Is Government a Lousy Venture Capitalist?

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Government investment was instrumental to the development of technologies such as the microchip and the Internet.

March 6, 2012 | Michael Shellenberger, Ted Nordhaus,

In response to evidence that the government played a critical role in creating the technologies of the shale gas revolution, some thoughtful conservatives have responded that it is the exception that proves the rule. "One success does not a champion make," writes American Enterprise Institute's Ken Green.

The main problem for our argument, Green writes, is that academic research shows no relationship between public R&D spending and economic growth. The government is what former Obama adviser Larry Summers said it was: "a lousy venture capitalist."

Now, in a cover story for the Sunday Insight section of the San Francisco Chronicle, Breakthrough Institute co-founders Michael Shellenberger and Ted Nordhaus point out an essential flaw in analyses purporting to show no relationship between public funding for innovation and economic growth. It takes decades for critical technologies -- especially "general purpose" technologies like microchips and the Internet -- to add to economic growth. Researchers have been comparing 1960s apples to 1990s oranges.

Since the 1950s, most economists have recognized that over 80 percent of economic growth is from technological change -- and that the biggest change comes from what are called "general purpose" technologies, like microchips and the Internet, that find their way into all sorts of new applications, increasing productivity across large swaths of the economy.

Heretical as it may sound, market competition has not been the primary driver of world-changing innovations. There was no market for microchips when the Air Force and later NASA in the 1950s and 1960s contracted with companies to make microchips -- and loaned them money to build factories. It would take until the 1980s for personal computers to take off, and until 1990 for their increases in labor productivity to translate into economic growth (accounting for much of the post-1990s economic boom).

Same story for the Internet. In the 1960s, there was no commercial interest to link computer networks. But the DoD wanted to make it easy for its researchers to communicate, and in 1968 contracted with BBN (now part of Raytheon) to create the protocols for computers networks to efficiently route information in packets. It took 25 years for the Internet to become commercially viable, and until the early 2000s for the Internet to add 0.25 to 0.5 percent to annual U.S. economic growth.

Given how much time and money major technological innovations take, it's little wonder that government increasingly plays a leading role. And the decline of the big monopolies like Xerox and AT&T, which funded significant new innovations in the post-war period, makes public funding for innovation all the more important.

The long-term decline in public innovation spending thus occurs at our peril. Private companies competing for market share still innovate around the edges -- creating incrementally better jet planes and smart phones. But if we want the big technological revolutions that are crucial to rapid growth and rising prosperity, we must renew America's historic commitment to innovation.

Read the full article by Michael Shellenberger and Ted Nordhaus in the San Francisco Chronicle here.