Innovation Prizes can accelerate technological innovation
An almost cost-free solution to many of our worse problems.
My guess is that virtually every Progress Studies researcher believes that increasing the rate of technological innovation is a cost-effective means for accelerating material progress. The best means to do so, however, is quite controversial.
Governments have a wide variety of strategies through which they can stimulate desired innovation:
Direct government research and development
Tax exemptions for private-sector research and development
Funding of university research
Purchasing large amounts of a new technology from the private sector
Regulations and mandates
For the sake of brevity, I do not want to go into details on all of these strategies. I will, however, go into one key weakness that all of them share.
Centralization of Funding
All of the innovation strategies that I mentioned above involve a centralized government directly or indirectly funding research and development. They all involve elected officials or policy experts choosing which projects to fund. This inevitably means that other potential solutions are starved for funding.
The problem is that, when technology does not exist, it is very difficult to know which ideas can lead to useful technologies and which ideas will lead to dead-ends. We need a method for funding technological innovation that does not pick potential winners up front and hope that, with the proper funding. they can be turned into cost-effective solutions. We need a funding solution that only spends taxpayers’ money when the problem is solved. Fortunately, there is such a method.
The following is an excerpt from my second book Promoting Progress: A Radical New Agenda to Create Abundance for All. You can order e-books at a discounted price at my website, or you can purchase full-price ebooks, paperback, or hardcovers on Amazon.
Other books in my “From Poverty to Progress” book series:
See also my other articles on Technology and Innovation:
Book review: "The Nature of Technology: What It Is and How It Evolves" by W. Brian Arthur (podcast)
Innovation Prizes
I believe that the most cost-effective means of stimulating socially desirable innovation is via innovation prizes. An innovation prize is where an institution promises to pay a cash prize for any individual or group of individuals who solve a specific problem.
Innovation prizes have a long, but not so famous, history. One of the most famous examples was the Longitude Prize in 18th Century Britain. To promote the power of both the Royal Navy and merchant shipping, Parliament offered a prize of £10 million to the first team that offered a practical method for the precise determination of a ship’s longitude at sea (Sobel).
A more recent example of an innovation prize has been the XPRIZE Foundation, which has offered substantial prizes for radical breakthrough innovations that benefit humanity. XPRIZE started in the field of space exploration and has subsequently branched off into the fields of super-efficient vehicles, oil clean-up, health care sensors, ocean acidification, education, literacy, and pandemic mitigation.
Ideally, an innovation prize:
Identifies an important problem that the government or private sector is not solving or cannot solve.
Sets a specific amount for the prize to be awarded in the future.
Establishes very specific, transparent, and verifiable metrics for earning the prize.
Is open to as broad an audience as possible.
Advantages of Innovation Prizes
Innovation prizes have many advantages over the other strategies that I mentioned earlier. The single biggest advantage is that, if the proposed solution does not meet the criteria, innovation prizes cost the taxpayers almost no money. Most of the other strategies require the government to spend significant amounts of money or defer on raised revenue regardless of the result. This alone is a huge advantage that prizes have over all other strategies.
Innovation prizes are the perfect method for leveraging the efforts of a constellation of individuals, start-ups, and established companies. Rather than creating a large centralized bureaucracy to solve a problem, prizes promote a large number of small-scale experiments by different organizations.
In other words, just like progress itself, prizes work on evolutionary principles. Prizes encourage decentralized experimentation and allow the best solution to survive. If all attempts fail, then no money is lost, but if one succeeds, it will be an important step forward for society.
Innovation prizes also offer the advantage of focusing on outputs (i.e. results), rather than inputs (i.e. how those results are achieved). All of the other strategies for promoting innovation focus on inputs. Innovation prizes, when correctly designed, focus exclusively on outputs. And it is outputs that matter because that is what affects society.
Because innovation is focused on the unknown, it is not clear how a problem should be solved. There are typically many potential pathways to doing so, and all institutions and individuals have different ideas as to which pathway is preferred.
An incorrect decision on the best pathway early in a project is likely to lead to a dead end. And it may not be clear that a dead end has been hit until after an organization invests millions or even billions of dollars. Ideally, governments should encourage all of those potential pathways to be fully explored, while only rewarding the groups that followed the correct path.
Most government subsidies for technological innovation favor one or a small number of established institutions to the exclusion of the rest of society. Prizes enable a single individual or a small informal group to compete on equal terms with giant established institutions. This dramatically increases the potential number of proposed solutions. The greater the number and the wider the diversity of solutions, the more likely that the problem will be solved.
