Moonshot – A Policymaker’s Guide to Innovation

Moonshot is a book about the why, what and how of innovation with social value.

The author, Owen Barder, is a respected economist who has worked on public finance and on the economics of innovation. Owen led the team which designed and implemented the first Advance Market Commitment, a groundbreaking mechanism invented by Michael Kremer which provided a new way for societies to stimulate and support innovation for public value. Owen also helped design the first Development Impact Bond.

Part 1: Why should society support innovation?

Innovation drives the quality of our lives: our health, our environment, our prosperity, the quality of our work and of our leisure time.

Yet economists have struggled to explain how it happens. It is often left as the part that is not explained after we take account of the things we can see, like people, machinery and land.

Knowledge is not like the other determinants of economic well-being, because it can be re-used. If a person works in factory, they cannot do the same hour of work in a hospital. A tractor cannot be used on two fields at the same time. But ideas, once we have them, can spread at no cost, with no constraint on the number of times they are used. This is both a blessing and a curse. The good news is that societies can benefit from new knowledge costlessly, making everyone better off. The bad news is that firms and inventors do not have enough economic incentive to create all this extra knowledge, because they keep little or none of the value that it creates. So there is a huge opportunity to make ourselves better off, by innovating more, but market incentives alone are not enough to make it happen. The rest of the book is about what kinds of innovation we should be supporting, and how we should be supporting it.

Part 2: What sort of innovation should society support?

If society is going to support innovation, we need to decide what kinds of innovation we want to help bring about.

The most common way we intervene to support innovation is by creating temporary monopolies for inventors (using patents or other forms of intellectual property protection). This enables the inventor to charge more for their idea. That can repay the cost of innovation for things for which markets work, and for which there are sufficiently wealthy consumers. But those are not the only things we should care about.

We also invest innovation for public goods (such as environmental protection) and in innovation for goods and services that would benefit people with lower incomes (especially not for people in low income countries). Patents cannot be used to pay for these kinds of innovation. If we only use intellectual property to reward innovation, there won’t be enough innovation in these things. Furthermore, some people on lower incomes will be priced out of accessing innovations that would help them (such as drugs). Moonshot argues that if we mainly use intellectual property rights to drive innovation, we will innovate too little and in the wrong places.

Another way to pay for innovation is public spending on research and development, paid for with your taxes. There are lots of reasons to be nervous about this – governments may not be very good at picking winners and deciding where to invest, and public funding could easily get corrupted or diverted to the government’s political friends or persuasive salespeople. That is why governments tend to be conservative about spending on innovation; and when they do invest, many countries have chosen to keep the government out of decisions about how this funding is allocated, delegating decisions to scientists and researchers. (This is called the ‘Haldane Principle’.) The logic is that researchers are better placed than civil servants to decide which kind of research might produce results. But this approach abdicates responsibility for deciding what has social value: that is the job of society, and the government acting on society’s behalf, not the job of scientists. Moonshot argues that the Haldane Principle should be adapted: the allocation of research funding should be decided by scientists and researchers, who should be tasked with deciding how best to acheive the goals set for them by government. This would make a big difference to the kinds of innovation that get funded.

When governments decide what should be given priority, they usually look at the benefits compared the cost. Economists have a very simple, widely-used approach, called benefit-cost ratios, which they use to compare different options. But Moonshot points out that the way this tool is used by governments and investors is simple but wrong, leading to the wrong decisions about what kinds of innovation to support. Moonshot sets out how this should be changed.

Innovation is inherently uncertain: we do not know whether or how we will solve a particular problem. Usually we want to make many shots on goal, and to accept that some of them will fall short or go wide before we get one in the back of the net. Society should take risks that individuals cannot take. But we do not have mechanisms to share the risks of innovation – the losers are not protected, and the winner tends to take all the benefits. Furthermore, governments have little appetite for spending money on activities where some will fail. Moonshot explains how governments should take calculated risks when we decide together which innovations to support. This would enable us to support different kinds of innovation than we do today.

Part 3: How should society support innovation?

Conventional wisdom about how to support innovation is out of date. We take it for granted that a combination of patents and public research grants are the best way for us to stimulate and support innovation.

But intellectual property rights are useful for some sort of innovations and not others, and they distort the pattern of innovation towards innovations that are useful to the wealthy. For example, pharmaceutical companies have no incentive to find cures for malaria, because most of the people who catch malaria are poor. That is why society as a whole spends 10x more on cures for baldness than for malaria. Using patents alone skews innovation towards goods that benefit the wealthy, so increasing inequalty over time. We should be tilting the scales towards innovations that reduce, rather than increase, differences in our society.

There are many possible strategies for supporting innovation. These include:

• Patents or intellectual property rights
• Research by public bodies
• Funding from government for private research
• Philanthropic funding
• Prizes
• Patent buyouts
• Social Impact Bonds and Development Impact Bonds
• Advance Purchase Commitments
• Advance Market Commitments

All these approaches have strengths and weaknesses. Instead of championing one or another as the best way to support innovation, we need a better way of deciding which approach, or which combination of approaches, we should be using in different circumstances. Moonshot explains these different approachs and, most importantly, provides a guide to policymakers on how to use them to support innovation with social value.