• Innovation

    More Hayek, less Schumpeter in European digital policies

    The Google probe seems to prove that the EU is way too focused on fighting old wars. However, if it wants to put in place a system where innovation thrives it must care less for the existing IT industry and do more for those that do not exist yet. Alread [read more]
    byŽiga Turk | 05/May/20158 min read
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    The Google probe seems to prove that the EU is way too focused on fighting old wars. However, if it wants to put in place a system where innovation thrives it must care less for the existing IT industry and do more for those that do not exist yet.

    Already during the early 1990s – in the Bangemann Report – the information and communication technologies (ICTs) have been politically understood as a strategic development priority of the European Union.

    ICTs were high on the agenda of the Lisbon Strategy whose goal was “to make Europe the most competitive and dynamic knowledge based economy in the world”.

    In the Europe 2020 Strategy, the Digital Agenda for Europe is one of the seven flagship projects. Its overall aim is “to deliver sustainable economic and social benefits from a digital single market based on fast and ultra fast internet and interoperable applications.”



    Schumpeter: Profit is result of innovationimageedit_3_3072764512

    European policies in the field of innovation are based on the Schumpeterian assumption that innovation is the key driver of economic growth and entrepreneurial profit. The latter is a politically wise compromise between the leftist idea that profit is result of worker exploitation and right-wing argument that profit is the result of voluntary and mutually beneficial transactions between two parties.

    Joseph Schumpeter believed that investing in knowledge and innovation pays off. Therefore, public policies should create incentives for the enterprises to innovate and more should be invested in knowledge, innovation and any digital-related activity. Such idea in Europe enjoys large support.

    The resulting policies include funding or subsidising research and innovation through Framework programs such as Horizon 2020, tax breaks for firms that innovate as well as protecting innovation through copyright protection, patent law etc.

    A kind of protection are also the regulatory and competition procedures that the EU has been regularly filing against high-tech companies that seemed too powerful at the time.



    Hayek: Open innovation to everyoneimageedit_7_4435674075

    Schumpeter was not alone in believing in the power of innovation. Another Austrian economist understood the importance of innovation but identified a complementary issue – that the challenges are numerous, that ideas in a society may be dispersed and that as many as possible should get the opportunity to innovate, not only those that are already doing it.

    This idea – that the knowledge is “in the open” – became fashionable with the emergence of the internet, the open systems, the open source software, the open scientific publishing and the open innovation. But it was there since the 1930s under the general label of open society.

    Hayek would understand how important it is to build infrastructures that give opportunity to innovate, do not monopolize innovation, do not limit innovation to existing players and allow innovative companies and business models to emerge, grow and succeed.

    He would understand that excessive copyright and intellectual property protection harms innovation. While it is to some extent an incentive for innovation, when applied too strongly, these protections make patent portfolios a tool for limiting competition.



    Scientific excellence, business impotence

    When one compares the high quality of European education systems and excellent science on the one hand and the digital industry’s impotence on the other, the explanation is exactly in the balance between Hayekian and Schumpeterian view on innovation.

    The innovation and entrepreneurial system in the US is open to new entrants. Many Europeans are going across the Atlantic with their ideas. The start-up culture is flourishing in the Silicon Valley and is well supported by the legal, business and financial mechanisms.

    On the other hand Europe is unable to create a company that could compete with IBM, Microsoft, Apple, Google or Facebook. What the EU seems to be capable of doing is just binging them to court. Whichever company happens to be the biggest has problems with the EU competition officers. In this respect Google is the new Microsoft.

    But Microsoft and its media Player, Internet Explorer and Windows operating system were not dethroned because of the regulatory actions of the European politicians who are always eager to justify their existence by doing something “for the people”, “for European industry” and “against multinationals”.



    Too slow to innovate, too slow to legislate

    It is simply in the competitive nature of the digital economy that the playing field is levelled every few years. And a company can come from anywhere and become a major player.

    Microsoft did that to IBM with personal computer operating system and desktop applications that included the infamous Media Player and Internet Explorer. Google changed internet search and advertising. Apple redefined the mobile phone. Facebook invented the social media as we know it.

