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Does the Government Bureaucracy Stifle Innovation?

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[Aug 19, 2013] 'Does the Government Stifle Innovation? I Don’t See It (To the Contrary…)'

August 18, 2013

Jared Bernstein responds to the Robert Shiller article I linked to yesterday:

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

... 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... But most manufacturers I’ve spoken to about them tells 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. ...

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. ...

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

NKlein1553 said...

Ryan Avent: Is Wasteful Government Spending Causing the Third Greatest Event in Human History?

"How much did the government spend on computers from 1940-1970? Probably $200 billion in todays money. If we assume the add to the U.S economy is ~ 1.5% due to computers – which seems absurdly low, we get roughly $200bn added to the economy every year due to computers. We get that back every year from 2005 (absurdly late), going forward, for the next century or so – APPL has already built up a cash balance of $130bn plus, after paying wages and buying a ton of stuff! NPV of $200bn at a 5% discount rate a 20 bagger for the U.S. economy. For the world economy, it’s probably closer to a 50 bagger. It could easily be a much higher multiple if you step into the real of the real world and use reasonable assumptions."

Matt Young said in reply to NKlein1553...
History of transister. The only role the government had was letting ATT hold a monopoly based on the Bell patents.
Then there was Noyce and the micro chip which followed. Then Intel and the micro processor. The government was buying from IBM! which missed the whole parade. Were military purchases involved? Sure, but there were a boatload of industrial controls customers as well as consumer products.

Ryan Avent is handwaving. If anything DC purchases of mainframes set the industry back durung this period. In fact it was ATT and a few geeks who created unix and c, no government to be found.

Bill Bradley said in reply to Matt Young...

Sorry, but 100% incorrect. Where it not for the government (mainly military) purchases at high prices, there would have been no incentive for mass production of transistors, integrated circuits, or microprocessors. No one invests in production without a consumer, and the Government was and is a huge consumer of high price, cutting edge technology.

Kaleberg said in reply to Bill Bradley...

Exactly! The US private sector was whining about the shortage of relay ready engineers until the Japanese started flooding the market with cheap transistor radios.

Matt Young said in reply to Bill Bradley...

No, it was the need by ATT to replace its tubes in telephone amps.
I did mention government purchases, they are part of the package, but the defense demand was about the same as the civilian demand, and the ubiquitious transister radio of the 70s is testament.
Government had no direct input to MOS technology, nor ECL technology.

As far as the Internet, I was there at tymnet, the privately developed network when it happened. What happened was ten pages describing the next step fromtraditional packet switching TCP/IP networking. That ten pages was developed independently in tymnet, and about threeother vendors. We looked at all the versions, and chose IP, not because it was government funded, ut because it was marginally better tha the host of other proposals floating around.

Darpa came into the picture long after the industry had working, profitable networks, and after the microprocessor was around.

I didn't say that DC is not a customer, I am saying they were a end product customer, until darpa arrived late in the scene.

Joe Smith said...

Darpa's VLSI project seems to have been a major spur to innovation. 

Reply Sunday, August 18, 2013 at 12:13 PM

Matt Young said in reply to Joe Smith...

The design path went from transister - transister logic to emiter TTL which was simply connecting Shockley's transister to emitter coupled logic, ECL which caused a huge increase in speed to finally metal oxide silicon which greatly reduce geometry and made vlsi possible. Up to this point, no government involved except purchases, no darpa. This pre-darpa period also saw the proliferation of two packet switching designs, x25 from yurp and tymnet, a proprietary format. Still no darpa.

The problem to be solved was recursion in design, the ability to make large designs from building blocks by specifying scaled design rules. Meaning, regardless ofadvaces in gate density, the relative channel with betwwen gates and connections remained the same. This is where darpa funding came in. The rest, SUN and the networked work station were well formulated concepts, the real effect of darpa, by now, was simply to give stanford kids free start up money.

I was there, an eye witness.

Joe Smith said in reply to Matt Young...

If DARPA made a material difference, the precise channel by which it operated may not matter. 

Matt Young said in reply to Joe Smith...

Like I say, I was there. I was at one of the major vendors, and ethernet, new networking protocols, smaller intelligent computers was all we talked about, none of it on the government dime, except we had some government accounts. But most of our customers were banks and insurance. The company was Tymnet.

dilbert dogbert said...

Shiller could have incorporated the current Patent Wars of the Corporatist Culture and had a good story to tell.

Matt Young; Some time back I was reading the bio of one of the founders of Intel. Seems the major buyer of their product was the US military. Yields were low so the price was high and the only buyers at that price were the military. A story of farm boy to high tech. Interesting.

Matt Young said in reply to dilbert dogbert...

Yes, absolutely. My uncle worked at Northrup, and I was a middle schooler. He used to send me loads of pcbs with discrete transister amps.

Absolutely, government is a buyer. 

Darryl FKA Ron said...

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.

[THis paints a false dichotomy between corporatism and entrepreneurial opportunities. Perhaps this dichotomy is true in Japan where industrial conglomerates like Hitachi and Fujitsu are so huge that they can crowd out entrepreneurial investment opportunities, but not here in the good ol' USA. We got GE and General Dynamics and Lockheed Martin and Northrop Grumman and big pharma and big FIRE sector players while we still got Microsoft and Sun and Apple startups along with Facebook and Google more recently. Maybe we really do not have corporatism, which explains our single payer healthcare system and fair trade policies. Oh, wait...]

Darryl FKA Ron said in reply to Darryl FKA Ron...

In the US the best entrepreneurial investment opportunities are largely motivated by either the entry into the corporatist elite or selling out to the corporatist elite.

Darryl FKA Ron said in reply to Darryl FKA Ron...

