Breakthrough: Beyond Market Fundamentalism: Government Leadership in Energy Innovation

By Chris Knight, Breakthrough Generation fellow

A paper by political scientist Glenn Fong starts out with a 1998 quote by Bill Gates:

"The PC industry is leading our nation's economy in to the 21st century...There isn't an industry in America that is more creative, more alive and more competitive. And the amazing thing is, all this happened without any government involvement."

Fong goes to on describe the myriad ways the federal government--mostly through its Advanced Research Project Agency (ARPA) --was involved in nearly every aspect of the development of the personal computer, from the human-computer interface (HCI) to the graphical user interface (GUI), to picture icons, to computer networking. Bill Gates, brilliant as he might be, seems deluded about the history of the computer.

A recent paper by UC Davis sociologist Fred Block shows that the federal government's pervasive role in the development of the personal computer is not an anomaly. Block analyzed the history of inventions that have won R&D 100 awards, and found that in recent years, federally-funded university research, federal innovation grants, and federal labs have been directly tied to more and more of these valuable technologies.

While in 1971, over 80% of R&D 100 awards went to private firms, this figure sank to around 30% in 2006. Publicly-funded organizations went from receiving less than 20% of awards in 1971, to more than 70% of awards in 2006. Given that this trend towards increasing publicly-supported high-technology innovation is so robust and well documented, how can brilliant people like Bill Gates claim otherwise?

The answer is that an ideology known as Market Fundamentalism. Market Fundamentalism prevents Americans from seeing the real economy they participate in. Market Fundamentalism asserts that the "free market" is where all good innovations comes from, and that the public sector is a giant leech on economic growth. The Market Fundamentalist solution for nearly every social problem is to starve the public sector in hopes of reducing the ranks of the corrupt and inefficient bureaucrats who occupy it.

While market fundamentalists are nearly always politically conservative, their ideas have infected both sides of the debate on climate change. On the right, if not denying the reality of climate change, conservatives oppose every realistic public solution, decrying the government's supposedly poor track record on "picking winners and losers." On the left, however, Market Fundamentalist ideas have taken a more insidious form. Liberals and environmentalists have become irrationally attached to a market-based solution to global warming: "cap-and-trade."

What liberals have forgotten--and what Market Fundamentalists will not admit--is that the energy markets are very far from competitive markets. Whether it be the oligopolistic and heavily subsidized petroleum firms, the split incentives in the residential building markets, or the lack of responsibility for electric transmission infrastructure, energy markets are a rich case study in market failures. The negative externality of global warming is just one of dozens of problematic issues.

Given these circumstances, the carbon mitigation solutions that firms adopt under a pure "cap-and-trade" scenario will likely be far from socially optimal, if effective at all. Unless the government takes a more active role in eliminating market failures, and/or overriding them with targeted investments in promising clean energy sources and energy efficient technologies, the problems that plague the energy markets will still exist and prevent socially desirable solutions.

The thought of such an active federal approach to climate change makes many Americans uncomfortable, but it shouldn't. Believe it or not, the government does do some things--like high technology innovation--very well, and is learning to do others--like energy policy--better all the time. Rather than criticize the federal government for every slip-up it makes, maybe its time we worked to channel its vast resources to solve the greatest problem mankind has ever faced.

Claiming that government is good for innovation because it has taken over large portions of science and research is like claiming that slavery was good for agriculture because of its dominance. Such claims ignore the fundamental distinction between free-markets and government control. Innovation, research, product development, computers, cell phones, power generation and a myriad of other values are products of individual thinking minds. This is true whether they work alone or collaborate with a thousand other individuals. The freedom to think and act underlies any and all innovation. Capitalism is a political system which recognizes the necessity of freedom to the achievement of any value, including scientific innovations, and protects the freedom of individuals to think, act, and trade free of coercion. Government, on the other hand, is the institution of force. When it takes taxpayer money and redirects it to various science programs it does so by force. The NIH for instance, takes money from from investors and scientists and redirects these funds, preventing them from pursuing the endeavors they value. This is destructive regardless of how these funds are used because basic freedom of thought - the one thing underlying any innovation - has been compromised. The only thing government brings to the table is the power to force people to do things they rationally would not do. It undermines the freedom to use one's mind and act on one's own judgment. This can only lead to destruction. Force and innovation are opposites. Posted by: Jim Allard at July 16, 2008 11:09 PM

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