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.