The Anti-Economist — From the November 2013 issue

The Future Progressive

Download Pdf
Read Online
( 2 of 3 )

“The first step in winning the future is encouraging American innovation,” President Obama said in his 2011 State of the Union address. He was right. Technological advancement is widely understood to be the main source of economic growth, and common sense confirms this view — think of the water mill, the steam engine, electricity, mass production, and, more recently, television, jets, the supertanker, the Internet, and the smartphone.

Our national reflex is to assume that most technological breakthroughs come from entrepreneurial giants and venture capitalists. We are too ready to accept the distorted antigovernment ideology of such economists as Milton Friedman, who wrote in his book Capitalism and Freedom, “The great advances of civilization, whether in architecture or painting, in science or literature, in industry or agriculture, have never come from centralized government.” When Americans think of innovation they are more apt to focus on Thomas Edison or Henry Ford or Steve Jobs than on public investment in transportation and education. “When government was smaller, innovation was easier,” claimed a January column in The Economist. “Industrialists could introduce new processes or change a product’s design without a man from the ministry claiming some regulation had been broken. . . . [O]fficialdom tends to write far more rules than are necessary for the public good.” Soon after he left his job as Bill Clinton’s Treasury Secretary, Lawrence Summers made a similar assertion about Washington’s role in technology investment. In an interview in which he praised Milton Friedman, Summers said, “There is something about this epoch in history that really puts a premium on incentives, on decentralization, on allowing small economic energy to bubble up rather than a more top-down, more directed approach, that may have been a more fruitful approach in earlier years.”

In fact, the opposite is true: the federal government — not merely through financial grants to private industry but through government research, vision, and risk-taking — has been the prime mover of innovation in America since World War II. Americans have a hard time accepting this fact, and so they tend to react mostly when government support fails. Consider the media uproar over the 2011 bankruptcy of Solyndra, the federally financed solar-panel manufacturer. Never mind that the $535 million the company received in federal loan guarantees paled beside the billion dollars it raised from those infallibly visionary venture capitalists, or that only 1 percent of all renewable-energy projects backed by the Obama Administration since 2010 have gone bankrupt, compared with 40 percent of venture-backed businesses.

In her new book, The Entrepreneurial State, Mariana Mazzucato, an economist at the University of Sussex, documents in plentiful detail the role of the government as an innovation leader. “Not only has government funded the riskiest research, whether applied or basic,” she writes, “but it has indeed often been the source of the most radical, path-breaking types of innovation.” One example is the state’s contribution to what are known as general-purpose technologies (GPTs), which include aviation and space transport, the Internet and telecommunications, and certain types of mass-production systems. One economist Mazzucato cites found that “large-scale and long-term government investment has been the engine behind almost every GPT in the last century.”

While Summers and others point frequently to Silicon Valley as an example of private innovation at its best, empirical research by Mazzucato and others shows that military contracts enabled Silicon Valley firms to sprout and thrive early on; only later did they innovate on their own. For example, Apple has repeatedly capitalized on the findings of government-sponsored programs from around the world. Mazzucato notes that work by two European researchers who shared the 2007 Nobel Prize in Physics led directly to the invention of the iPod. This work was done at government-funded research institutions in France and Germany. Other such breakthroughs have made their way into Apple’s touchscreen displays and voice-recognition program.

Government generally takes the risks private industry won’t — precisely because the funds needed are unusually large and the payoffs highly uncertain. And government investment is often patient; Wall Street funding rarely is. Organizations such as the National Institutes of Health, the Defense Advanced Research Projects Agency (an early contributor to the development of the Internet), and the Small Business Innovation Research Program are indispensable to the advances — in green technology, nanotechnology, biotechnology, and pharmaceuticals, among many others — on which our economy relies. In 2011, the most recent year for which I could find data, government was the funding source of 53 percent of basic research, while business accounted for just 23 percent.

Each year, R&D Magazine ranks the hundred most important innovations of the past year. A recent analysis of their 2011 rankings showed that seventy-seven of those hundred had been funded at least in part by the federal government. The number of major innovations from Fortune 500 companies, meanwhile, had fallen from an average of thirty-six per year in the 1970s to four per year in the 2000s. Those from government labs rose from nine per year to thirty-two per year over the same period. As the Wall Street Journal noted, Summers’s declaration that the government is a “crappy venture capitalist” seems to have been dead wrong.

Under the sway of Bowles–Simpson thinking, we are now spending less than ever on R&D. Budget sequestration is likely to knock more than $50 billion off the nation’s federal R&D spending through 2017. This will cut funds for science and medical research, the Agriculture and Energy Departments, and NASA. In a world where almost everyone agrees on the importance of innovation, dumb ideas are inhibiting innovation’s most prolific source.

You are currently viewing this article as a guest. If you are a subscriber, please sign in. If you aren't, please subscribe below and get access to the entire Harper's archive for only $23.99/year.

= Subscribers only.
Sign in here.
Subscribe here.

Download Pdf
Share
undefined

More from Jeff Madrick:

Get access to 169 years of
Harper’s for only $23.99

United States Canada

THE CURRENT ISSUE

February 2020

Dearest Lizzie

= Subscribers only.
Sign in here.
Subscribe here.

Trumpism After Trump

= Subscribers only.
Sign in here.
Subscribe here.

“My Gang Is Jesus”

= Subscribers only.
Sign in here.
Subscribe here.

The Cancer Chair

= Subscribers only.
Sign in here.
Subscribe here.

The Birds

= Subscribers only.
Sign in here.
Subscribe here.

The Skinning Tree

= Subscribers only.
Sign in here.
Subscribe here.

The Interpretation of Dreams

= Subscribers only.
Sign in here.
Subscribe here.

view Table Content

Close

You’ve read your free article from Harper’s Magazine this month.

*Click “Unsubscribe” in the Weekly Review to stop receiving emails from Harper’s Magazine.