Innovation prizes also encourage experts in completely different domains to get involved. While experts in a certain domain often have a knowledge advantage, that advantage is often undone by a group-think mentality. Often the best solutions come from applying slight variations on tested solutions in one domain into a different domain. Prizes make that much more likely.
Prizes also encourage outsiders and iconoclasts to get involved. While scorned by experts, these people often offer simple solutions that are missed by experts who are so immersed in their field that they get tunnel vision.
Prizes encourage individuals with contrarian ideas within established institutions to quit, form their own institutions, and test their ideas in the field. Rather than being stymied by bureaucratic politics, prizes can enable iconoclasts to put their potentially revolutionary ideas into practice.
Prizes do not require the government to find new institutions and ramp up the hiring of experts. One of the major problems of direct government research projects is that they require established institutions and expensive, long-term funding streams. The method also requires hiring a large number of experts in their domain. If those institutions already exist, this is less of a problem, but funding is always a problem. And remember that all this funding is required, even if the institution fails to achieve its goals.
Prizes also have zero costs in the short run, so it is possible for the government to create a large number of prizes very quickly. The new prize system would then compete with already-existing government research institutes. If the prizes yield better results than existing models, then funding could shift away from government research institutes to more prizes. If the prizes fail to produce results, then there is no financial loss.
For all of the reasons above, innovation prizes should become the default method through which the government and other institutions promote technological innovation. If we take advantage of the unique benefits of innovation prizes, we can also leverage in other institutions that have already contributed heavily to innovation.
Innovation prizes also have some disadvantages. One of the biggest is that they do not provide funding for individuals and organizations while they are working to solve the problem. For governments and society in general, this is a huge advantage, but for those who are trying to solve the problem, it is a huge disadvantage.
Innovation prizes encourage individuals and organizations to devote years of their lives and vast sums of money to solving a problem knowing full well that they will most likely fail. They might fail because the problem is unsolvable with current technology, or they might fail because some other group can implement a better solution.
For innovation prizes to work, we need a set of mediating organizations between the prize itself and the people who work to solve the problem. This set of institutions would provide funding for those individuals and organizations before they actually win the prize. Presumably they would do so in return for a share of the prize. Given that so many different groups would be trying to solve the problem, this would be a high-risk, high-reward financial industry.
We have a word for that: venture capital.
Expanding Venture Capital
Venture capital is a critical financial institution that specializes in high-risk, high-reward loans to entrepreneurs. As any entrepreneur knows, raising capital is one of the key challenges to scaling up a new business. With the right amount of funding, “crazy ideas” can grow into major sectors of the future economy.
Venture capitalists in the private sector are experts at vetting new, untested ideas and deciding which ones should be funded. The field is particularly active in the digital technology industry.
Today, the single greatest geographical concentration of venture capital firms is on Sand Hill Road in Menlo Park, California. Menlo Park is on the edge of Silicon Valley, the heartland of the digital technology industry. Sequoia Capital, Kleiner Perkins, Andreessen Horowitz, Lightspeed, IVP, GCV and Greylock are just a few of the legendary venture capital firms concentrated in one very small geographical area.
Ironically, I lived most of my childhood just a few blocks away from the headquarters of all of these legendary venture capital firms, and this was just as they were getting started in the 1970s. Many of my relatives were indirectly involved in the early Silicon Valley technology sector. I have since followed up with more than 20 years in my own career in the field.
Venture capital is so critical to technological and organizational innovation, and innovation is so critical to material progress, that we should look for ways to grow the field to solve a broader range of problems. Such expertise deserves to have a broader impact on society.
My hope is that, once innovation prizes become a standard practice of governments, an entire new sector of venture capital will spring into being. Today venture capital is associated with digital technology because that is where investors have the best opportunity to make huge returns. But there is no inherent reason why venture capital should be restricted to that domain. With the right incentives, we could get venture capital to spread into entirely new domains.
Obviously, the amount of the prize and the total number of prizes will play an important role in determining whether venture capitalists find the potential pay-offs enticing. My guess is that current venture capitalists will stay away from innovation prizes, so they can focus on their current field of expertise. My hope is that a whole new generation of socially-conscious venture capitalists will found new institutions that focus largely on innovation prizes.
