Friday, June 12, 2015


In the past I've written about the historical role of the state in creating the conditions under which wealth is created. In the process I've pointed to the many forces of innovation that are not market driven. To do this I illustrate how state policies encourage innovation and market success while explaining the importance of the state getting legal and civil rights right.  

Specifically I explain how the modern liberal state has had to work consistently to remove or soften the impact of market enemies like 
societal prejudices (racism, sexism, etc.), market conspiracies (monopoly, oligopolies, etc.), government-corporate collusion or capture (favorable legislation, slavery, bailouts, regulatory capture, etc.), hereditary privileges (inheritances, wealth transfers, etc.), and outright corruption and theft.

Getting Civil Rights and Civil Liberties right was instrumental in
creating access and market opportunities for all in America.

Left untouched, these enemies of the market grind away at both talent and initiative, and work against what makes our economic world tick. This, as I describe in my classes (and in my book), undermines the integrity of the market and the laws of justice in our markets.

But going after market deadening activities like market conspiracies, corruption, and collusion alone don't necessarily create a dynamic economy. History tells us that we also need the state to drive market investments and innovation. Here we need to think more like Alexander Hamilton and Friedrich List than Adam Smith and David Ricardo (those who've taken my classes, and the smart ones, know what this means).

This is where economist Marian Mazzucato enters the scene. 

Mazzucato is out to demonstrate that what you think you know or believe about the big inventions in our lives is wrong. In her book The Entrepreneurial State Mazzucato explains that innovation is not really led by the private sector. The private sector only jumps in the game once the bugs and big dollar investments have already been made, as Mazzucato discusses below.

To help make her point the good people at Naked Capitalism ask us to think about recent "private" success stories like Apple and Google. They remind us that the "smart" devices and communication networks that are the backbone of these industries were made possible because of the financial support and resources provided by the U.S. government. 

Whether we're talking about the Global Positioning System (GPS), the touchscreen display, and voice-activated technology what's clear is that the state poured the vast majority of the money and resources into making these "private sector" industries possible.

Want more? 

The National Science Foundation and the U.S. military are behind the algorithms and internet technology that made Google and Facebook what they are today. The relationship between the growth of the Silicon Valley and our cold war state is an incredible story, and discussed here. Market changing NASA and military inspired inventions are discussed here.

A recent report from the Joint Economic Committee of Congress pointed out that public funding was "instrumental" for the development of 15 of the 21 highest ranking therapeutic drugs introduced between 1965 and 1992. One equity manager was particularly blunt when he discussed the role government investments played in making our markets tick in the postwar era:
Why has it been in the world of information technology and, secondarily, biomedicine that venture capitalists have been successful? In brief: Only in these sectors did the state invest at sufficient scale in scientific research and in its translation to working technology. In over 40 years as a working venture capitalist, I learned that my colleagues and I and the entrepreneurs whom we backed were all dancing on a platform constructed by the federal government.
In effect, as was pointed out in the clip above, the United States government has become the "loss leader" of major projects in the American economy. It funds and introduces consumers and market players to new products and new ideas that are too expensive or too much of a nuisance for the private sector to develop on its own.

Unfortunately, after benefiting from taxpayer supported subsidies, investments and technologies high flying companies and industries now want to take their financial ball and go home (as it were). Caterpillar has no factories in Switzerland yet books 85 percent of its profits there. Apple has stashed billions in overseas accounts in Ireland to avoid their tax obligations here. 

The list of American companies who have "legally" left the country to avoid paying taxes is a long one. The point here is that they now want to rewrite the social contract they benefited from on their way up the economic ladder.

Responding to the suggestion that they owed more to the United States, one Apple executive took a look at the labor conditions and financial subsidies that made him money in China and said, "We don't have an obligation to solve America's problems."

What comments and attitudes like this ignore is that for every Google there are 10 failed government or military projects that went no where. For every Tesla backed by the federal government there are 10 Solyndras. These are big budget bets that the private sector will not or can not carry out. Also ignored is how investing in Tesla and Solyndra are gambles that domestic science and market players learn from, which allows them to move in other directions

Today most market players want to demonize the government as a failure in spite of the fact that the major innovations of the 21st century have their roots in government sponsored research and, yes, government sponsored failures. Successful market players did not become successful on their own. 

How we get others to recognize this simple fact is one of the great challenges of our time.

- Mark

UPDATE (6-16-15): As this Tom Dispatch piece makes clear, the Manhattan Project was government science ... The Apollo program was government science ... Plate tectonics was government science. So, yeah, contrary to what some might want to claim, "government science" is both good science and necessary for economic development. 

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