Business Development the Government Is Good At

At Financial Times Martin Wolf reviews a book on the “entrepeneurial state”:

Mazzucato notes that “75 per cent of the new molecular entities [approved by the Food and Drug Administration between 1993 and 2004] trace their research … to publicly funded National Institutes of Health (NIH) labs in the US”. The UK’s Medical Research Council discovered monoclonal antibodies, which are the foundation of biotechnology. Such discoveries are then handed cheaply to private companies that reap huge profits.

A perhaps even more potent example is the information and communications revolution. The US National Science Foundation funded the algorithm that drove Google’s search engine. Early funding for Apple came from the US government’s Small Business Investment Company. Moreover, “All the technologies which make the iPhone ‘smart’ are also state-funded … the internet, wireless networks, the global positioning system, microelectronics, touchscreen displays and the latest voice-activated SIRI personal assistant.” Apple put this together, brilliantly. But it was gathering the fruit of seven decades of state-supported innovation.

Why is the state’s role so important? The answer lies in the huge uncertainties, time spans and costs associated with fundamental, science-based innovation. Private companies cannot and will not bear these costs, partly because they cannot be sure to reap the fruits and partly because these fruits lie so far in the future.

I think there are some things that the state is good at, some not so good, and some very bad.

I think the state is good at mass engineering projects. Boulder Dam. The power facilities of the Tennessee Valley Authority. The space program. Much as I despise it, the interstate highway system. These have all paid for themselves many times over and in ways that were impossible to foresee.

Although I supported it for many years, I think the evidence now suggests that the investment the federal government has done for so long in pre-school education for normally developing kids has been wasted. To my eye it appears the jury is still out on medical research. We’ve spent an enormous amount and I’m not sure if we had known the actual results in advance we would have made the investment. I think the space program probably did more for medicine and biotechnology than all of the federal government’s investment in medical research.

I think the areas in which government is especially useful are large scale, long term projects with clear deliverables.

There’s something in which I think I may disagree with a lot of those who support federal infrastructure spending. Just because a bridge is good doesn’t mean that two bridges are necessarily better. Sometimes that’s just money wasted.

I guess I should look at the bright side. At least we’re not building empty cities. On a more sobering note, we already have plenty of them.

28 comments… add one
  • PD Shaw

    I perhaps see two categories of worthy state-funded technologies. (1) Projects, particularly military and space, that were developed for a specific narrow purpose, such as the internet or putting a man on the moon, but were later found to have found capable of very expansive consumer-related uses. Its not clear to me that the state could have created the world wide web as we know it today if that had been the initial goal. We may not be able to successfully direct spending in this area, must recognize its greater potentials. (2) Public goods. Things like highways, the internet, and GPS could be operated in a way that excluded users, but we’ve chosen not to. We should avoid state investments in what would become private goods, private benefits at public cost.

  • Its not clear to me that the state could have created the world wide web as we know it today if that had been the initial goal.

    There are several different things involved here. “The Internet” was originally a DARPA project whose objective was to design a computer network that could survive a nuclear attack. The “world wide web” was designed at the Center for European Nuclear Research (CERN) to run on the Internet and was designed to do very much the same sort of open-ended stuff it’s being used for today.

    They’re both in essence sets of standards rather than being projects with tangible deliverables like landing on the moon. I think that setting standards is something that government is good at (although it can be done privately, too, as the American National Standards Institute, a private not-for-profit).

    I think the factors behind the success of the WWW were a) the Internet standards were a well-designed, open, proven technology and b) they were both free.

    The actual hardware backbone of the Internet in the United States is entirely private.

  • We should avoid state investments in what would become private goods, private benefits at public cost.

    I’m in general agreement with that. There’s an article over at RealClearPolitics on that very subject I’m drafting a post on right now.

  • sam

    “We should avoid state investments in what would become private goods, private benefits at public cost.”

