Government As Venture Capitalist: The Amazing True History

How government investment created the technologies that have made us so rich

Photo Credit: chailey

In the early days of the Solyndra debacle, as the reality dawned on the White House that its half-billion-dollar investment was about to go belly-up, former Obama economic adviser Larry Summers famously observed that, "Government is a lousy venture capitalist."

The quip, discovered after House Republicans subpoenaed White House e-mails about Solyndra, fairly well characterizes good Washington opinion these days in the wake of the Solyndra bankruptcy. But before we conclude that government ought to get out of the business of betting on new technologies, we'd do well to try imagining our modern economy without computers, the Internet and jet travel, all of which were heavily subsidized by the federal government.

Critics of government investment in technology cherry-pick high-profile failures such as Solyndra, the 1970s "synfuels" program to make gasoline out of coal, and corn ethanol. But these relatively marginal failures pale in comparison to the long history of successful government investments that have transformed our economy and contributed mightily to our affluence over the last century.

The idea that technological innovation is what drives economic growth — 80 percent or more by some estimations — is now broadly accepted by most economists. And there is even broad agreement that not all technologies are created equal. The technologies that really matter are those that economists call "general purpose technologies," things like the steam engine, electricity, and microchips. General purpose technologies make an outsize contribution to economic growth because they find their way into all sorts of new applications, increasing productivity across large swaths of the economy.

But the question of where general purpose technologies actually come from remains hotly contested. The pat answer that mainstream neoclassical economists offer is that technological innovation primarily happens when private firms, disciplined by competitive markets, create new technologies and products in pursuit of profits. They argue that government investments in innovation have been, at best, a sideshow and brandish economic studies which purport to show that nations that spend more on public research and development don't grow any faster than those that spend less.

It can all sound very convincing until one considers the actual history of government investment in general purpose technologies. In his 2006 history of military-funded technologies, "Is War Necessary for Economic Growth?," the late University of Minnesota economist Vernon Ruttan concluded that computers, the Internet, jet turbines, and other military-funded technologies would have taken decades longer to develop without government support, if they had been created at all.

Michael Lind, the polymath co-founder of the influential Washington, D.C., New America Foundation, further challenges conventional wisdom with the publication of his forthcoming economic history of the United States, "Land of Promise" (Harper Collins). In it Lind shows that while government investments in new technologies have become increasingly important to America's economy over the last century, the practice dates to the founding of the republic.

Alexander Hamilton championed government-funded factories to make interchangeable parts in order to make cheaper and more reliable rifles — a process innovation that ultimately led to Henry Ford's assembly lines. In the 19th century, Lind notes, the federal government funded land grant colleges to make agriculture more productive through better seeds, fertilizers and mechanization, which liberated millions of Americans from lives of hard agricultural labor and helped spark America's rise as an industrial power.

And that tradition continues today. Though we pay obeisance to the late Steve Jobs for the iPhone, all of its core technologies, from the microchips to GPS to the voice-control application, Siri, depended on years of Department of Defense funding.

But if government investment has been so important to the development and commercialization of general purpose technologies, how come studies that attempt to correlate economic growth and public investment in the aggregate fail to do so? The reason is that the long lag between when general purpose technologies are first developed and commercialized and when they become ubiquitous makes it difficult if not impossible to establish a definitive link between early public investments in those technologies and overall economic growth.

The federal government invested heavily in microchips in the '50s and '60s, for instance - virtually inventing the field of computer science from whole cloth, carving what we now know as Silicon Valley out of the orchards and farms of the South Bay, and guaranteeing the entirety of the market for microchips through most of the 1960s. But it took several more decades before private firms fully understood the commercial potential of information technologies powered by microchips and began to pour resources into commercial applications.

The same has been the case with myriad other technologies. Today's relatively inexpensive jet travel began with Pentagon procurement and R&D for jet turbines in the 1940s and '50s. But it took many decades before jet travel became accessible to the average American, and much of the rest of the world.

The rapid diffusion of general purpose technologies across international borders also make cross-national comparisons of the relationship between public investments in technology and economic growth problematic. The Internet, to take one obvious example, was invented in a government laboratory in the late '60s , and its early applications connecting universities and research laboratories were heavily underwritten by the federal government. But within just a few years of its broad commercialization in the late 1980s and early '90s, it had become the World Wide Web and quickly spread to economies all over the world, which reaped the benefits along with the United States.

Meanwhile, the long-standing conventional wisdom that what drives technology innovation is economic competition between firms for profits and market share is increasingly being undermined by new research. It now appears that the more ruthlessly competitive a given market is, the less innovative it tends to be. More firms competing for less market share mean lower profit for each individual firm — and lower profit means fewer investments in technological innovation.

During America's mid-century economic heyday, a lot of important technological innovation was done by large private firms, which were either outright monopolies or overwhelmingly dominant in their primary markets. With steady profits to reinvest for the long-term, firms like AT&T, Edison Electric and Xerox made enormous investments in potentially game changing technologies and corporate research laboratories like Bell Labs and Xerox Park are justly revered for their many innovations.

But now that the national monopolies and oligopolies of the industrial era have been broken up, private firms tend to invest much less in the high-risk, high-reward technologies that drive economic growth. The chance of failure is too great, the rewards too uncertain, and the technologies too easily copied by competitors. Firms still spend a lot on research and development in the aggregate, but it is mostly spent on incremental product or process innovations, not long-term research to develop new disruptive technologies with the potential to radically transform existing markets and create entirely new ones.

As a result, public funding for technology innovation is now more important than ever. In his 2010 book, "State of Innovation," UC Davis sociologist Fred Block examined R&D Magazine's list of the top 100 annual innovations over four decades, going back to 1970, and found that the percentage of those technologies to which public investment could be traced had grown dramatically. In 2006, 77 out of 88 domestic winners had been at least partially funded by government. And yet, ironically, public investment in technology innovation has been declining, as a percentage of GDP, for 30 years, in no small part because, while we often celebrate failure in the private sector as an essential part of the innovation process, we have increasingly little tolerance for it in the public sector.

Ideological opponents of government investment - aided and abetted by an economics profession that dresses up theories borne of 18th century, preindustrial capitalism with fancy mathematical models and calls them authoritative - serve up exaggerated tales of government investments gone terribly wrong while downplaying the remarkable history of government investment in technologies that have transformed our economy.

The truth is that government investment in general purpose technologies has not been the exception over the last two centuries, it has been the rule — and an important part of the story of America's extraordinary rise as an economic power. We forget that history at our peril.

Ted Nordhaus and Michael Shellenberger are Chairman and President, respectively, of the in Oakland, California. This piece was originally published at the San Francisco Chronicle.
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