17 April 2014

What Government Does Well: Basic, Market Changing Research

There is a fascinating book review by Jeff Madrick that undermines so many of the casually inaccurate claims made by libertarians in the course of exploring The Entrepreneurial State: Debunking Public vs. Private Sector Myths by Mariana Mazzucato and Doing Capitalism in the Innovation Economy: Markets, Speculation and the State by William H. Janeway.

These titles buttress my suspicion that to be a libertarian requires a special blend of intelligence and naivete. Specifically, a naivete about the history of government's role in economic progress to date. These authors argue that economies move forward on a dance between government innovation (usually for basic research) and private innovation (usually for products that apply these innovations).

"Government can't do anything well," libertarians say. They've said it so much that it begins to sound like truth, in the same way that the Greeks' repetition of Homer's myths made Athena seem real. But what are the facts?

Despite protestations that government should not pick winners or losers, even including Solyndra it's only about 2% of the projects partly financed by government that go bankrupt. Symantec and Qualcomm were among the new companies funded by The Small Business Innovation Research program - a program started by Ronald Reagan. Google's basic algorithm was funded with a National Science Foundation grant. The iPod - and essentially every computing device - depends on technology that came out of US and European government-funded research labs.

It seems silly to say that the government should not choose research projects or companies or industries to invest in. The government - in the form of universities - regularly chooses which kids to invest in for undergraduate and graduate studies. The government chooses who goes to prison and who goes free. The government chooses who pays taxes and who gets subsidies. Governments inescapably make big decisions.

The real criticism of government is that they're likely to invest in projects, technologies and even companies that the market would not finance. I think this is accurate. I also think that such an accusation is actually an argument for such investment. Taking the lead on research can give a country an advantage for decades (look, for instance, at what the spending on computer chip and Internet research did for the US). Better to spend on 10 technologies, only a couple of which change the economy, than to spend on no technologies and watch another country take the lead on an important new industry or technology.

Yet because of recent cuts, funding for government research programs is at its lowest rate - as a percentage of GDP - in 40 years. Back to the level it was at before the personal computer, the Internet, bio-tech, and nanotech. (All, by the way, products of basic research initially funded by government programs.)

We're about to enter a period of even more rapid technological and economic change, not less. We can listen to the historically naive and continue to cut our funding on basic research. Or we can assume that even with all the change we're living through,the one thing that hasn't changed is that investment now determines income later, and in no area does that investment have more potential than basic research or even subsidies to startups.

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