578) Innovation and the Role of Government - The Economist

Closing statements
The Economist, Friday, March 26th, 2010

Defending the motion
Amar Bhidé
Visiting Scholar, Kennedy School of Government, Harvard University

People must see their government play the role of an even-handed referee rather than be a dispenser of rewards or even a judge of economic merit or contribution. Picking winners—this technology or that developer—which is an inevitable consequence of expansive schemes such as Mr Sandalow's, makes us all losers.

Against the motion
David Sandalow
Assistant Secretary for Policy and International Affairs, US Department of Energy

Will government sometimes make mistakes? Of course. So does the private sector. Innovation is about taking risks. There may be times when government should do less, but there will never be a time when it should do the "least". Government has unique and powerful abilities to promote innovation. We should recognise and embrace them.

The moderator's closing remarks
Vijay Vaitheeswaran
Mar 26th 2010

Our debate on the government's role in innovation is drawing to a close, and it is running neck and neck. The side in favour of the motion started off on the back foot, but has gained enough ground to keep this an unusually close affair. The side opposite has lost a bit of the initial starting advantage, but remains just as well positioned to pass the post first. Both debaters have ginned up their final arguments in hopes of emerging the winner.

Amar Bhidé, arguing in favour of the proposition, insists that "a minimising, no more than necessary standard, is crucial in maintaining widespread, decentralised innovation". He brings out the big guns, invoking the hero of free marketers ("Friedrich Hayek pinpointed why centralised control was an economic dead end") and the bête noire of freedom during the last century (the Soviet Union). Quirkily, he also takes aim again at the side opposite's support for advanced battery technologies, demanding to know when his uber-green bicycle is going to earn him government subsidies.

Arguing against the motion, David Sandalow offers a closing statement that is sure to please fans of government-supported innovation. With as much gusto as his rival mustered up for attacking batteries, he jumps on the Google example cited earlier by his opponent. Mr Sandalow goes back to original writings by the founders of the firm to show that, in fact, this paragon of seeming free-market virtue in fact got government money from several sources during its early uncertain days. Government, he insists, "has unique capabilities and a full toolbox for helping spur the innovative process". It must, he suggests, steer money towards innovations that serve social goals.

The hour is late, but the clouds have cleared. You must now choose which good guru you will follow on the innovation trail. Cast your vote now, as this debate promises to be a nail biter.
Thoughts?

Amar Bhidé
The proposer's closing remarks
Mar 26th 2010

Minimal government does not equal no government or even government of unchanging size. New technologies, as I argued in my opening statement, often demand new rules. Nevertheless, a minimising, no more than necessary standard, is crucial in maintaining the widespread, decentralised innovation that undergirds our prosperity.

Many who oppose the standard, such as David Sandalow, seem to argue that if some government is good then a lot must be great. For instance, they extrapolate from the value of the government's role in providing a high-quality basic education for all to demand tax subsidies for the advanced training of a few in fields that they somehow know will have large social returns.

They see no evidence of governmental overreach in California's soaring unemployment and empty public coffers. California's government does not spend too much or do too much; it is just pesky laws passed by ornery voters that prevent it from raising the taxes it needs, suggests Mr Sandalow.

But if California has it right, then governments in most other states must be too small. Why then has California chronically lagged behind in employment and income growth, long before the current crisis?

The current crisis itself owes much to governmental overreach. Politicians from both parties used the tax code and loan guarantees to pump up the construction industry and housing prices, drawing resources away from innovators in other sectors and turning those who could not afford it into reckless speculators. The boom was channelled through securities issued by two governmental agencies, marginalising traditional decentralised lending by loan officers.

Nearly 70 years ago, Friedrich Hayek pinpointed why centralised control was an economic dead-end. The decision of what to plant and when was best left to farmers who knew their soil and local weather conditions. The best judge of the product mix of an industrial enterprise was the person who was in constant touch with customers. Central planners who thought they knew better, didn't. Indeed the inability of planners to match the supply and demand for the most basic goods helped bring down the Soviet Union.

Now comes the alternative energy and battery brigade, which is confident that it can make top-down plans work with advanced and dynamic technologies. Mr Sandalow, for instance, has offered a detailed plan to end the United States' oil addiction. This is certainly a worthwhile goal both on national security grounds and in light of the grave risks of global warming. The plan sensibly proposes a gasoline/petrol tax. Unfortunately it does not stop there; that would be too minimalistic. The plan, for instance, proposes an $8,000 tax credit for buying plug-in hybrids, a ten-year extension of the ethanol tax credit and (truly) a federal battery guarantee corporation, which would underwrite insurance on batteries used in hybrid vehicles.

Now plug-in hybrids have become popular in recent years—Mr Sandalow reportedly owns one too—but before that few experts thought they held any promise. All-electric was supposed to be the technology of the future. The auto industry more or less stumbled into hybrids by chance. And who can tell whether plug-ins are really the answer? Could they be like Alta Vista's search engine to some Google-like technology that a couple of graduate students might be hacking away on? And if we don't know, why entrench plug-ins?

What about my favoured form of transportation, bicycles? They are even greener than plug-in hybrids, especially the old-fashioned non-battery-enhanced kind. A tax credit would increase ridership (and I would trade in my clunker). Better tyre and gear technologies and bicycle pumps might help too, so why not subsidise that research?

There is in fact no limit to the number of ways in which individuals and businesses could reduce the consumption of fossil fuels: reducing commuting distances, smaller homes, better insulation, sweaters and solar panels to name just a few. In the minimalist view, what we need is a simple, even-handed incentive, such as a gasoline/petrol or carbon tax, leaving specific choices to those best positioned to make them. Setting up a Soviet-style apparatus to select and promote a particular set of solutions is not the answer.

