then is how you get more competition, what’s the right way to get more competition. There’s a whole set of different tools governments can do. So you’ve immediately gone to what everybody says, it’s competition policy, which is important, but that’s only one tool in the toolbox. So there’s other tools like being, you know, open to trade, being open to, you know, foreign investments.

RG: That’s not going well for us. [laughs]

JVR: No, that’s not going well for us, we’re moving in the wrong direction. But on competition policy, the way to think about competition policy, especially in the digital era, but more generally, is what you want to do is you want to, I don’t think you want to have just the view, well, big is necessarily bad and therefore you immediately, you know, anything gets bigger you want to break it up. Because part of the incentive to innovate is to get bigger. So that’s the first thing to, the first point to bear in mind. Now, what you do want to do is you want to stop the firms who have got big, or who are in dominant positions, from abusing their power to maintain their positions of dominance. So to me, the problem is not so much you have, you know, firms who’ve like, you know, who’ve got very successful if they’re competing on their merits by producing better products or being more efficient, the problem is when they start then using their power to keep other firms out, and a classic example of this would be when Facebook was allowed to buy up Instagram or WhatsApp and, you know, the competition authorities generally said, well, well, you know, these are- at that time WhatsApp was a very small platform, very small market share, similar for Instagram, but the problem is, these firms could have become larger platforms in the future which could have, you know, competed with Facebook, and even though they were small now, in the future they could have become big. So you could think, you know, of course one of the reasons that Facebook may have an incentive to buy these companies up was not, you know, for just the reasons they said which was to get hold of their better technologies or their better people, but was also to take a future competitive threat out of the marketplace. So I think when we think about mergers, takeovers, we should be thinking a lot more about not the current, you know, market shares, but the kind of future potential competitors to those firms and, you know, an even worse example, you know, if you look at the pharmaceutical industry, with the example of so-called ‘killer acquisitions’ where big pharmaceutical firms might take over, say, a promising biotech company and then there’s examples where that biotech company was going to come up with a new drug which would have competed against one of the big pharma’s existing drugs and so what, you know, what some of these big pharma companies do is take them over then kill off their innovation so they, you know, you take that, the drug actually no longer comes out to threaten all the profits they’re making. And that’s, you know, that’s even worse because you’re kind of killing off an innovation and you’re killing off competition. So I think that in terms of competition policy we really have to think about actions which are designed to reduce future competition and, you know, ultimately, I think if the existing, you know, that’s down on the existing competition rules, this is not really changing the philosophy of competition law, but it’s changing the way it gets implemented. Too often in these things the burden of proof was always on the government or the regulator to say well, can you prove without a shadow of doubt that this company that, say, one of the big tech companies is taking over, will become a future competitor. Of course you can never prove that without a shadow of a doubt because we don’t know the future for sure. But I think the burden of proof has to be switched more towards the companies to say well you’re taking over this firm which, you know, looks like it’s got a viable platform to compete against you. How can you demonstrate to us there’s not a significant risk that, you know, this is going to be taking out a future competitor from the marketplace. And I think that’s part of the changes that we have to make. Now ultimately, if you think that you can’t do that, I mean the combination of better competition law, better regulation, you still see these things happening, does seem to be happening, then you have to go for the structural break-up solution. But that’s a very blunt tool because, you know, it’s very hard to unstitch many of these companies if they’ve been together for a long time, you may lose some of the efficiency. So that’s kind of the last resort. Of course it should be there if the companies don’t change their behaviour and the other mechanisms that we have under competition law can’t be used effectively to kind of inject more competition. By the way, I think this is not just a competition in the digital sphere, we focus a lot on the kind of, you know, the gaffers, you know, the Googles, Amazon, Facebooks and so on, you know, of the big companies. But it’s also true if you look at many other parts of the economy, so the older tech kinds of the economy have also become a lot more concentrated over time. I did a study with David Autor from MIT where we showed that if you look in the US since the early 1980s, just about, you know, on average every big industry you look at has become more concentrated. So that’s a kind of signal that markets are becoming a lot more concentrated. Sometimes that might be fine if they’re doing it for efficiency reasons, but many times that is going to raise competition concerns. So I think that there is a general sense in which we are as a world moving to a much more winner takes all kind of world and these kind of issues of competition policy actually are going to be very widespread across a large number of sectors. Tech is really important, but it goes wider than just tech, I think.

RG: We’re getting more on to solutions now and I just want to almost put it to you, if you were, you know, in government, you were Rishi Sunak right now, what would be the sort of top two or three things that you would actually do? And I wondered about the, you actually recently published something about how to boost productivity in the US and you graded the level of evidence about different interventions and the confidence you have in different policies. Are they the same kind of things in the US that you’d do here or are they very different?

