The role of government

I recently read, “The Entrepreneurial State” by Mariana Mazzucato.   It was interesting to read in light of Peter Thiel’s “Zero to One” and Steven Johnson’s “Where Good Ideas Come From”.   Mazzucato’s central theme is that contrary to the idea that government is an impediment to economic development, the US government has actually spurred a lot of the most innovative sectors in the economy.   Beyond simple support of basic research, government has spurred development.   Unfortunately, at times, I think that she is her own worst enemy and at times draws rather tenuous connections between government investment and marketplace results.

To my mind, the government has done and continues to do an excellent job at funding basic research.  In the past, there was more support from industrial research labs such as AT&T Bell Labs, but that was during an era where monopoly profits allowed them to have the funds to do so.  In the US, prizes have also proved stimulating (ex. the X-prize).  DARPA has also been rather successful in funding risky targeted research.  Mazzucato correctly points out that SBIR grants have served to support companies in the development of technology that government needs that later has commercial application (ex. Apple).   But, it’s a stretch to suggest that Apple would not have existed without such investment.   However, she does raise a good suggestion—rather than just paying cash for SBIRs, the government would do well as a long term “venture capitalist” if it actually took on a small stock holding in companies where if they really took off, the funds could be used and reinvested in other research areas.  

Peter Thiel brings up the idea in Zero to One and in his book and talks that Clean tech and thin film solar panels in particular were a disaster for venture capital funds that poured in as a result of funds available from the DOE.   I think the problem here is time horizons—venture capitalists really only have maybe a 10 year time horizon to return a profit for their investors.  There has just been too much uncertainty in this market for them to really win (https://gigaom.com/2013/03/27/the-state-of-cleantech-venture-capital-what-lies-ahead/).   At this point, in the lab, single crystal silicon seems to have approached theoretical efficiency limits (http://en.wikipedia.org/wiki/Solar_cell_efficiency).   The difficulty at this point is more engineering and finance—namely, making it economical for people to buy panels at those efficiency levels.   At that point, it might be feasible to start thinking more about distributed power.  However, there is a rather disheartening  article in IEEE about what it would really take to reverse climate change, but that’s another topic (http://spectrum.ieee.org/energy/renewables/what-it-would-really-take-to-reverse-climate-change)…However, here Mazzucato is correct about the need for “patient” capital that can wait for more than 10 years to reap the benefits of investment.  Here, government is not just generally stimulating basic research, but is instead trying to achieve a given goal and allowing companies and labs to try different ways of realizing the goal of developing cleaner sources of energy.

Another point that Thiel brings up is that he believes that the pace of innovation is slowing.   One of his prime examples is the pharmaceutical industry.   Peter Thiel believes that it’s a result of government regulation.   I disagree.  Here, I think the conventional view is actually correct.  We really have eaten a lot of the low lying fruit.   Johnson raises the idea of the “adjacent possible”—a space of ideas that are accessible to a given person at a given time in history.   At this time, we’re waiting for the adjacent possible to sweep the next major wave of innovations.   We’ve discovered that cancer for example, is much more complex than we originally thought.  Rather than just being a simple disease with a simple cure (for example one drug that treats all cancers), it’s more likely that tailored solutions will be necessary.  Who knows, perhaps treatments will have to become on going and adapt to individual patients with time.   We’ve laid a lot of ground with projects such as the Human Genome Project, but it may take some time before it starts to bear major fruit because the problems at this stage are hard.   It’s also important for the government to continue to fund “risky” research where failure is possible.

Besides government directly investing in research, government can try to facilitate the transfer of knowledge from the university to industry (for example, with the Bayh-Dole act.  Or to encourage corporations to work together on hard problems like with Sematech.   It can also try to encourage environments where “random” encounters are likely to result in innovation—for example encouraging technological incubators  in large cities.   

Posted by william

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