Does the Government Stifle Innovation? I Don’t See It (To the Contrary…)

August 18th, 2013 at 1:30 pm

I usually find economist Robert Shiller’s commentaries resonant and insightful, but this one seemed more confusing than enlightening.  The thrust of the piece is the concern that government activities to promote innovation can just as easily stifle it.

The piece introduces the notion of corporatism, from a new book by Ed Phelps.  What means “corporatism”? It’s:

…a political philosophy in which economic activity is controlled by large interest groups or the government. Once corporatism takes hold in a society…people don’t adequately appreciate the contributions and the travails of individuals who create and innovate. An economy with a corporatist culture can copy and even outgrow others for a while…but, in the end, it will always be left behind. Only an entrepreneurial culture can lead.

While Shiller’s less worried than Phelps that this is a national problem, he’s concerned about some of what the President is trying to accomplish in this space:

…President Obama has been talking a lot about innovation as a job creator this year, and while some of his intentions may be good, I’m afraid that some of his proposals look a little corporatist, and might suppress individual initiative.

I don’t get it.  While “entrepreneurial culture” will always be essential, many innovations that turned out to be economically important in the US have government fingerprints all over them.  From machine tools, to railroads, transistors, radar, lasers, computing, the internet, GPS, fracking, biotech, nanotech—from the days of the Revolutionary War to today—the federal government has supported innovation often well before private capital would risk the investment (read about it here).

Shiller’s critical, for example, of the manufacturing innovation institutes that the White House has been both touting and setting up.  He’s certainly right to ask what it is these new creations do and why we need them—I’ve been bugging adventuresome journalists to get out to one and tell us the story.  But most manufacturers I’ve spoken to about them tell me they fill an important niche, essentially building a path through the Death Valley between the university lab and the factory floor.  If so, that’s a classic coordination failure in which markets have been known to underinvest.

Second, how do these institutes stifle innovation?  By way of explanation, Shiller tells his own tale of developing and selling the innovative home price index that bears his name (and that of his collaborator, Case).  But if the feds were off in another corner trying to promote some other slice of innovative work that they viewed as under-supported by the market, as they certainly were when he and Case were developing their index, he fails to explain how that hurt them or anyone else.  Would the fed’s efforts have distracted venture capitalists?  I’ve not seen evidence of that; by definition, the private folks are looking elsewhere, which is usually why the feds go in.

To be clear, my argument is not at all that government efforts in this area are all successful or are somehow always free of the corruption that is too common when politics enters the fray.  My points are that a) many important innovations have involved government support somewhere along the way, and b) while one could and should worry about waste in this area, I’ve not seen evidence, nor does Shiller provide any, of stifling.

Here’s a figure I often come back to in this debate.  I admit that it is no more dispositive than Shiller’s case, but at least it’s some circumstantial evidence.  It shows jobs created by very young establishments in the 1990s and 2000s.  The dismal trend in the 2000s is one reason why job growth in that expansion was so lame—solid research has shown that surviving, young firms are critical in terms of job growth.  It’s also reasonable to consider this trend a rough index of entrepreneurial innovation, or more precisely, its impact on job growth.


Source: BLS

I don’t recall much that was going on in terms of government innovative efforts in those years and I suspect a careful look across history would not find evidence of the government stifling innovation, especially on net (i.e., also accounting for ways in which government research and support has “crowded in” private innovation).  More likely, what was happening in the 2000s was the bubbly financial sector was sucking profits, ideas, talented human capital, and yes, innovation down what was ultimately an economic black hole.

So I’d suggest we be more careful in where we point the corporatist finger.

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9 comments in reply to "Does the Government Stifle Innovation? I Don’t See It (To the Contrary…)"

  1. Steve Bannister says:

    I agree with everything you have said; however, it seems increasingly likely that the current patent system does stifle innovation, as it did in pre-industrial England, and this is a function of government writ large.

    • Jared Bernstein says:

      That may be so and it’s an important point–obviously, there are arguments on both sides. But I was talking specifically about gov’t as investor, as was Shilling.

  2. Yastreblyansky says:

    Shiller’s own innovative project doesn’t look like anything government could usefully pay for–just a device for getting more funds into the casino. Whereas in pharmaceuticals…

  3. Paul says:

    I cannot judge across the entire range of government activities — and to be sure in many areas the government does help innovation — but in the area that I am familiar with, scientific software, I think there is cause for concern. The Materials Genome Initiative (MGI) is an example. The goal is to reduce the time and cost to insert new materials into products by 50% by advancing computational and experimental tools.

    The issue, I think, comes on the software side, where there is a strong emphasis on “open” software, most of which is being developed in universities and national labs, and much of which already competes with commercial software that is available. Naturally “free” software is very nice, but obviously it puts strong pressures on commercial companies in this area. In addition, there seems to be very little if any thought about the long-term sustainability of open software. Not all open source licenses cause problems, but the main one, the GPL, makes it essentially impossible for a commercial company to support a code.

    This is a very different model than that when e.g. the finite element analysis (FEA) codes migrated from academia to commercial use, forming companies such as MacNeil-Schwendler, Abaqus and Ansys. The FEA codes were in the public domain or under licenses that allowed companies to make their own versions.