    How do we know in advance that Project X will result in what will become, as you say, a “private good”?

  • PD Shaw

    I guess what I was trying to get at with this rough division btw/ the internet (military-design) and WWW (consumer applications) is that I wonder if the military had not designed the initial network with its own objectives in mind and we had started with the premise that the network would be used for consumer applications, it would seem likely that the design would not be so open and simple.

  • How do we know in advance that Project X will result in what will become, as you say, a “private good”?

    It’s definitional, sam. A public good is a good that is non-excludable and non-rivalrous. Defense is the classic example of a public good. I think that public health systems are another example.

  • sam

    I understand that distinction. My question is, really, how can we know in advance what the spinoffs of a project will be?

  • Red Barchetta

    “How do we know in advance that Project X will result in what will become, as you say, a “private good”?”

    Three points.

    First, implicit in sam’s comment is the successful project. You don’t have to “know” in advance. You just have to have a funding, governance and spoils sharing arrangement worked out in advance. It is done every single day in the investment world. (Note: most of what had been cited is “funding” not doing) Nothing ground breaking here. The very reason it might not work is the same one that makes me – and should make all of us – wary of an expansive posture on potential projects is that it is in the realm of the political.

    Which brings me to point two. The obvious politically motivated projects need be culled. Solyndra is a prime example. Solar and wind mills. Electric cars. High speed rail. How about ag subsidies or ethanol? It doesn’t take a rocket scientist to figure out these should not be in the project candidate mix. They are clearly not big enough or even close to making it through an even cursory investment committee review. Yet zealots, rent seekers, career pols and a docile and lazy electorate are the biggest impediments to a good result.

    Three. There will be some tweeners. The world isn’t perfect.

    The longer I live the more I believe that the only real answer to problem #2, previous, that the human condition makes government the worst solution for about 85+% of everything is term limits.

  • PD Shaw

    @sam, I don’t think we can always know what technological advances might develop, which was kind of my first point. But I do think we can have reasonable suspicions, particularly on excludability. Movement of people and transmission of information are difficult to exclude without expenditures that may be disproportionate to any potential private benefit. You can make a toll road, but you have to design barriers, guard the entrance and exits and extract a fee. Same with GPS.

    If the project is in a technological area, it will likely produce patent rights, which the law can exclude others from using. Giving money to a solar panel company which is developing new techniques might be an example of public money for private profit. I think the Hoover dam project developed a lot of new knowledge about practices for mass concrete construction, but these tend not to be subject to patent.

  • Lee

    Used to work for a research institution that NEEDED NIH funding. My livelihood depended on it. And there was a fair amount of it that was worthwhile. However, there is a LOT of waste. PI’s spend a hell of a lot of money on getting the latest Apple has to offer, because last year’s Mac is soooooo yesterday. (And it is NOT about the computing requirements of their research! It is about having the latest and greatest toy!) The money wasted during the funding of WORTHWHILE research, like curing some cancer, or working on spinal injuries) was bad enough, but there is even MORE wasted on spurious research.

    When the sequester was just a threat, I read op-ed peices about how desperately important it was that no NIH funding be cut because of how it would cripple research. But the amount to be cut under the sequester was not that huge, but of course, the NIH was threatening to take it all out of the grant money.

  • michael reynolds

    Yeah, electric cars are stupid.

    In other news, Tesla gets the highest rating ever handed out by Consumer Reports and BMW comes out with a brand-new all-electric 3 series. Wonder if either company benefited from government research either here in the US or in Germany.

    Solyndra cost us half a billion. Of course we should hold government investments to a standard demanding 100% success — because that’s certainly the standard set by private investors. Enough with solar, bring on nuclear – which benefited not at all from government research and investment.

  • Red Barchetta

    Uh, uninformed, not lazy.

  • Red Barchetta

    Michael

    Are you aware that both a US and a European study have concluded that the comprehensive carbon footprint, birth to death and all components, is larger than a gasoline car? Do you care?

