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Policy narratives in OECD nations are now starting to stress the importance of ‘innovation’ as a public sector objective. On one level, this reflects efforts to align thinking with a wider discourse on innovation, arguably in an effort not to be left out of the picture. For example, Geoff Mulgan[3] has argued persuasively that, contrary to some common assumptions, the public sector has a longer history of innovation than the private sector. Indeed, public sector innovation created the modern world—an operating environment in which private sector innovation per se has flourished.[4]
In this essay, I focus upon a particular objective of innovation in the public sector: the management of uncertainty and risk. In this context, following Knight (1921), ‘risk’ applies to cases in which a probability of occurrence can be assigned. Uncertainty refers to situations in which it is not possible to assign such probabilities. The critical distinction is that the ability to assign probabilities allows various other formal estimates related to risk and its consequences to be estimated.[5] I argue that governments place too great an emphasis on the ‘management of risk’ and not enough emphasis on the ‘management of uncertainty’. A greater emphasis on the management of uncertainty, in turn, helps us to understand what public sector innovation is—and why it is so important.
This perspective applies a line of inquiry previously developed in relation to innovation in the private sector to the specific issues faced in the public sector.[6]In so doing, it also draws upon previous efforts to define a new ‘realist’ agenda for science and innovation policy that addresses the distinctive role of the public sector in providing the ‘prescience and preparedness’ for dealing with potentially damaging future events.[7] The essay also seeks to relate this treatment of the public sector innovation challenge to the issue of cooperative federalism. This is a particularly important issue when the uncertainties and risks governments must address cross jurisdictional boundaries—as many do.
The theoretical underpinning for this policy-oriented discussion is that there is much to be gained from exploring how our policy narratives can be informed by drawing upon the ‘Austrian’ tradition in economics associated with Von Hayek and others. For a flavour of this work, see Kirzner[8] and Littlechild[9] for a discussion of markets as processes. One can extract some very useful insights from such thinking without necessarily subscribing to the full gamut of liberalist stances associated with that body of work. As I set out to show, certain insights in this ‘subjectivist’ tradition in economics are particularly useful for helping us to develop strategies for effective innovation in the public sector.
Somewhat paradoxically, reframing key aspects of the policy narrative along neo-Austrian lines in terms of the ‘management of uncertainty’ rather than the ‘management of risk’ does more to re-enforce the importance of the State than undermine it. The trick is to recognise that whilst most of the discussion on the management of uncertainty and risk in current policy narratives focuses on the management of risk, the management of uncertainty is in fact what governments spend more of their time actually grappling with. For instance, in 2007 the Australian Public Service Commission moved to highlight the challenge posed by ‘wicked problems’—complex intractable challenges with uncertainty over causes and effects and also a likelihood of damaging unintended consequences arising from policy interventions, see Australian Public Service Commission (2007).[10] Indeed, vast swathes of public expenditure (notably funding for basic science) seek to translate uncertainty into risk. This is the essence of the process of ‘discovery’: delving into the unknown to make it less threatening and easier to live with—whether we are talking of diseases, near-Earth objects or climate change.
[1] This paper was originally presented at the ANZSOG Annual Conference on 11 September 2008.
[2] I would like to thank Dave Marsh, John Wanna, Bradley Smith and Grahame Cook for useful comments, and Bev Biglia and John Butcher for proofreading and editorial contributions. Thanks are also due to SQW Consulting in the United Kingdom and Geoff White in particular, for stimulating and supporting exploratory thinking on the role of risk and uncertainty in public sector settings several years ago. Thanks also to the Federation of Australian Scientific and Technological Societies (FASTS) for funding the science and innovation policy work on uncertainty and risk that is reflected in this paper and also to The Australian National University’s new Centre for Policy Innovation for more recent support for this line of research.
[3] Mulgan, Geoff 2007, Ready or not?: taking innovation in the public sector seriously, National Endowment for Science, Technology and the Arts (NESTA) Provocation 03, April.
[4] Many key aspects of the physical, legal, financial, scientific and cultural infrastructures that have enabled private sector innovation to flourish and grow in prominence rely on, and stem from, public sector innovations—for example, patent protection regimes, dual-use export controls, ways of organising public science, and so on.
[5] Knight, Frank (1921), Risk, Uncertainty and Profit. H Mifflin: Boston.
[6] See Hartmann, G. and Myers, M. 2001, ‘Technical risk, product specifications, and market risk’, in L. Branscomb and P. Aursweld (eds), Taking Technical Risks: How innovators, executives, and investors manage high-tech risks, MIT Press, Cambridge, Mass. pp. 30–43; and also a detailed case study in Matthews, Mark and Frater, Robert 2007, ‘Capacity building and risk management in commercialisation: lessons from the Radiata experience’, Innovation: Management, policy & practice, vol. 9, no. 2, pp. 170–80.
[7] Matthews, Mark 2006, Managing uncertainty and risk in science, innovation and preparedness: why public policy should pay more attention to financial and geopolitical considerations, Discussion paper commissioned by the Federation of Australian Scientific and Technological Societies, Howard Partners, August, Canberra.
[8] Kirzner, Isreal 1973, Competition and Entrepreneurship, University of Chicago Press, Chicago; Kirzner, Isreal 1979, Perception, Opportunity and Profit, University of Chicago Press, Chicago.
[9] Littlechild, Stephen 1989, ‘Three types of market process’, in Richard Langlois (ed.), Economics and a Process: Essays in the new institutional economics, Cambridge University Press, Cambridge.
[10] Australian Public Service Commission (2007), Tackling Wicked Problems: A Public Policy Perspective. Australian Public Service Commission: Canberra.