Innovation is a word that’s been bandied about a lot since Malcolm Turnbull became prime minister. But what does it mean and why is it important?

That’s the question that Martin Parkinson, the secretary of the Department of the Prime Minister and Cabinet, tackled in a speech at CEDA in Canberra overnight.

Explaining innovation, Parkinson said it is “a term often used, but not well understood” but “at its core, innovation is simply the creation and application of ideas”.

And it is the application of ideas, how they help an economy, and incomes where he spent most of his discussion.

Using other people’s ideas seems to be the key.

“Occasionally, the ideas that drive innovation are truly original – that is, new to the world. But most of the time innovation is the result of the adoption or adaptation of an existing idea,” Parkinson said.

And through this channel innovation can improve national income “when ideas are successfully applied to production or processes”.

What’s especially great about innovation, Parkinson said, is that unlike labour and capital, innovation doesn’t depreciate with use, like a machine does. And the gains from innovation can be shared across an industry or the economy rather than concentrated in one firm.

Parkinson said innovation is the “unconstrained, but ephemeral, input essential to productivity”.

That seems to be a crucial point about the real value of innovation, one that can go unrecognised.

That, Parkinson says, is because the rise in living standards over the past century are not about how many workers we have or how much capital may be at our disposal. Rather, he says it’s “how we use them”.

Which means that it’s all of us in the economy – businesses and their employees – who drive the real gains from innovation.

Parkinson said (emphasis added):

We tend to think of innovation as being done by start-ups or people in white coats, but it’s much more than that. By and large our greatest gains have come from building a culture that adapts and diffuses the ideas of others.

Parkinson said the government had to “ensure the conditions are in place to both facilitate and encourage the importation and diffusion of ideas across the economy”.

In this context you can see why treasurer Scott Morrison and the prime minister are so keen on the spread of innovation in the economy.

But it still scares many workers, fearful of losing their jobs, and it’s not always cheap for business to adopt new methods and take the risk they will generate a positive payoff to the firm.

So when he says “it’s business that has to adopt the ideas – to bring them into your product and process mix and to take the chance that they will give you a competitive advantage”, Parkinson also knows that policy needs to support such risk taking.

Many lament Australia’s recent poor productivity performance, as Parkinson himself discussed.

But he highlighted the work of Professor Robert Gordon of Northwestern University, who highlights the time lag between broad adoption of transformative technologies such as electricity, sanitation, the internal combustion engine and air transport.

These ideas, “largely of the 19th century”, didn’t have major payoffs until the mid-20th century he said.

That’s a natural salve to concerns about the state of productivity growth in Australia.

Parkinson says that “just as contemporary observers have sometimes underestimated the impact of technological innovations in the past, it may be that we have barely scratched the surface of the productive potential of emerging technologies”.

Which means Australian business has the potential to gain a competitive advantage if we can quicken the pace business adopts technology and innovates with it.

That, he said, will drive higher Australian income and living standards.

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