    Do you notice the irony in what you say about Tesla or BMW? Private ventures? What about Tesla safety, or does “just one life saved” apply only to gun laws. And what do you see as the market potential? A grain of sand on the beach?

    And you completely miss (ignore, probably) that Solyndra had nothing to do with investment, and everything to do with the nexus of political payoffs, crazed ideology and feeling good.

    Your brain is just full of mush when it comes to these issues, Michael. Just emotional nonsense.

  • sam

    ” They are clearly not big enough or even close to making it through an even cursory investment committee review.”

    Well, see, that’s just the point about basic research and government financing, isn’t it? (And I’m not offering a brief for Solyndra, et al.) Recall Wolf:

    Why is the state’s role so important? The answer lies in the huge uncertainties, time spans and costs associated with fundamental, science-based innovation. Private companies cannot and will not bear these costs, partly because they cannot be sure to reap the fruits and partly because these fruits lie so far in the future.

    But if we cabin government support on the basis of, “Well, some of the — at this time unknown — results of the research might result in some benefit to some private company”, shouldn’t we just give up government-funded basic research in toto? Does anybody really want to do that?

  • PD Shaw

    @sam, as I recall re Solyndra, the government number crunchers that were bypassed had stated that the deal was all risk on the part of the government and all upside for Solyndra. I know you don’t want to necessarily make this about them, but its a good marker for what I think we should avoid.

    Solyndra claimed that it had a patented technology that would greatly improve solar panals, which they needed financial help move from the demonstration phase to mass production. If it had succeeded, their patent would have been extremely valuable, and they could have either charged rents or run their competition out of business. When silicon prices plummeted, it was Solyndra that was thrown out of business.

    There wasn’t a lot of uncertainty about the specific technology, as opposed to:

    whether it could be developed as a marketable product;
    the progress of competitive alternatives;
    the rate of technological obsolescence in solar panels;
    the nature of any government intervention in favor or against Solyndra’s product;
    important commodity prices; and
    Chinese ability to steal the end product.

    I don’t think any of these uncertainties justify government subsidies in this instance. At the very minimum, the government is intervening late, quite close to the marketing stage, as opposed to assisting with more questions of pure science. Better cases probably can be made in medical research of rare disease, particularly if the cost of the disease is often paid by the government health-care system.

  • sam

    “If it had succeeded, their patent would have been extremely valuable, and they could have either charged rents or run their competition out of business. When silicon prices plummeted, it was Solyndra that was thrown out of business.”

    My understanding is that Solyndra had also garnered about $1 billion in private capital (a large chunk, Walmart money), so it wasn’t solely the government that took a bath. Moreover, and maybe more importantly — in the long run — Solyndra’s technology wasn’t faulty. In fact, I wouldn’t a bit surprised if at some point down the road, that technology is widely adopted. For a good rundown strength of the technology and of the debacle, see Solyndra’s collapse is a tale of too much dazzle

    I do take your point, though. And I certainly wouldn’t argue that uncertainties justify investment (that would be silly) — just the reverse: uncertainties ought not to rule out government investment in basic research. And that’s really the only point I’m trying to make. There those abroad today who would sharply reduce, if not eliminate, government investment is basic research. That would be suicidal, I think.

  • ...

    The longer I live the more I believe that the only real answer to problem #2, previous, that the human condition makes government the worst solution for about 85+% of everything is term limits.

    California uses term limits for its state government. How is that working out as a test case for curing the problems of entrenched government + rent-seekers?

  • Red Barchetta

    Because I do what I do, and know investment and actually making and selling products like the back of my hand, I find much of this debate low level.

