The last half of the 20th Century bred more than a few superstar economists. Even those who are not students of economics have heard of Milton Friedman, Paul Krugman and Paul Samuelson. Columbia University professor of economics Mark Skousen has a different threesome in mind. In his book “The Big Three in Economics,” he argues on behalf of three who have the most lasting effect on our economic thinking: Adam Smith, Karl Marx and John Maynard Keynes. That each of them lived and worked in three different centuries is no accident. It is, rather, a measure of how long it takes for breakthrough economic theories to take root and have lasting effect on the societies that embrace them.
While Smith (18th Century) and Marx (19th) might be posed as polar opposites, Keynes (20th) proposed a blend of free enterprise and government using fiscal policy to affect economic outcomes. (We are now more affected by the monetary theories of Milton Freidman. But he didn’t make Skousen’s cut.)
The NY Times profiled an economist who endeavors to have that kind of effect on the 21st Century. Mariana Mazzucato -- born in Italy, raised in the US and teaching in London – would like to change “how society thinks about economic value.” Eschewing the now tired debate that frames the free market and government as opponents, she points to the Internet, GPS and the silicon chip of examples of how government research has enabled free enterprise to flourish and society to benefit. She also suggests that the political left is “losing around the world because they focus too much on redistribution and not enough on the creation of wealth,” according to the Times. Her theories have been embraced by politicians of both parties who declare themselves to be capitalists but want government to be more active in achieving economic outcomes. Elizabeth Warren would double federal R&D to “Create and Defend American Jobs”. Meanwhile, Senator Marco Rubio (R-FL) has published a treatise outlining how the federal government should steer capital to favored industries.
It would be easy to fall into the usual tribal debate about Dr. Mazzucato’s ideas – the libertarian right vs. the socialist left. But the dogmas of either side don’t hold up under scrutiny. It’s hard to argue that capitalist Silicon Valley startups enabled by Wall Street money haven’t created jobs, prosperity and the follow-on effects of both. It’s also hard to argue that government didn’t play a role as technology from both the Defense Department and NASA is at the core of all digital businesses. (The GPS system on which we all rely is still operated by the US Air Force.)
So, the question isn’t whether government research can benefit the economy or not. It is rather where should we draw the line? Mazzucato, Warren and Rubio would have the federal government not only directing research dollars according to social goals they deem beneficial but also extending government investments into the (no longer) private sector. The paradigm they propose is not without precedent. Countries as diverse as Japan, China and the former Soviet Union have created industrial policies to guide the economy.
There is no question that government can play an active role in wealth creation. However, Dr. Mazzucato (as well as Senators Warren and Rubio) draw the line in the wrong place. It’s certainly true that the iPhone wouldn’t exist without silicon chips, the Internet and GPS. It’s also certainly true the federal government would never have invented the iPhone. So, I would stop at having government invest in companies that will bring innovative technologies to market. There’s plenty of private capital to make that happen.
Indeed, the digital technologies brought to fruition by government agencies had no commercial purpose when they were invented. They enabled those agencies to pursue their objectives. Silicon chips supported the space program. GPS supports the US military.
By contrast, the Obama administration invested in green technology to enable private enterprise to achieve a beneficial outcome. The creation of the Advanced Research Projects Administration – Energy (ARPA-e) under the Department of Energy was meant to mirror DARPA, the Defense Department agency at the heart of the development of digital technology. It has granted over $1.5 billion to 580 projects. Many of these projects were highly speculative and haven’t borne fruit. However, a select few have attracted $1.8 billion in private sector investments. In other words, the government invested in research where the private sector wouldn’t and, much like digital technologies, the private sector has taken the results and developed products that are market ready. The greatest successes have come from the improvement in cost and efficiency of both solar panels for power generation and battery technology for electric vehicles. So, it can be shown that the DARPA/ARPA-e model can be translated into commercial success.
As for its social purpose, the results are a mixed bag according to Investors’ Business Daily. The adoption of alternative energy throughout the US has resulted in a doubling of the percentage of total energy generated from alternative sources since the turn of the century. However, in that time, U.S. consumption of energy from fossil fuels has remained about the same according to the Congressional Research Service. Similarly, while there has been a boom in sales of electric and hybrid vehicles, the environmental benefits have been offset by the increased sales of SUV’s, this despite powerful financial incentives to buy electrics. So, in the case of environmental technology, it might be said that government research has contributed to a green future but those who might benefit – the voters – have undermined our success. The game’s not over, of course. More than 40 years elapsed between the invention of the silicon chip and the creation of the iPhone. Few would have predicted it. So, we shall see what the future holds when the future happens.
End of Part 1 of 2 parts
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