    Unfortunately it is not entirely true that these companies come from anywhere. They do not come from Europe. And no matter how hard the EU makes life harder for them … the next Google will not come from Europe because of that.

    Media Player was succeeded by iTunes. Internet Explorer was not succeeded by Opera but by Chrome and Firefox. Actually what the EU tried so hard to regulate is today a commodity nobody cares about.

    Browsers and media players are a thing of the past, apps are in fashion today. It is very likely that when the EU is done with picking on Google, we will be finding our stuff on the Internet through recommendations on social networks such as Facebook. And Facebook will be made obsolete by something like Snapchat.

    Here’s why the EU seems to be fighting old wars. A lot of civil servants will have something to do and a lot of lawyers will make money in such legal procedures. Eventually the consumer will be better off too. But because there will be other companies innovating, not because of any legal action.



    More Hayek, less Schumpeter

    Competition in the digital world is fierce. It is made worse by the fact that every few years the whole scene is disrupted by something totally new. The EU should focus on putting in place a system where such innovation would thrive in Europe and will be brought to market and to Wall Street from Europe.

    To do so it must care less for the existing IT industry and the existing big science that takes advantage of the EU programmes. It should do more for those that do not exist yet, that do not have lobbyists in Brussels and who are not the usual suspects for getting public research money.

    It should unify and relax intellectual property regulation. It should do more for business start-ups and SMEs in science and innovation. Not to mention the common digital market. In short, there should be less Schumpeter and more Hayek in the European innovation and digital policies.

    Or, in the words of the Bangemann report:

    Actions must be taken at the European level and by Member States to strike down entrenched positions which put Europe at a competitive disadvantage: it means fostering an entrepreneurial mentality to enable the emergence of new dynamic sectors of the economy; it means developing a common regulatory approach to bring forth a competitive, Europe-wide, market for information services; it does NOT mean more public money, financial assistance, subsidies, dirigisme, or protectionism”.

    What is depressing is that this report is more than twenty years old.


    photo credits: Dennis Skley
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  • Digital Single Market

    In praise of the European Commission’s digital plans

    If the latest leaked version is a good indication of where things will come out, there are serious grounds for optimism about the Juncker Commission’s Digital Single Market  As a Brussels veteran, it is tempting to lapse into cynicism when confronted [read more]
    byChris Sherwood | 24/Apr/20158 min read
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    If the latest leaked version is a good indication of where things will come out, there are serious grounds for optimism about the Juncker Commission’s Digital Single Market 

    As a Brussels veteran, it is tempting to lapse into cynicism when confronted with a new Commission’s policy programme. Recent Commissions have often re-packaged existing policy initiatives and added generous doses of jargon and waffle, guaranteeing under-delivery.

    But if the latest leaked version is a good indication of where things will come out, there are serious grounds for optimism about the Juncker Commission’s Digital Single Market strategy.

    There are several reasons for this:

    First, the Commission’s starting point is exactly right.

    In striking an optimistic tone that is positive about Europe’s strengths, assets, and potential (“Europe has the assets to succeed in this global digital economy”), the Commission is allowing space for a shift in mind-set for the many decision makers who have been tempted to associate Europe’s digital prospects with doom and gloom.

    It seems to be rejecting the politics of despair and defensive policy options that would simply guarantee Europe’s future as a consumer and importer of foreign digital services and technologies, rather than a producer and exporter – a follower rather than a leader.

    Second, the Commission understands the barriers and challenges.

    There has been a considerable amount of consultation, both formal and informal, and it looks like the Commission understands many of the key barriers to the digitalisation of the European economy.

    It’s very important that the resulting policy initiatives stay focused on achieving the objectives of the DSM, rather than developing some kind of independent existence, or carrying on because they respond to political pressure from one or other interest group.

    Just as importantly, it seems to be clear about the landscape of competing interests and to have an idea of where it wants to come out in terms of some of the big debates.

    In other words, it looks like there is political will to tackle strong opposition from vested interests. It is to be hoped that this level of ambition can be matched by the Member States and the Parliament – no small challenge in a time of such economic uncertainty.


    Third, the Commission understands the importance of evidence and problem definitions.

    It’s too often been the case that the Commission has brought together stakeholders to discuss and find solutions to “problems” that are not clearly identified or proven.

