Sunday, 25 March 2012

Flags for Orphans - policies that are so good, they don't need justification

My policy encourages innovation and entrepreneurship. It creates jobs, and growth. It improves the quality of people’s lives and will reward hard working people.

This is what I call a flags for orphans policy (FFO): an outcome or policy label, with positive connotations, that can be applied without having to be justified.

In the Simpsons (Mr. Spritz goes to Washington), Lisa attaches an airline route amendment to a bill that US congressmen cannot possibly be seen to vote against – the Flags for Orphans bill. Other countries may have less enthusiasm for flags, but that’s by the bye. The point is that it is a universally positive policy message, which no one could possibly object to.

If someone says that a policy will encourage innovation, my instinct now is immediate disbelief. It is very easy to say, and even to put forward a reason why something encourages innovation, but the level of rigour required to demonstrate such a statement is usually absent.

For example, one can always argue that innovation in some form will result from most policies: 
  • I will increase regulation in the building industry; innovation will result to meet the new regulatory standards efficiently. - Plenty of evidence supports this.
  • I will decrease regulation in the building industry; innovation will result as the reduction in regulation leads to greater scope for innovation. - Plenty of evidence supports this too.

In other words, innovation happens, and whether more or less innovation will occur requires some avoidable intellectual effort. It can be used as an FFO.

FFO logic can be applied to a lot of non-rigorous economic thought. A brilliant example of a negative FFO is Nigel Lawson panicking about the pound in a classic Spitting Image sketch:

Another of my favourite examples is the enterprise allowance scheme (EAS, 1983), which provided funds to unemployed would-be entrepreneurs to start businesses. The scheme was a roaring success; it created hundreds of thousands of jobs with minimal investment – a cost of about £2k/year per person.

On paper, it decreased unemployment and increased entrepreneurship at a very low cost (the FFO logic). In the long run, it may have done neither as it distorted the market, giving new entrants an advantage over more productive incumbents.

Where does that get me as someone who researches innovation and entrepreneurship policy? Well, if I ever have a policy, I’m going to say that it encourages innovation and entrepreneurship – because I can, it’s easy.  I may even be able to back it up, if I’ve done the legwork.


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