Pethokoukis

Here’s the kind of innovation government should invest in

Former Microsoft technologist Edward Jung makes the case for basic research and against industrial policy:

Silicon Valley itself was built on demand. The US Department of Defense put up tens of billions of dollars in contracts for microelectronics, a commitment that both paid down innovators’ risk and created an infrastructure that would support the growth of start-ups. All demand is not created equal, though, and it is instructive to examine the differences.

Consumer or market-driven demand – the kind most of us think of when we hear the word – is far less predictable, and therefore much riskier, than state-sponsored demand of the sort that landed a man on the moon. Companies that depend solely on their products’ commercial appeal are limited in the kinds of innovations that they can safely introduce, because if one of their products fails in the marketplace, they may not survive to build another one. This is especially true of start-ups and small companies – the very players that everyone hopes will show up in the next-wave of Silicon Valleys.

Fortunately, by sponsoring long-term, targeted initiatives, governments can stimulate more predictable demand. The Apollo program gave innovators clearly defined goals and a roadmap for getting there: first put animals in orbit, then put people there, then send probes to the moon, then send people there.

The US Department of Defense was the only customer for integrated circuits in 1962, but by the end of the decade consumers were buying transistor radios and pocket calculators in droves. Likewise, state-sponsored demand should not take the form of subsidies to specific technologies or companies; the government has no business gambling taxpayer money on particular ventures. Assuming that risk is the job of venture capitalists and others in finance, not public officials. But there is little risk in offering a contract for a job well done: there is no payout if the problem remains unsolved.

The economic planners and policymakers who are chasing Silicon Valley’s taillights are learning that they cannot always replicate the entrepreneurial culture and finance mechanisms that flourish there now. But they have forgotten how it all started: guaranteed demand, which stimulates the most ambitious kind of innovation.

Jung is surely correct that a top-down effort to replicate Silicon Valley or create an innovation hub is probably doomed to fail, as Enrico Moretti points out in the Geography of Jobs. Increased basic research funding, some in the form of innovation prizes, should be an area of bipartisan agreement.

5 thoughts on “Here’s the kind of innovation government should invest in

  1. But this administration seems addicted to “investing” in start ups, providing at risk capital instead of providing a market (demand) for desirable products.

    Instead of throwing money at a Solyndra, why not provide a contract for solar panels – panels on government buildings throughout the country? With that type of contract in hand the company would be able to secure more traditional financing.

  2. I do not subscribe to any form of government R&D, military or otherwise. I think free markets will always do better.

    The military R&D budget now tops $70 billion. Does anyone really believe we get our money’s worth out of that?

  3. We (not just in the US) has benefited tremendously from government sponsored R&D. Almost nothing you can see when you look around has not in some way benefited from the initial dollars invested. For example, the internet began as a sort of party line for researchers in various government labs to use in communicating data and coordinating research. The smartphone would not have been possible without investments made by the US governments in education and basic R&D that led to most of the technological advances needed. The issue is who should be awarded this R&D money. Today, a lot of government investment is politically motivated and offers less benefit than it would have if it was distributed based on expected impact on society and the economy. Imagine if a major reduction in the cost of energy was possible due to government R&D in some sort of “clean” technology such as fusion or thorium. That $70 billion is a pittance compared to the $1 trillion plus spent on welfare in the US every year. Overall, I would have to say we get our money’s worth and then some.

  4. Rob Benton:

    Yes, but by your line of reasoning, then every federal department—agriculture, commerce, energy, labor, transportation, NASA—should have $10 billion+ R&D budgets.

    There are always sound arguments for spending more money at the federal level. One man’s waste is another man’s sacred cow.

    In the next 10 years we will spend $2 trillion on just the VA (FY 2014 is at $152 billion, and this department is growing gangbusters). And who wants to cut VA benefits?

    But we gotta cut.

    • I still say that you get a lot more bang for the buck out of government sponsored basic research than, for instance, $100 billion in food stamps. Consider that a lot of tax dollars goes to support research in a university setting. Do you not believe the government should invest in education and training? Without government investment, basic research would be greatly reduced. Regarding VA spending, it is a direct result of 2 wars in the past decade. Not sure why the department needs to grow when we are pulling out of the last war zone. I have heard there are a number of vets who need help but can’t get it at the VA.

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