And more than technical efficiency, the right mix of energy conservation choices is at stake.

The government has a unique capacity to demand compliance. We must all pay taxes, send our children to school and obey traffic laws. Preserving the legitimacy of its coercive powers, however, requires the government to limit its use to situations where the public interest is clear and widespread support has been secured. This does not preclude the use of public funds for investments whose payoffs are intangible and long-term, in museums, public art or the study of dark matter. But taxpayers whose money is used to pay must be persuaded of the merits of such investments. Obviously this imposes limits on what is financed from the public purse.

Conversely, expansive interventions unilaterally decided by experts pervert incentives in fundamental ways. Americans are unusually idealistic and optimistic, believing that that the game is not stacked in favour of the powerful. This belief encourages the pursuit of initiatives that contribute to the common good rather than the pursuit of favours and rents.

To sustain these beliefs, people must see their government play the role of an even-handed referee rather than be a dispenser of rewards or even a judge of economic merit or contribution. Picking winners—this technology or that developer—which is an inevitable consequence of expansive schemes such as Mr Sandalow's, makes us all losers.

For the record, Mr Sandalow's asserts that I am "flat out wrong in asserting that GDP per head in Israel is lower than in Cyprus or Slovenia". The very first item that comes up in a Google search of "per capita/head GDP" is a Wikipedia page. The first column of data on this page contains the IMF's 2009 estimates of GDP per head (adjusted, as is conventional, by purchasing power parity). Cyprus ranks 26th from the top on the list, Slovenia 30th and Israel 31st.

The opposition's closing remarks
David Sandalow
Mar 26th 2010

Let's talk about Google. Amar Bhidé questions government's role.

Google's founders can speak for themselves. In 1998, Sergey Brin and Larry Page published a paper that begins: "In this paper, we present Google, a prototype of a large-scale search engine…" At page 16, Brin and Page write that their research was "supported by the National Science Foundation", with funding "also provided by DARPA and NASA". All three are government agencies. The paper makes for fascinating reading, for reasons related and unrelated to this debate.

Prof. Bhidé invokes Isaac Newton and other great figures from history, asserting that none received government grants. Yes, an apple tree may have been sufficient infrastructure for scientific discovery in the 17th century. Today, a linear accelerator is needed in some fields. Satellites and supercomputers are needed in others. Government funding—beyond the "least" amount possible—makes advances in those fields much more likely.

Furthermore, no one is arguing that all innovation depends on government funding. Knowledge has certainly been created without government support. The motion asks, instead, whether "innovation works best when government does least". The answer is no, because government has unique capabilities and a full toolbox for helping spur the innovative process.

Prof. Bhidé's most interesting argument involves Minitel, the French government-owned monopoly that launched an online service in the early 1980s, before the World Wide Web. Minitel was a success at first, providing French customers with online services unavailable to Americans at the time. Then it floundered in the 1990s, in the face of competition from the internet.

However, Prof. Bhidé draws the wrong lesson from this tale. Minitel was a monopoly. Its story stands mainly for the proposition that monopolies, public or private, do not innovate well. For example AT&T, a private telephone monopoly in the United States, once required its customers to use rotary phones leased from the company. Customers had two options: white or black. Then starting in 1968, other companies were allowed to compete in this market. Not only did the types of phones available increase dramatically, but innovative devices such as modems emerged.

And who has an important role in breaking up monopolies, thereby unleashing innovation? The government. Let us hope the government doesn't do the "least" when it comes to trust-busting.

The economic case for innovation is overwhelming. Innovation plays a central role in productivity growth and wealth creation. How can government best promote it?

First, by protecting property rights. Intellectual property protection and a stable legal system are the bedrock on which much innovation rests. If we were committed to government doing only the "least", we would stop here.

But government can do much more. How else can government help?

Second, by investing in education. An educated citizenry is the fertile soil from which innovation grows. As Prof. Bhidé correctly argued in his opening statement, this means training young people not just in math, but also in how to think independently and work collaboratively. Providing this education is a classic government function, one for which there are outsized benefits from government spending.

Third, by investing in basic research. For many research tasks, the payout is too long, benefits too dispersed and the scale too large for the private sector. When government steps in, returns can be huge. In the 1980s, for example, the US Department of Energy supported research into recovering natural gas from shale formations. Few companies were interested. But that research led to innovations that are now transforming the natural gas sector in the United States and around the world.

Fourth, by ensuring that social returns are reflected in investment decisions. Public companies have fiduciary responsibilities to their shareholders. In most cases their primary mission is not to clean the air, prevent climate disruption or pursue other public objectives. Governments have a responsibility to promote the public interest, steering capital toward innovations with high social returns.

Fifth, by protecting public safety, giving consumers the confidence to try innovative products. We expect our vehicles, food and pharmaceuticals to be safe and criticise government regulators if they fail to detect problems. This standard-setting role not only protects the public, it promotes innovation by giving consumers confidence in innovative products.

Sixth, by providing consumers with reliable information. Seventh, by purchasing output from innovators, helping innovative products scale. Eighth, by building infrastructure on which innovators depend (such as interstate highways and electric transmission grids). The list goes on.

Will government sometimes make mistakes? Of course. So does the private sector. Innovation is about taking risks. There may be times when government should do less, but there will never be a time when it should do the "least". Government has unique and powerful abilities to promote innovation. We should recognise and embrace them.

It has been almost 45 years since Bob Taylor first convinced his bosses at DARPA, a government agency, to invest in a new idea for computer communications. That led to the internet and, eventually, to The Economist online. It led to the clever managers of this site combining a classic debate format with 21st-century technologies and, in turn, to our discussion today. Many thanks to The Economist, to Prof. Bhidé and especially to all of you reading this dialogue.