The recent emergence of a national innovation policy agenda—and indeed the marathon election campaign founded on it—raises serious questions about the role and scope of the government in fostering entrepreneurship.

Governments should clearly and forcefully articulate one point: getting innovation policy right means getting economic policy right.

It is true that innovation should sit as one of the key pillars of a 21st century economic agenda – innovation is one of the central determinants of economic growth. Indeed, as I commented in the Sydney Morning Herald earlier this week, adopting new technologies and business models drives down costs for consumers and raises our living standards.

But what does effective innovation policy look like?

The first point is that innovation policy as a standalone political endeavour—detached from good economics—can not only become confusing and ineffective, but also damaging and costly.

The nature of innovation policy makes it particularly prone to rent-seeking: businesses and entrepreneurs regularly dip their hands into government coffers at the faintest hint of innovative activity.

How, then, should government achieve innovative outcomes without succumbing to the pressures of regulatory capture?

Now more than ever governments must redouble their innovation policy efforts towards establishing the foundations of economic freedom.

That means governments must lower taxes and cut red tape.

As Professor Jason Potts and myself wrote in a submission to the Productivity Commission last year:

The process of the free market is the only true business selection mechanism; expanding productive and innovative businesses while replacing unproductive dead wood.

Red tape is the friction in this market process.

Entrepreneurs must be left free to test, trial and experiment with new technologies. As new technologies are born—from 3D printing to bitcoin to drones—they do not come fully labelled with their uses. Discovering this information is the role of the entrepreneur.

To facilitate this process governments should adopt the concept of permissionless innovationpioneered by our friends at the Mercatus Centre.

The basic principle behind permissionless innovation is that public policy around new technologies is currently too precautionary: we overweight hypothetical future harms and underweight their future benefits.

The outcome of this precautionary principle is that we end up with piles of unnecessary, complex and burdensome red tape, precisely where entrepreneurs need freedom.

This red tape doesn’t only impose compliance costs, it pushes us away from long run growth driven by innovation.

As recent Institute of Public Affairs research has shown, red tape costs the Australian economy $176 billion every year in foregone economic output. Part of that number includes the lost productivity and cost of red tape from suppressed entrepreneurial endeavour.

If governments are serious about stimulating innovative activity, then the most fundamental step is to discover and cut the shackles of red tape holding back entrepreneurs.