    Has anyone watched how the Reynold’s and lefties of the world shuck and jive? When it suits their purposes they will accuse the right or business world as being craven and drooling pursuers of financial gain at every turn. Hell, they might even characterize business as slave owners in pursuit of filthy lucre. (snicker)

    But then their mush brained “logic” can turn on a dime when it suits their purpose: “well, you know, business people wouldn’t know a profit opportunity if it stared them in the face, so we need the investment gurus in government (snicker) to fund these wonderful and certainly profitable and worthy “investment” opportunities.”

    Right.

  • steve

    1) I dont think that private enterprise really has the incentive to do much basic research. For the reasons Wolf outlined, it is a lot of risk with no guarantee of a payoff. Plus, your competitors can use your research. I think it is more than a coincidence that we have seen innovation accelerate throughout the last 80 years, when we have also had increasing govt money going into basic research.

    2) There will always be some waste with this. I dont think you can avoid that, unless you just want to stagnate.

    3) The problem with health care is not the research, but the fact that we pay for every new technology that is developed. We actually require Medicare to pay for any therapy which works and is safe. It doesnt need to work better than existing therapies. It can cost three times as much, and Medicare is still required to pay. Private insurers, even though not required by law to pay, do it anyway. So, there is nothing really wrong with the research that shows proton beams can treat prostate cancer. What i s wrong is the effort to turn that into a treatment that works no better than standard radiation and costs three times as much.

    4) Keep govt out of private business as much as possible. Regulate as needed. Small business doesnt need much. It is probably impossible to over regulate banks.

    Steve

  • michael reynolds

    There’s wise old hand . . . and then there’s cranky out-of-touch old man yelling at the kids on the lawn, Drew. The footprint is larger now, today. You do realize there’a future, right? And that the tech will evolve?

    Had we had smart guys like you in the early 20th century they’d no doubt have explained how utterly impractical the internal combustion engine was. Too little horsepower to haul goods. Required expensively-paved roads. Couldn’t make it up hills. Needed some kind of crazy, elaborate system to deliver a highly explosive liquid fuel which would be so many time bombs waiting to incinerate neighborhoods. The government would obviously get stuck with the bill for roads and bridges, oh the poor, deluded souls. My God, there’ll be belching, underpowered, poorly-controlled, rich men’s toys rattling about on a taxpayer-funded system of roads requiring government feeding stations to keep motorists from starving in the vast open spaces.

    So many obstacles. You’d have doubled down on buggy whips.

    “I think there is a world market for maybe five computers.” — Thomas Watson, chairman of IBM, 1943. Smart guy, Watson. Completely full of shit, but I’m sure he’d have enjoyed playing golf with you.

  • michael reynolds

    steve:

    Keep govt out of private business as much as possible.

    Why? Aren’t basically all our major competitors in bed to one degree or another with their respective governments? Aren’t we, and haven’t we always been?

    It’s not just the above examples, it’s the entire history of his country. A slave system enforced by government. Westward expansion enabled by cavalry and land grants. An aircraft industry that’s so intertwined with government you can’t find the gap. An automotive industry that prospered in large part because government built roads. Sea trade dependent on the US Navy. Foreign trade dependent on diplomacy and military muscle. A fast food industry that wouldn’t exist without the interstate system. Government-run airports and shipping ports. Government-insured mortgages. Government-insured bank deposits. Plus the above examples of computers, GPS, pharmaceuticals, space, etc…

    I mean, in reality, isn’t the notion of the rugged, square-jawed, loner businessman who doesn’t need anything from government about 90% bullshit? Should we be basing our decisions on mythology? I asked Dave this the other day: isn’t it true that “rent-seeking” has always existed, will always exist, is in fact necessary, and so whining about it is like bitching about gravity?

    Shouldn’t we accept the obvious fact that government exists, that it is a vital partner to business, and then rather than pining for some silly Randian utopia, shouldn’t we get on with making the system work better?

  • michael reynolds

    sam:

    My understanding is that Solyndra had also garnered about $1 billion in private capital (a large chunk, Walmart money), so it wasn’t solely the government that took a bath.

