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Government As Venture Capitalist: The Amazing True History

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

 
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