Later On

A blog written for those whose interests more or less match mine.

The government’s crucial role in innovation

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While many on the right condemn the government to the extent of denying that it exists, our government is very much a part of our lives and plays a strong role in innovating new technology. Jeff Madrick in the NY Review of Books reviews two books on the topic:

The Entrepreneurial State: Debunking Public vs. Private Sector Myths
by Mariana Mazzucato
Anthem, 237 pp., $19.95 (paper)

Doing Capitalism in the Innovation Economy: Markets, Speculation and the State
by William H. Janeway
Cambridge University Press, 329 pp., $35.99

“The great advances of civilization,” wrote Milton Friedman in Capitalism and Freedom, his influential best seller published in 1962, “whether in architecture or painting, in science or literature, in industry or agriculture, have never come from centralized government.” He did not say what he made of the state-sponsored art of Athens’s Periclean Age or the Medici family, who, as Europe’s dominant bankers but then as Florentine rulers, commissioned and financed so much Renaissance art. Or the Spanish court that gave us Velázquez. Or the many public universities that produced great scientists in our times. Or, even just before Friedman was writing, what could he have made of the Manhattan Project of the US government, which produced the atomic bomb? Or the National Institutes of Health, whose government-supported grants led to many of the most important pharmaceutical breakthroughs?

We could perhaps forgive Friedman’s ill-informed remarks as a burst of ideological enthusiasm if so many economists and business executives didn’t accept this myth as largely true. We hear time and again from those who should know better that government is a hindrance to the innovation that produces economic growth. Above all, the government should not try to pick “winners” by investing in what may be the next great companies. Many orthodox economists insist that the government should just get out of the way.

Lawrence Summers said something of the sort in a 2001 interview, shortly after the end of his tenure as Bill Clinton’s treasury secretary:

There is something about this epoch in history that really puts a premium on incentives, on decentralization, on allowing small economic energy to bubble up rather than a more top-down, more directed approach.

More recently, the respected Northwestern economist Robert Gordon reiterated the conventional view in a talk at the New School, saying that he was “extremely skeptical of government” as a source of innovation. “This is the role of individual entrepreneurs. Government had nothing to do with Bill Gates, Steve Jobs, Zuckerberg.”

Fortunately, a new book, The Entrepreneurial State, by the Sussex University economist Mariana Mazzucato, forcefully documents just how wrong these assertions are. It is one of the most incisive economic books in years. Mazzucato’s research goes well beyond the oft-told story about how the Internet was originally developed at the US Department of Defense. For example, she shows in detail that, while Steve Jobs brilliantly imagined and designed attractive new commercial products, almost all the scientific research on which the iPod, iPhone, and iPad were based was done by government-backed scientists and engineers in Europe and America. The touch-screen technology, specifically, now so common to Apple products, was based on research done at government-funded labs in Europe and the US in the 1960s and 1970s.

Similarly, Gordon called the National Institutes of Health a useful government “backstop” to the apparently far more important work done by pharmaceutical companies. But Mazzucato cites research to show that the NIH was responsible for some 75 percent of the major original breakthroughs known as new molecular entities between 1993 and 2004.

Further, Marcia Angell, former editor of The New England Journal of Medicine, found that new molecular entities that were given priority as possibly leading to significant advances in medical treatment were often if not mostly created by government. As Angell notes in her book  (2004), only three of the seven high-priority drugs in 2002 came from pharmaceutical companies: the drug Zelnorm was developed by Novartis to treat irritable bowel syndrome, Gilead Sciences created Hepsera to treat hepatitis B, and Eloxatin was created by Sanofi-Synthélabo to treat colon cancer. No one can doubt the benefits of these drugs, or the expense incurred to develop them, but this is a far cry from the common claim, such as Gordon’s, that it is the private sector that does almost all the important innovation.

The rise of Silicon Valley, the high-technology center of the US based in and around Palo Alto, California, is supposedly the quintessential example of how entrepreneurial ideas succeeded without government direction. As Summers put it, new economic ideas were “born of the lessons of the experience of the success of decentralization in a place like Silicon Valley.” In fact, military contracts for research gave initial rise to the Silicon Valley firms, and national defense policy strongly influenced their development. Two researchers cited by Mazzucato found that in 2006, the last year sampled, only twenty-seven of the hundred top inventions annually listed by R&D Magazine in the 2000s were created by a single firm as opposed to government alone or a collaboration with government-funded entities. Among those recently developed by government labs were a computer program to speed up data-mining significantly and Babel, a program that translates one computer-programming language into another.

For all the acclaim now given to venture capital, Mazzucato says, private firms often invest after innovations have already come a long way under government’s much more daring basic research and patient investment of capital. The obvious case is the development of the technology for the Internet, but the process is much the same in the pharmaceutical industry. . .

Continue reading.

Written by Leisureguy

29 April 2014 at 8:04 am

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