    Well, that can’t possibly be true. That would suggest private investors were flawed and not the Randian gods Drew believes himself to be.

  • Andy

    I think there’s a pretty big difference between, for example, Cray and Solyndra. There’s nothing wrong with government contracting with private companies to buy things and capabilities, but government should not act like private investors, which is what happened with Solyndra.

    As for the bigger picture, I agree with most of Dave’s points. There’s still a lot of stuff derived from government-sponsored programs and research. The NSA and the DOE are still on the leading edge of super-computing for example. Military research into multi-spectral imagery is starting to make it’s way into some commercial applications. I know a couple of Air Force engineers who are working on systems to allow independent and coordinated formation flying of unmanned aircraft. Most satellite technology is still military or intelligence funded.

    In my mind, that is all stuff that is appropriate for government to be funding even as I agree with Lee that there is way too much waste and graft. There’s also the problem that R&D and acquisitions are tied too closely which results in “gold plated” systems like the F-22 and F-35.

  • jan

    Solyndra is a perfect example of government incompetence in business matters. After all where does government get it money? From revenues, of course. It’s no skin off anyone’s nose, just the backdrop of taxpayers, who have no control (or knowledge) over where their money is spent on so-called “investments.”

    In the case of Solyndra, it was simply giddy after getting a government-backed loan of $535 million and went on a spending spree.

    “After we got the loan guarantee, they were just spending money left and right,” said former Solyndra engineer Lindsey Eastburn. “Because we were doing well, nobody cared. Because of that infusion of money, it made people sloppy.”

    Then there was the aftermath, called ‘lessons learned,” from the government teaming up with private investment, as laid out in this WSJ article called: One year after Solyndra collapse where are they now.

    The investor took away a big lesson from the Solyndra story.

    “We are never going to partner with the government again,” he said. “That’s what all the investors in Solyndra missed. If things are great, [that’s] good, but if things are challenging, then get ready for all hell to break loose. You don’t know who’s making the decision and what they’re motivated by. Is it political, is it someone’s career they’re trying to advance?”

    Government belongs on the back-burner of making national decisions of safety, infrastructure, keeping the nation, as a whole, on tract, etc.. It doesn’t belong, though, in State health care, taking over car companies, promoting personal green projects while hiking up regulations on coal and fossil fuel industries. It should be a limited intrusion on innovative and creative endeavors of private enterprise, instead of taking over the whole tamale of getting into everyone’s business.

  • On a side note I continue to be amazed at how few people recognize metonymy when they see it.

  • TastyBits

    In space, fossils fuels are of little use. If space travel had continued to be funded at Apollo levels, we would have the energy alternatives that are desired. Driving on Mars requires efficient, reliable, small batteries and solar panels.

    The other items on @Dave Schuler’s list are similar. Specific goals have specific problems that need to be overcome. For NASA, the research is specific to space travel. The additional applications would be market driven. The patents would be public domain, and anybody could use them.

  • That’s a valuable distinction, TB. The strategy for government investment I would like to see is investment as a component in a larger vision targeted at specific, large objectives rather than direct investments in companies that are, presumably, producing products that are furthering a larger vision.

    The analogy would be the difference between the interstate highway system and investing in Bechtel.

  • TastyBits

    @Dave Schuler

    My father worked in the space program, but it was Chrysler not NASA directly. A lot of what they did eventually migrated to the private sector. One area was Quality Assurance programs. They needed to be sure that what went into the rockets worked and that there was an audit trail.

    He was indirectly involved with QA through his usual work. He later worked for a company developing a QA program for the Alaska pipeline. (There was a serious problem with the welds.) There were using computers and Computer Assisted Drafting (CAD) long before private industry, and they had to develop many of the processes associated with this new technology.

    Private Investment should be left to @Drew. He can decide which of the new technologies to use, and the public can decide if he was right. It seems to me that it is: win-win-win.

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