Three Big Ideas #53
Industrial illusions, ‘Mafia’ recycling, and connection conundra
Welcome to our fortnightly Three Big Ideas roundup, in which we serve up a curated selection of ideas (and our takes on them) in entrepreneurship, innovation, science and technology, handpicked by the team.
📜 Eamonn Ives, Research Director
One of the lazier tropes in political economy debates is that the United States is a free-market paragon, while in Europe it’s government bureaucrats who have their hands on the economic steering wheel.
New research, in which economists Jiandong Ju, Yuankun Li and Shang-Jin Wei review every Act of Congress and Presidential Order since the early 1970s, punctures this myth. They calculate that in an average year, 5.4 laws and 3.4 Presidential Orders are passed containing new industrial policies. Their finding that the US has long practised industrial policy holds true across parties, and they also show that the policies passed have meaningful economic impact — as evidenced in stock market reactions and changes in firms’ performance.
Of course, one easy retort is that without establishing how European governments compare, it’s hard to know whether passing 5.4 laws or 3.4 Presidential Orders a year is a little or a lot. To invoke the academic’s favourite turn of phrase: further research is required.
More interesting to my mind, however, is another part of the paper. The authors note that “many U.S. industrial policies incorporate design features that help mitigate potential drawbacks, such as explicit expiration dates and pilot programs for emerging technologies.” In other words, these measures are often time-bound, experimental, and contain built-in mechanisms that make them easier to reverse.
British policymakers should take note. Our statute books are littered with examples where well-meaning but outdated policies persist despite having limited — or even net negative — utility to wider society.
I don’t think the correct lesson to learn is that every new policy passed ought to be automatically subject to review, or only rolled out after small-scale trials have been completed. Predictability, after all, has a beauty of its own — allowing entrepreneurs and investors alike to plan effectively. Rapid adaptability matters too, especially if we’re trying to lock in a first-mover advantage in emerging industries.
Nonetheless, at the margin, when it comes to designing measures to support innovation, we should be minded to look across the Atlantic for inspiration. Intervene narrowly, experiment openly, and design off-ramps so that inertia doesn’t end up masquerading as strategy. Above all, ensure policies incentivise firms to build for the market, not for the subsidy.
♻️ Philip Salter, Founder
The Economist has written a necessary defence of London as an entrepreneurial hub, rightly describing it as “the rest of the world’s startup capital” (outside the US, of course).
The facts speak for themselves:
“It has produced more unicorns ($1bn-plus startups) than Berlin, Paris and Tokyo combined. Their alumni are now spawning a second generation of firms. London is the world’s fourth-largest venture hub, according to Dealroom, a data provider, and it is moving away from other capitals. In 2025 its startups raised $17.7bn, behind only the Bay Area, New York and Los Angeles.”
This is something many of us — particularly those deep in the weeds of trying to drive policy change — can sometimes take for granted.
Pleasingly, The Economist cites our finding that more than half of Britain’s fastest-growing startups were founded by immigrants, a result regular readers of our work will be familiar with. But today I want to focus on another theme of the article that is equally important: entrepreneurial recycling.
Entrepreneurial hubs develop through a self-reinforcing cycle in which successful startup employees use their experience, networks and wealth to become founders and investors themselves. Policymakers currently pay too little attention to this process. That is likely because, despite its disproportionate impact, entrepreneurial recycling operates at a relatively small scale: it depends on a small number of individuals exploiting tacit knowledge that is inaccessible to outsiders.
This matters for politicians and policymakers who should be focused on growth — in other words, all of them. In particular, spinouts from productive, larger firms tend to also start bigger and grow faster. At the extreme, this dynamic produces the so-called ‘Mafia effect’, most famously associated with PayPal and Skype. It is not a matter of chance that alumni from these two companies went on to found LinkedIn, YouTube, SpaceX, Palantir, Starship, Wise, and more.
We might be on the verge of our own Mafia here. As The Economist notes, former staff of Revolut and Wise have already founded more than 230 startups. It will be fascinating to see how this plays out over the coming years — and, crucially, how many choose to remain in the UK.
⚡ Mann Virdee, Senior Researcher
There is a common meme about entry level jobs requiring five years of work experience. That paradox, absurd as it is seemingly pervasive, also describes the way Britain decides which businesses to connect up to the grid.
Towards the end of last year, the National Energy System Operator changed its approach to connecting businesses to the grid from a “first-come, first serve” model to one better described as “first ready and needed, first connected.” While logical in theory to clear a huge backlog that had built up over years, it presents a new Catch-22 for founders.
Before securing a power connection, companies are now required to demonstrate their readiness by proving land and planning approvals. But for most ventures, land and planning requires investment – and that investment is dependent on securing a power connection.
As we discussed in a recent policy roundtable, some energy intensive companies are responding by exploring the potential of generating the power they need behind the meter, bypassing the grid altogether. This approach also allows firms to circumvent expensive long-haul wiring and rising energy costs.
While that may be good for those companies and their individual resilience, it makes balancing the energy system at a macro level much more difficult. That’s because it becomes a lot harder to forecast demand, and large amounts of capacity can disconnect or reconnect at short notice.
Britain’s grid is already in a parlous state. Unless the connection process is streamlined to account for the realities of early-stage investment, the ‘first ready’ concept may inadvertently push the country’s most promising industries off the grid entirely, turning things from bad to worse. This should give the government the wake up call it needs to act.