JVR: Yeah, you’re referring to this kind of Hamilton policy paper that I did looking at, it was specifically on innovation policy. So I think there are some differences in the UK. Let me go on to your first question though, so if I was Rishi Sunak. Now of course if I was, you know, I would be doing in some sense what he is doing, that the immediate crisis is how we deal with COVID and of course, you know, we’re in this very strange position for the economy where we have to deal with the pandemic and in order to do that, you know, we’re having to put lots of restrictions on the way that we live and that is causing, you know, a big fall of economic activity to happen. So, what’s really important right now is that the measures we put in place to reduce economic activity through social distancing, through reducing, you know, the hospitality industry, everything else, that that fall of demand doesn’t translate through to, you know, mass increases of unemployment which will then have a scarring effect, you know, decades in the future as we know has happened from previous recessions. So that, I think, is number one kind of priority. And of course, and as we come out, we should also not make the mistake, which we did, of the global financial crisis to move too quickly to austerity and trying to reduce the budget deficit by vast falls of public expenditure and increases of taxation. So I think that, you know, it’s very important that, you know, that we kind of manage that immediate crisis. But as we, hopefully as we will come out, there’s a whole set of new challenges that we face and the Hamilton policy thing, Hamilton foundation thing I did is about thinking about the more optimistic thing as we come out, how we kind of build for recovery. And I think there’s lots of different elements to how we kind of can build for recovery. One of those is around innovation policy, so I do think that’s where it connects with UK policy. I think, you know, we have an opportunity to make a kind of recess to our kind of, you know, growth model or a model of innovation which could be really helpful. So, you know, in that, you know, in terms of thinking around innovation and R&D policy, what we were talking about earlier in terms of thinking about how to get more green growth, how to have these type of missions, is really important, and that’s going to include health type of missions as well. So I think that we could have a whole package of things around that. Now, the UK is not really, you know, on the technological frontier in so many industries in the way that the US is, so I do think we have to be a bit more modest and think about the balance is a bit more towards diffusion of new technologies rather than necessarily innovating at the frontier in a large number of different technologies. The UK does have strength in certain areas, so I think that part of what we have to think about in terms of our industrial policy is to think about the areas where we have some, you know, potential comparative advantage in and then focus on those areas, rather than trying to do everything across the board. So I do think there’s a kind of, you know, a sense in which we can focus on certain areas. But the messages from that paper were that R&D subsidies can be very effective. So thinking about how you make innovation policy grants, where you put your R&D subsidies can be important. You should think about what they are very carefully. I mean one of the issues I have in the UK is if you try and understand, you know, why we give out innovation grants to some companies and not others is not very transparent and, you know, I think that we should think about trying to focus on our areas of strength, areas of growth and nationally, like in climate change, but also we should think about where the spillovers are greatest. Where there’s a big private return already, then it’s not so obvious that, you know, government needs to give out some money. Where there’s an area where there’s a lot of spillovers, lots of benefits to other firms and consumers, then firms may have less of an incentive to make the right kind of investments. So we should think about where those spillovers are. Of course we’d like the spillovers to be, you know, captured, you know, by the UK, you know, UK taxpayers and people and not just to flow everywhere. Well, it’s great if they flow everywhere to the world, but if we’re paying for this with our taxpayers’ money we want to think about the web of connections which can benefit kind of the UK in these kind of spillovers more than if they’re just general type of spillovers. So that’s the kind of criteria I would think of using in some of the R&D space. The other thing I think is really important, and you know, I was surprised, this comes out of the research I’ve done with Harvard’s Raj Chetty, which we call the kind of ‘Lost Einstein Effect’, is that I’ve been really – maybe I shouldn’t have been surprised – but I was surprised on that study, which is on US data but I think similar things are true in the UK and other countries as well, is that how many, you know, potential innovators, entrepreneurs were not created because there’s barriers to enable very talented kids who happen to be, you know, born to lower income families or to, you know, be minorities, or to, in the innovation space if you’re a woman rather than a man, there’s a lot of barriers as you grow up to becoming an innovator. Now, those barriers are things through, partly it’s access to education, but partly it’s also being exposed to role models. You know, if everybody you see who’s an inventor is always a kind of, you know, white middle class male then it kind of gives you the idea that you might grow up to be an inventor or entrepreneur becomes much less. So I think there’s a whole role for interventions which can try and tackle some of those barriers towards people becoming inventors and entrepreneurs, and those are things which, you know, going back to your inequality point, might be to do with tackling some of the sources of inequality, it might be thinking of going to schools with inventor education, it may be obviously direct discriminatory barriers and who gets access to finance. There’s a whole range of different measures. Those take a long time to come through the system so I think that, you know, these are not necessarily things which are going to change innovation overnight, though the long run, I think they could have an important effect on innovation and growth. And also, of course, they’re good for, you know, addressing some of the problems of social mobility and inequality as well. So those type of policies are kind of good both on the kind of, I think, productivity side and also good on the side of equity and social justice. So I think that’s another range of innovation policies which is important, both in Britain and in America.

RG: And you mentioned earlier on about perhaps focussing more on diffusion rather than innovation at the frontier. I’m just interested in your reflection on, you know, the interest that the government has in an ARPA [?] equivalent. Do you think that’s sensible but has only a very long-term pay-off and is risky, or do you think it’s just a little bit hubristic and we should just focus on diffusion?