A new generation of venture capitalists would have a strong incentive to contact individuals and organizations who are attempting to win a specific innovation prize. They might even recruit individuals and institutions to start working on the problem. These venture capitalists would then use their skills to identify which individuals or groups stand the best chance of winning the prize. They could then offer them capital in exchange for a promised percentage of the prize earnings. Since the amount of the prize is known, this is a fairly easy calculation.
Crowd-Funding
It is also not too difficult to imagine something like Kickstarter springing up around innovation prizes. Kickstarter is a crowd-financing website where individuals or companies can list their proposed products and request donations to help them design and produce their ideas. Usually, people who donate larger amounts get something in return, such as the actual product when it is completed.
Something similar could emerge for innovation prizes. Anyone who is attempting to win a prize could create a page via which individuals could donate to the cause. Depending upon the desires of the individual, a donation might give them a small portion of the earnings. Or it might just give them the satisfaction of knowing that their money is going towards a good cause. The site might also include a way for venture capitalists to easily contact the individual.
Social Entrepreneurs
Because innovation prizes are focused on socially beneficial solutions, an entirely new type of person might get involved. When prizes are focused on solving important societal problems rather than just creating a new product, “do-gooders” get into the action. When people can combine technical expertise with a desire to change the world for the better, they can achieve impressive results.
The combination of bettering mankind and being able to earn lots of money is a potent combination. If dozens of innovation prizes in the amount of billions of dollars went public, this would attract a great deal of attention from people wanting to make money and also those who want to help humanity.
Between a large prize, an emerging venture capitalist sector and Kickstarter-like crowd-financing, it is not difficult to imagine a Silicon-Valley-like culture emerging around solving important social problems via innovation prizes. The more prizes, and the greater their amount, the more likely such a culture is to emerge.
There is absolutely no reason why innovation prizes should be restricted to the U.S. federal government. Foreign governments, state governments, local governments, non-profits and billionaire philanthropists could also get in on the action. They could either create separate prizes with different goals and criteria, or they could pool their resources together to increase the total amount of the prize.
Successful Prizes
It is important to note that many innovation prizes fail to achieve results. If implemented incorrectly, prizes might not achieve positive results that exceed their significant pay-out cost. Some of this is due to the prize itself, and other failures are due to the inherent riskiness of innovation. We can, however, increase the likelihood of a prize inspiring success by creating innovation prizes with the following characteristics:
The prize should be focused on an important problem that current market incentives are not able to solve in the desired timescale. Prizes should not be subsidizing normal private-sector research and development. Nor should they focus on trivial issues that few care about.
The goals of the prize should be relatively uncontroversial politically. If either party or substantial sections of American society think achieving the goal is inherently bad, this will tend to undermine the political legitimacy of all prizes.
The prize amount should be substantial enough to motivate people, but not more than the actual benefits to society.
The criteria should be focused on the desired outcome, not how it is achieved or a certain technology or method. Ideally, the criteria should be about solving a problem and not a specific solution, though this can be hard to achieve in practice.
The criteria should be very specific, measurable, and potentially achievable. This is probably the most important characteristic. The criteria must be very well designed.
The prize should be as available to as broad a demographic as possible. It should not be restricted to government agencies, established institutions or credentialed experts. Even supposed crackpots should be eligible. Earnings should also not be restricted to any one nation.
The prize and its criteria should be transparent to all of society on the internet. Ideally, the prize would also be widely advertised by media and social media.
The government should follow through on delivering the prize as stated in the criteria. Obviously, this is critical. If the government gets a reputation for reneging on its prizes, trust will collapse and so will the entire prize system.
Prize-generation process
Successful prizes are more likely to come out of a solid process. The prize-generation process should go something like this:
Individuals and groups identify a societal problem that currently does not have a profit incentive that enables the private sector to solve it. They pressure elected officials to establish a prize.
Elected officials negotiate amongst themselves for the overall amount of money that should be devoted to the prize.
Experts in the field both in the government, academia, and non-profits recommend criteria that an innovation must meet or surpass.
The prize along with the amounts and criteria are published on one highly-visible government website.
Individuals, informal groups, and formal institutions launch projects to earn the prize. Some may do so publicly to acquire financing, while others might do so quietly.
Government or independent third-party institutions validate the fact that the criteria have been fulfilled.
Once the criteria are met, the prize is paid out to the inventors.
The inventors then pass part of their earnings to venture capitalists and donors who helped them finance their efforts (if they agreed to do so beforehand).
The solution is then implemented at scale by either the inventor or an organization that has purchased the rights.
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