    In the so-called integrated computational materials engineering (ICME) area promoted by the MGI, the government is pouring money into open software, developed in universities and national labs that directly competes with commercial offerings. And it is not at all clear that the innovation can be transferred to commercial companies due to the open licensing. Researchers in the area understandably prefer free software, so are pressuring for development of free alternatives to commercial software. In national labs, a major justification for software development is the size if the user base, so they are motivated to get their codes out to the largest audience. Free does this. This does not bode well for the field in the long run.

    I would think this trend is common across many areas of software, so government attempts to stimulate innovation in an increasingly large sector of our economy may backfire, at least for small businesses. The national labs may take over much of corporate research in e.g. scientific areas.

  4. Dave says:

    I’m going to challenge you one one point which you don’t mention, which is the degree to which laws by the government favor those with venture capital over those that don’t have venture capital.

    Ok, anything that makes it harder for a single person to start a company plays into the hands of venture capitalists. More complicated laws, anything requiring outside agency such as legal representation, or financial representation leads into this.

    Not a second premise: today most venture capital firms are owned entirely by larger, competing firms that also own the patent lawyers. They have a huge incentive to stifle true innovation and that is why they take the position they do. They listen to ideas, run them by the lawyers they own, and decide which people are allowed to succeed.

    Anything the government does that encourages the need for multiple agencies, such as a complication of the law, such as a patent system that demands that inventors comply with 2 400+ page documents just to retain their rights, absolutely stamps out competition to the owners of venture capital and the patent trolls.

    Game over.

  5. Dave says:

    Jared, here’s the experiment to end all experiments:

    Take a group of people and ask them to watch a person’s job being taken over by a robot.

    That same group is asked to watch a person’s job being taken over by a lower-wage worker.

    Now, ask those watchers how much lower they rate the monetary value of the worker within our system.

    In the case of the robot taking a person’s job, do the observers believe that the person’s value to society has been reduced.

    In the case of the person willing to work for lower wages, do the observers believe that the person’s value to society has been reduced.

    The result, I’m quite certain will show, that in the case of the robot, little change in the observed result occurs. However, in the case of the personal substitution, that is a worker replacing another worker, that the observer will perceive a lower value to society of the replaced worker.

    This runs counter to all prevailing economic ideas, but is in line with your feelings of unfairness of outsourcing. My claim is that outsourcing, through this phenomenon, accounts for most of the political decline in this country as of late.

  6. save_the_rustbelt says:

    Innovation becomes implementation when private individuals are willing to take immense risks and make a fanatic commitment to getting a company started.

    At that point it takes a large effort by lawyers and accountants and Lord knows who to nag the new entrepreneur about all of the tax and regulatory requirements of starting even a small business.

    Governments value compliance a whole lot more than accomplishment, despite claims to the contrary. It is the nature of bureaucracy.

    Mountains of regulations tend to protect large businesses (plenty of lawyers) from competition from smaller businesses.

    I wouldn’t start a labor intensive small business in this environment, too many headaches.

  7. Andrew West says:

    think it’s beneficial to have this conversation, but I think we need to be fair about some of the words that are being used and misused. If we limit our historical analysis to the last 3 decades a few things have happened:

    1. the word “entrepreneur” has been diluted to almost meaningless status. 30 years ago an entrepreneur (French for “undertaker”) saw an opportunity because of an existing demand that wasn’t being met. That entrepreneur would then “invent” a solution. It wasn’t innovation, it was invention. Today, any startup is considered entrepreneurial when they are simply innovating (incremental) and generally speaking they don’t create any NEW jobs, they simply replace jobs lost by the losing competitor. It gets worse – buy a franchise and you’re an entrepreneur. Many of the activities we refer to as entrepreneurial are simply small business and they too, will displace jobs, not create any. Competition determines that.

    2. Job creation is not something the government of business does, only DEMAND can create a job – A) aggregate demand, B) unmet demand or C) lost demand. Aggregate demand takes care of itself. Unmet demand should be our collective target and lost demand may be lost forever (electronics).

    3. Innovation is primarily handled by committees or groups. It is generally risk averse and simply seeks a small advantage of another product or service. Certainly corporations lead in this regard. In 30 years we’ve settled for innovation and forgot about invention. Invention allowed America to change industries and capture unmet demand. Generally speaking invention comes from inventors, a group we mock on reality shows and fail miserably at giving them assistance. Their ideas and solutions are “too big” and dismissed without any fair, objective review. Part of this stems from our becoming a society of “experts” carving out our own special area. Gone are the generalists that are unafraid to take on entire industries or propose significant (and valuable) changes.

    We have several industries in America that are remarkably inefficient – healthcare, education, agriculture, construction and even charitable giving, yet we don’t seek to change those industries, we tolerate the status quo.

    If America is to become productive and economically sustainable we MUST focus on those people believe they can satisfy unmet demand with invention, not incremental innovation.

    America is getting smaller because our ambition is smaller. Add all the attempts by government to pick winners and it just gets worse. If our government wanted to make a bigger difference, how about offering prize money to those that create economically viable solutions to our greatest problems? If they weren’t solved we wouldn’t waste our money, but entrepreneurs (as we’ve seen with X Prizes) will embrace the challenge and seek to invent valuable solutions.

  8. george kaplan says:

    I participated in both the federal nuclear program (Naval and commercial) and the solar program; the former at Westinghouse and the latter at NASA. There was no stifling at Westinghouse and most NASA funds were contracted to industry. Some research was performed at Federal supported research centers such as Sandia Laboratories and Livermore.