    This strategy has a welcome emphasis on tackling actual, rather than perceived, problems. It’s good to see that on some of the vaguer concepts like “platform regulation”, it is intending to deepen its understanding of the problems by consulting, and indeed via a sector enquiry.

    This is obviously the direction that policy making must take. But it will not only be challenging for the policy makers. It will be just as tough for industry and civil society, which have relied on silver-tongued lobbyists in Brussels for decades.


    Fourth, the Commission wants to integrate enforcement of existing rules with the development of new ones.

    The launch of the DSM is an early test of the effectiveness of the new Commission structure and working method. Many of the key drivers in the policy debate on the DSM relate to competition and consumer protection.

    In deliberately launching both open consultations and formal tools like the proposed e-commerce sector enquiry – policy responsibilities that are held by different Directorates-General, the Commission seems to be delivering on its promise to improve coordination in policy making. The debate on “platform regulation” is the best example.

    Although there is considerable political pressure from Paris, Berlin, and Madrid to “do something” about “GAFA” (the playful French acronym for Google, Amazon, Facebook, and Apple), the Commission is rightly giving itself the chance to prove its executive and enforcement credentials, notably in the antitrust area.

    Apart from the crucial tests that the Google cases constitute, DG COMP will be given an important opportunity to reinforce its position as the world’s leading antitrust regulator through the launch of a sector enquiry on e-commerce.

    This position is one of the biggest achievements of the European Union writ large, and without it, the European project would lose a significant amount of respect among Europeans.

    And of course, it’s very important to develop strong ex post enforcement capabilities if the Commission is serious about becoming a modern and digital-friendly government institution. This is because digital markets are so fast-moving that traditional, long-winded legislative processes will no longer be adequate to regulate with.



    1. As noted above, the Commission’s starting point is excellent. However, it could go even further and embrace the concept of digital disruption and the value it provides, while noting some of the attendant challenges. The primary source of opposition to a pro-digital agenda like the DSM will come from disrupted industries, and it is important for the Commission to nail its colours to the mast from the start by laying down a challenge to them to modernise.

    2. As it prepares a final version of the DSM strategy, we would urge the Commission to consider being explicit about which anti-competitive or anti-digital practices it is targeting, where these have been identified. One example would be some of the specific ways that big brands segment the Internal Market along national lines in order to control prices, to the detriment of SMEs, competition, consumer welfare, and the potential of the DSM. This is not to say that the Commission has to spell out all of its policy plans in detail, especially where these are not yet fully formed or where the evidence base is still missing (e.g. platform regulation). However, where the targets are already clearly defined, the pressure exerted by publicly “outing” them will go a long way. Another excellent reason to take this approach is that it will contribute to a more straight-talking tone. This is preferable to the usual euro-speak because it sounds more honest and dynamic, and because it’s obviously more measurable.

    3. It would also be helpful to couple the regulatory agenda with a more explicit de-regulatory push. This is certainly present in the leaked draft, but could be emphasised more clearly. The benefit of emphasising the de-regulatory agenda is that it will provide the carrot that some industry actors need in order to engage more constructively than they might otherwise. Good examples that can be more explicitly enumerated could include the ePrivacy Directive and other rules that apply to the telecoms sector (on SMS, for example, since that will soon be completely overtaken by other messaging services), or aspects of the Audiovisual Media Services Directive, which also contains outdated provisions.

    4. Linked to this is the need to take a much closer look at legislative initiatives that are already underway. In particular, versions of the Data Protection Regulation, the Network and Information Security Directive, and the Payments Services Directive being debated by the Parliament or the Council each contain provisions that could seriously undermine the objectives of the DSM. These could be addressed by carrying out impact assessments of texts adopted by one or both legislative institutions.

    5. When promoting an investment agenda, the Commission would do well to ensure that investment is promoted up and down the value chain, and not just in infrastructure. This is important because applications and services drive the demand for capacity that is capable of raising consumers’ willingness to pay for Internet access. Too often, telecoms companies have been allowed to get away unchallenged with passing the message that net neutrality is somehow inimical to investment in infrastructure, when the opposite is likely to be the case.

    photo credits:Howard Ignatius 
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