Policy Priorities in 2018: Innovation without permission

Reforming the tax system, planning law, and facilitating immigration is essential to raising living standards in the UK. However, with a few exceptions these policies only raise the level of GDP. It is only by removing the regulatory barriers that prevent new technologies from being adopted that we can increase the trend rate of growth. Even relatively small increases in the trend rate of growth (0.1pp) can lead to very large increases in living standards over a few decades. This highlights the importance of getting innovation policy right.

To advance in innovation in the UK we will focus on three key areas in 2018.

Emerging technologies such as drones, autonomous vehicles, and consumer genetics could save lives, cut pollution and save money for millions of consumers. But the rate of innovation of depends on the speed at which entrepreneurs can bring new products to market. While centrally planned rollouts often backfire (e.g. smart meters), government can play a role. By proactively deregulating in favour of emerging technologies, they can create the space for entrepreneurs to experiment with new technologies.

Britain is a world-leader in FinTech as a result of the Financial Conduct Authority’s regulatory sandbox. The FCA’s sandbox allows start-ups to trial new products without going through extensive regulatory approval processes. This reduces risk for investors as firms are able to demonstrate business models before getting full regulatory approval. This is particularly useful to start-ups who both cannot afford legal counsel to navigate the regulatory process and cannot attract investment without demonstrating their business model is viable. We should apply the FCA’s regulatory sandbox approach to other emerging technologies such as driverless vehicles, consumer genetics, and commercial drones.

It is also important that regulation does not deter innovative business models. Ridesharing firms such as Uber have expanded flexible employment and delivered a cheaper, faster service. To ensure the sector remains competitive and to avoid a chilling effect on innovation, central government should restrict the ability of local authorities to unfairly crack down on disruptive firms.

Competition policy should protect competition, not competitors. But in recent years, innovative tech giants including Amazon, Facebook and Google have come under attack for being too large by the so-called ‘hipster antitrust’ movement. There is a risk that we return to a naïve ‘big is bad’ policy. The European Commission’s intervention against Google highlights the risk posed to innovative businesses. Even though there was little evidence that Google harmed consumers, the Commission forced Google to restructure its Shopping business. They risk deterring innovation and harming consumers. Recent attacks on Google, Facebook and Amazon rely on overhyped theory (network effects) when evidence suggests that platforms can still face intense competition (e.g. the fall of Myspace). There is a risk that firms face restrictive data requirements deterring innovation in AI. Others call for burdening Facebook and Google by treating them as publishers. Both policies would be a step backwards: they will reduce investment and make consumers worse off. If we’re to keep our economy innovative, competition policy must be guided by consumer welfare.

As we live more of our lives online, the importance of cybersecurity is increasing. However, government intervention risks making us less safe. Attempts to prevent terrorism by undermining encryption through backdoors, make us more vulnerable to cybercrime. At the same time, attempts to prevent children from accessing online pornography may put adults at risk of fraud and leave sensitive data unprotected.

We should also ensure that reducing the risk of terrorist cyber-attacks using driverless vehicles and drones does not create restrictive standards that impede innovation and create lengthy regulatory approvals processes.

This is the second part of our Policy Priorities in 2018 series. Check out how we will boost productivity and how we'll support the return of practical liberalism in British politics.