JVR: Well, you know, as with many things going on, it’s never quite sure exactly what that will mean in practice. So, you know, ARPA , all these other kinds of… I think, you know, successful institutional aspects of federal R&D funding in the US are things to look at and learn from, for sure, and I think that the ambition to try and learn from those is a good thing. But exactly how you then translate that in practice is another question. So I do believe that, you know, having something focussed on missions, having something thinking about bottom-up innovation. One of the successes of, my understanding of ARPA, is that although often there was a kind of a mission, say, to deal with energy issues like climate change or dealing with, you know, defence related issues and DARPA, there was a lot of autonomy given to the different programmes for people to come up with their own ideas or pursuing their own ideas. So the bottom-up type of innovation and autonomy in those institutions is really important. So I think that that’s one of the lessons, you know, should be taken in terms of thinking about supplying support for innovation. So I do think there’s lessons to be learnt from it, but I do think that we shouldn’t just think it’s all about, you know, shiny new laboratories and scientists, I think there’s often a lot more mundane things about trying to get, you know, the existing technologies adopted and spread out, better management practices adopted and spread out much more quickly than we do at the moment. I think the way to do that is twofold. So one is, there’s the sort of structural policies, so openness to competition, openness to trade, openness to FDI, getting good skills, especially intermediate skills which, you know, the UK is very bad at in terms of apprenticeships and so on, thinking about governance of firms. So there’s the whole sort of things like that. But then there’s the whole sort of more direct kind of policies, and the government does a lot of these things, there’s a lot of, you know, support for business and advice for business. But, the problem is that those things are very rarely evaluated to see what works and what doesn’t work. So I do think there is a role for providing information, better information to firms and helping firms adopt, but the exact way that that should be done needs a lot of experimentation to figure that out. So just having somebody in the Number 10 policy unit getting up one morning and saying this would be a great idea to do it, yeah, let’s squaff [sp?] a few hundred million against the wall to do that, is not the right way to do public policy. The right way to do it is to say well, we really don’t know what the right thing to do is precisely, let’s try a lot of different things and evaluate them properly to figure out what’s worth rolling out nationwide.

RG: Yeah, and as you say, compared to other parts of public policy there’s much less rigorous evaluation of those kind of business support policies and perhaps we haven’t also made those interventions particularly behaviourally informed. And if you think about a lot of the barriers to managers or people taking up practices, they’re often things like, you know, people having not enough bandwidth or being overly confident, and I think there’s a lot of potential there to apply behavioural science to design those interventions.

JVR: I totally agree. I mean, you know, there is, you know, I think we’ve moved away from the idea of, you know, Homo Economist who’s like perfectly informed and perfectly rational, we know that that’s not true, but what we don’t know is exactly what are the behavioural biases, what are the pieces where there’s a lack of information and how can we as, you know, as different forms of policymakers with governments, you know, support that in the most effective manner. So I think there’s a- and I think Nesta’s been extremely good for this in terms of supporting work on doing experimentation and learning from those experiments.

RG: I mean you also talked a bit about the way R&D grants and even credits are sort of designed, do you think there’s, again, more need for evaluation experimentation there? I’m just also interested in whether the role of prizes - one of the things that Nesta does is challenge prizes - do you think there is a value in those and does the evidence actually support that?

JVR: I think there is a value in kind of prizes. I mean the nice thing about prizes, several nice things, you don’t have to pay anything until somebody comes up with them, so that’s a very, you know, in that sense it’s a very cost-effective form of giving incentives. And you can also just, you know, you can allow, you don’t have to specify the way to do it, people can determine themselves the best way to come up with the particular solution. I do think it’s potentially a, you know, good way to do it. It’s not, again, it’s not the panacea because they’re very expensive investments, you know, if you can’t get access to finance then it’s going to be difficult to get the access to finance to meet the prize. But I do think that the great thing about prizes is that they are very good for evaluating, because you can look at the applicants, look at the people who’ve just won versus just lost and that’s a nice way of trying to evaluate whether the prizes are successful or not. So I do think there is a big role for evaluation and there is a, you know, there’s a big opportunity for different kinds of forward commitments.

RG: Thank you very much John. I was going to ask you what’s on the cutting room floor of your ideas that you’d love to revive, but we haven’t got time, unless you’ve got a very quick sort of thing that we should be looking at?

JVR: The cutting room floor. I mean I think the big, the big thing that I’m – I don’t know if I’ve cut it, but I was certainly involved with thinking about it – is going back to this question about how the business landscape is evolving in the UK and other countries and whether or not this thing that we were describing, like the growth, the winner takes all economy, the growth of superstar firms, to what extent is that a big problem, is the fact that these large firms are pulling away from others slowing diffusion down, what can we do about that, what’s the right form of interventions, that’s the kind of thing which is, you know, it’s less on the cutting room floor but still the cloth is being cut to understand what’s happening.

RG: John Van Reenen, thank you so much for joining us. Cheers.

JVR: Thank you.

[ends]