If you have an innovative idea it is difficult to convince a bank or superannuation fund to invest in that idea. In fact you will be hard pressed to find any fund manager willing to invest in an idea. This is because they do not care whether an idea is innovative or not, nor are they interested in how much money an idea will potentially earn. Their main concern is whether at some time in the future their money will be returned along with some interest. This means that most finance institutions require you to first have assets that can be “mortgaged” against the loans.
You would think that successful companies would be the main drivers for investment in innovation but they are constrained by “The Innovator’s Dilemma” so well described by Claytton Christensen in his book of the same name.
For small companies who are yet to be profitable there is another source of funding – the government through its R&D tax credit scheme. However, funding innovation this way will not raise the large amounts of money needed to introduce new technologies that will address problems such as climate change, secure water supplies, build broadband networks, create efficient public transport networks, invest in education etc. The initial funds needed to address these problems will not come from Australian private companies or individuals. Funds will come once innovative approaches have been proven to work and are profitable with low risk but the funds to get innovative processes to this stage are difficult to obtain.
An alternative way
Funding innovation is risky and it does not always work. This is something that risk-averse governments are well aware of and it is the reason why governments so often put all their investment “eggs” into one basket, or favour existing players.
One solution to the problem is to fund the innovation in such a way that the entire community bears the risk. For example, use public money but give that money to the population (or at least to a large number of people) and require them to invest in ways of producing goods and services that address particular problems. This brings the market place – which is a good conduit for allocating resources – to investment in innovation.
This paper proposes that we invest public money by giving the funds to the population and requiring them to invest in the infrastructure to provide goods and services through an investment market place. The risk of failed innovation is thus spread. The funds can be raised by taxes, surcharges or even by increasing the money supply via the issuing of funds. Some people will make good investment decisions while others will back duds but they will all invest because that is all they can do with the money. People are not risking their existing wealth so they will not feel quite so bad if they lose their funds because in a sense they never had it – and they can always eliminate their risk by selling their investment money at a discount to someone who is prepared to take the risk.
Although special investment money is given to the population as a whole it is expected that brokers (fund managers) will do the investing.
If we use this approach it is unnecessary to create public debt to get Australia through the GFC and beyond. Debt is about who owns things. It is not about wealth creation. If we have public debt what does that mean? We owe money to other members of the public, be it in Australia or elsewhere. Debt is a zero sum game while growing the economy is a non zero sum game. We have let the mechanics of debt (or who gets ownership of the results of investment) cloud our view of what is important for wealth creation – innovation. What we need to concentrate on are the mechanics of encouraging innovation or new wealth creation through investment markets where there are many people investing for particular purposes and where the wealth is then widely distributed.
That is what the current system is supposed to do and it has worked well for some. What is proposed is an innovation in how we, the community, invest public monies for the public good and where debt is not the mechanism used to fund innovation.