Innovation Policy for the Commons

Chapter 8 examines the implications of the private-ordering institutional perspective on the origin of innovation for innovation policy. It addresses the question of what innovation policy should look like based on the theory of innovation commons, proposing an institutional framework of new innovation policy coming from civil society as much as from government. It examines how the quality of the innovation commons shapes the prospects of an innovation trajectory. It is critical of innovation policy that ignores institutional context, offering policy guidance based on institutional design principles, or a framework of “rules as policy.” The chapter views the fundamental policy problem as addressing discovery failure. It develops the comparative institutional approach to innovation policy using the institutional possibility frontier approach.

Life Cycle of an Innovation Commons

Chapter 7 examines a life-cycle view of an innovation trajectory that begins with an innovation commons, and considers what happens after the innovation commons collapses when entrepreneurial firms emerge (i.e., the fundamental transformation). This chapter explores how the governance role of an innovation commons will often reform and reconstitute to provide industry-specific public goods through collective action, usually in the form of an industry association. This governance function is associated with what in evolutionary theory is called niche construction. This evolutionary governance model of an innovation trajectory shows the complexities of innovation policy.

The Innovation Problem

Explains the nature of the innovation problem as an economic problem in the context of economic trade and long-run growth. Distinguishes between a market failure definition of the innovation problem as an allocation problems and the innovation problem as a collective action problem of coordination and discovery. Defines the innovation commons as the zeroth phase of the innovation trajectory. Introduces the concept of discovery failure and discovery costs. This locates the argument of the book in the broader context of Schumpeterian, evolutionary, and Austrian “mainline economics” with a contextualization of the innovation problem simultaneously as both a knowledge problem and a coordination problem, and therefore as a governance problem solved with institutions.

Innovation Is a Knowledge Problem

This chapter furnishes a new theoretical foundation for thinking about the economics of innovation and the innovation problem as a knowledge problem, and a collective action problem, and therefore a governance problem. The theory of the innovation commons is therefore based in new institutional economics. It builds on the analytic frameworks of four key theorists: Deirdre McCloskey on the moral and cultural foundations under which innovation can occur as an evolutionary social process; Friedrich Hayek on “use of knowledge in society,” on cultural evolution, on the ideas of both distributed knowledge and group selection; Oliver Williamson on the coordination problem of idiosyncratic investment under uncertainty and the hazards that contains; and Elinor Ostrom, who resolves the Hayek and Williamson knowledge conditions with a general solution to the collective action problem of knowledge discovery by pooling knowledge through institutional evolution.

Inclusive Innovation Policy

Chapter 9 draws out a particular formulation of the institutional approach to policy that is based around permissionless innovation and the work of Calestous Juma. It distinguishes between two types of innovation policy from the perspective of government: (1) being supportive of “friends of innovation,” or (2) being against “enemies of innovation.” It argues from a public choice theoretical perspective that modern innovation policy is usually configured as (1), i.e., supporting investment in innovation, but it would actually be better if it were (2), namely configured so as to seek to oppose those who seek to stifle new ideas in order to protect their existing investments and economic rents. The chapter proposes inclusive innovation as a new social contract for innovation. I argue that this is a long run social welfare maximizing policy approach, but implies that the role of policy is largely to facilitate social Coasean bargaining in order to compensate the losers.

Rules of the Innovation Commons

This chapter examines the basic institutional similarities between innovation commons (as a species of knowledge commons) and the eight core design principles, or rules of the commons, that Ostrom discovered. It explores the innovation commons through the lens of these rules that enable a group to form under uncertainty, and that make cooperation a safe and effective strategy within that group. The question is explored in terms of the core problems a commons must solve: identity, cooperation, consent, monitoring, punishment, and independence. The chapter then examines these rules in the broader context of multilevel selection theory, arguing that group selection operates over innovation.

Origin of the Innovation Trajectory

This chapter explains how innovation commons work, in terms of the mechanisms of entrepreneurial discovery through institutions to pool information, and what specific problems they solve in order to discover entrepreneurial opportunities. It introduces the proto-entrepreneurs in the innovation commons, who are people exploring a new technology but who have not yet figured out the entrepreneurial opportunity. It introduces the dual-discovery problem, which is the problem of finding the people who will pool ideas into the innovation commons as well as the problem of finding the entrepreneurial opportunity. And this chapter also introduces the concept of the fundamental transformation, which is the institutional transformation when the innovation commons collapses in its extant form (although many institutional pathways are possible from this point onwards). It defines the innovation commons analytically as a higher-order discovery mechanism in institutional space.

We Innovate Together

This chapter introduces the economic problem of the origin of innovation. It observes that we don’t really understand the origins of innovation very well, particularly the origin of entrepreneurship. It points out that this is a weakness for innovation theory, and particularly Schumpeterian or evolutionary economic theory, as well as for innovation policy that is built upon such frameworks. Introducing the meaning of a commons, the chapter connects this to the innovation problem, working through several stories about the origin of innovation in terms of mountain bikes, computers, and modern science. It also discusses the role of group formation and governance in this early stage process.

Conclusion

The chapter concludes the book by placing innovation commons in a broader sweep of economic history in order to emphasize the institutional origin of innovation as an outcome of cooperative pooling of information and knowledge. It argues that cooperation to create a common pool resource in order to discover entrepreneurial opportunities is the evolutionary origin of innovation. It explains the institutional origin of innovation as the governance to facilitate this cooperation in order to solve the fundamental economic problem of discovery of entrepreneurial opportunity. The solution is in the use of institutions to pool distributed information. It explores implications for economic theory, and particularly the increased importance of institutional analysis for understanding the economics of innovation, industrial dynamics and economic evolution. It concludes by arguing that the innovation commons is the original sharing economy.

Four Theories of the Innovation Commons

This chapter proposes four theories explaining how innovation commons work, in terms of how they pool information, and what specific problems they solve in order to discover entrepreneurial opportunities. The first is the “two commons” theory in which the innovation commons is a screening mechanism by having the truly valuable commons of entrepreneurial information accessed only through the commons of technological knowledge and material innovation resources. The second is the “evolution of cooperation” theory, which draws on modern evolutionary theory (specifically multilevel selection theory and evolutionary game theory). The third is the “defense against enclosure” theory, in which the commons is a preferred institution for first movers because it raises the cost of alternative institutions and minimizes the risk of loss of control of the technology. The fourth is the “institutional uncertainty and real options” theory.