The innovation systems (IS) approach—developed by Richard Nelson, Christopher Freeman and Bengt-Ake Lundvall, amongst others—has become perhaps the dominant approach in the academic literature for the study of innovation. It has also exerted considerable influence on policy. This paper examines both the theory underpinning the IS approach, which bears considerable affinities with Austrian economics, and also its policy implications. It is argued that the work of Friedrich Hayek and Elinor Ostrom in particular can be used to draw attention to some potential difficulties with the way in which the IS approach is often used to guide policy. Ideas drawn from Austrian economics, as well as the work of Elinor Ostrom, are used to help develop and improve the IS approach, both theoretically and in terms of its approach to policy.