Apple is the most innovative consumer products company of the last decade.  It has redefined how people listen to music, blindsiding both music publishers and established electronics manufacturers.  And it has reinvented the telephone.

       Yet Apple’s achievement is not the result of its technology.  The gizmos in the gadgets are much the same as the gizmos in the gadgets of other companies.  Apple’s success lies in deploying existing technology in ways that meet consumers’ needs and in attracting buyers through coolly designed devices that do not require you to be a computer geek to use them.

       Understanding the needs of customers is what distinguishes innovation from novelty.  Quirky inventors have a place in the affections of everyone who enjoyed physics or chemistry at school  But the quartz watches and home computers that Sir Clive Sinclair championed in the UK were quickly overtaken by better products from other businesses, and his C5 electric vehicle was not wanted by anyone.

       Pioneers of innovation are routinely pushed aside by competitors whose skills are in the marketplace rather than the laboratory.  The invention of the body scanner won a deserved Nobel Prize for EMI’s Geoffrey Houndsfield, but almost destroyed the company.  The market for scanners is now shared by Siemens and GE.

       My favourite innovative company is Easyjet.  There is nothing technologically advanced about what it does, indeed nothing it does that some other airline is not doing.  Yet Easyjet catalysed fundamental change in the sleepy European airline industry.  Innovation is about finding new ways of meeting consumers’ needs, often including needs they did not know they had.  Sometimes such ideas comes from a laboratory scientist but, more often, the innovation that changes the business landscape comes from the imagination of a Henry Ford or Walt Disney, Steve Jobs or Sir Stelios Haji-Ioannou.

       For years research and development scorecards have dutifully recorded how much pharmaceuticals companies spend on the search for new drugs and the expenditure of governments on defence electronics.  But most of the spending that promotes innovation does not take place in science departments.  The financial services industry may have been Britain’s most innovative industry in the past two decades – perhaps too innovative – but practically none of the expenditure behind that innovation comes under “R &D”.  And the same is true of innovation in retailing, media and a host of other innovative industries.  Most innovation is the product of entrepreneurs, not people in white coats.

       So what should government do to promote innovation?  Understand that support for innovation is not the same as support for R&D, still less the activities that established firms in industry regard as innovative.  We despise geeks – but we are also intimidated by them, and they retain a powerful influence on our thinking.  Outside many university cities around the world there are biotechnology estates established by governments that believe high technology is the key to a competitive future.  The funds that governments provide to support innovation are all too often appropriated by large companies that are better at forming committees to pontificate about what the global village will want in the future than they are at assessing what their customers want today.

       If you were a government department pondering the future of the computer industry in the 1970s, you would naturally have turned to IBM for thoughtful experts and presentations.  You would not have consulted Bill Gates or Steve Jobs, who were barely out of school, or Michael Dell, who was barely in it.  But IBM did not know the future of the industry.  If it had known, it would – sensibly – have tried to prevent it.  The interests of the industry and of consumers were not only different from those of the dominant business:  they were diametrically opposed.

       If a decade later you had wondered what government could do to promote Britain’s civil aviation industry, you would have asked British Airways – and perhaps its main rival, British Caledonian.  The government tried to promote competition through liberal policies that particularly favoured Caledonian.  All irrelevant, of course – Caledonian would disappear and the people who controlled the future were Michael O’Leary and Stelios Haji-Ioannou.  But as business minister, you would have had no reason to give them the time of day.  Companies such as Easyjet see opportunities that others have missed.  Most of these opportunities do not actually exist and the innovations fail.  But only a few such entrepreneurs have to be right to change the face of business.

       Confusion between the interests of an industry and the interests of existing companies pervades last year’s Digital Britain policy document and the legislation that followed.  An admirable desire to promote Britain’s creative industries is translated into a wish list for corporate lobbyists, hired by large companies and trade associations.  Who else could they be hired by?      There are few certainties about how these creative industries will evolve.  But one such is that if an industry is to advance, much – perhaps all – innovation will come from businesses that do not yet exist.  Their founders may not even have imagined the activities that will one day make them celebrities.

       The primary role of government in promoting innovation is the promotion of markets.  The objective of promoting innovation should not be to reward grandees with knighthoods, favours and positions on committees:  it should be to encourage a new generation of people such as Gates, Dell and Jobs, Stelios and O’Leary.  Promoting innovation means making it easy for new entrants to develop new products and business processes, not subsidising existing research and development.