Yeah, the relaitionship between corporatism and entrepreneurial opportunities is a symbiosis, not a dichotomy. It is for the entrepeneurs to take the risk and prove the business model or fail while the corporations light the way to the Holy Grail. 

Jim Harrison said...

There are really two questions that need asking, not only "When does government spending encourage or discourage innovation?" but "When does corporate policy encourage or discourage innovation?" It's easy to recall cases where government action promoted new industry and business conservatism fought to preserve the status quo. It's also easy to recall cases that show the reverse. Blanket ideologically-based answers don't help very much, especially since the relevant political decisions have to be made in specific cases.

In the current pass, defending the role of government in innovation is essential because business just isn't interested in investing in very damned much right now as witness the piles of cash that supposedly innovative companies are sitting on. It's all very well to recall ancient history and remember that there was a time when outfits like the phone company supported research enthusiastically, but the era of Bell Labs is well and truly over. We should never forget that business is about making money, not improving anybody's life or spreading the wealth. If business people can secure rents without building anything, that's certainly what they'll do. In the absence of high corporate taxes, it simply makes more sense to pocket the proceeds than to reinvest them back into the business, especially since nobody thinks of corporations as long-lasting institutions anymore and managers are only rewarded for short-term gains. From the point of view of the stockholders, socially responsible or patriotic business plans are professional malpractice. If alternative sources of energy, biotech, and nanotechnology are to become the basis of prosperity in the next century, governments are going to have to act as the entrepreneurs, once again, not because there's anything obviously good about governments in this role, but because there really isn't any alternative under the conditions that currently obtain. 

Matt Young said in reply to Jim Harrison...

Check this site. It isa blog about nano-tech and batteries, right or wrong, this site describes the ongoing industry consensus about future energy sources. In the lab, today, we have technology that increases battery storage ten fold. In five years this site will be describing a lab prototype of a two stage battery that generates methanol from electricty with a 30% efficiency. Say good bye to fossil fuels.

Randy said...

Just off the top of my head I can think of several ways that politics stifles innovation;

- Patent protection
- Regulatory protection
-- Banks
-- Money
-- Housing
-- Automobiles
- Trade restrictions
- Professional education and licensing requirements

Randy said in reply to Randy...

And corporatism, of course. 

Randy said in reply to Randy...

And also... political programs like Social Security, Medicare, Education and financial aid, the ACA, etc.. When the political system throws money at the various problems these programs purport to solve, it also embraces and rigidifies a particular solution, thus locking out other possible and innovative solutions.

dilbert dogbert said in reply to Randy...

"thus locking out other possible and innovative solutions."

MMMMMM? Could those include starvation and dead bodies in the streets. All our Tiny Tims cured by our Uncle Scrooge's generosity?

Randy said in reply to dilbert dogbert...

Perhaps you have a limited imagination. Perhaps you've never had to exercise it.

Dryly 41 said...

This is a foolish debate. In an August 4,2013 entry, Brad DeLong posts Martin Wolf's review of Marriana Mazzcato's book" The Entrepreneurial State in which she spells out the role played by the Defense Advanced Research Projects Agency in the development of the internet. She also listed other programs such as the Small Business Innovation Research program, the National Institute of Health, the National Science Foundation and the National Nanotechnology Initiative.

That issue is settled. What we have is corporate leaders such as Tim Cook of Apple who think they did it themselves, or so they say, and evade corporate taxes so the next generation can't have the same foundation to build on as the WW II generation provided to them. In addition we have had corporate "Looters" such as "Neutron Jack" Welch who closed down and reduced research labs that he inherited from Reginald Jones who held the spirit of General Electric, following the path of Thomas A. Edison, "Loyalty, Moral Integrity, and, Innovation". "Neutron Jack" transformed G.E. Capital to the 7th largest bank in the U.S. which was insolvent in the crisis. He bought RCA which Robert Sarnoff built up over a lifetime, wrecked it, and gave its research lab in Princeton, N.J. away for a tax write-off. It's the corporate leaders who have failed our nation while transforming it to a financial rent-seeking rather than innovation leading to productive economic growth.

Darryl FKA Ron said in reply to Dryly 41...

It's the corporate leaders who have failed our nation while transforming it to a financial rent-seeking rather than innovation leading to productive economic growth.

[Amen, brother.]

Roger Gathman said...

From The Closed World: Computers and the Politics of Discourse in Cold War America By Paul N. Edwards"

"By 1948 the ONR [the predecessor of the National Science Foundation, a federal government agency] was 40 percent of all basic research in the United States... About half of all doctoral students in the physical sciences received ONR support. ... "

However, as Edwards points out, it was not ONR or NSF, but the Pentagon that provided the vast majority of the support for computer research. "Bell Laboratories, the largest independent electronic research laboratory in the country, saw the percentage of its peacetime budget devoted to military projects swell from zero (prewar) to upwards of 10 percent as it continued work on the Nike missile and other systems..."

Finally, Kenneth Flamm has estimated the amount of funding provided in the early fifties to computing from the military vs. corporate sources. According to his figures, in 1950, a crucial cold war year, 75 to 80 percent of funding in computer research was provided by the military.
"... between 1949 and 1959, the major corporations developing computer equipmment (IBM, General Electric, Bell Telephone, Sperry Rand, Raytheon and RCA) still received an average of 59 percent of their funding from the federal government (the majority from the military)." (60)
It isn't just that "innovation" - or more specifically, invention - was funded in a major way by the government, but government command and control methods permeated the entire research infrastructure.

If you want to, you can trace the same postwar story in the development of biotechnology, which was massively funded by the government up through the 1970s. You can't turn anywhere, in post war america, and find an Edison. The research is too complex and expensive. Frank's worry that we aren't going to preserve nineteenth century ways of inventing things if we flood the zone with government money is mythbased - but then again, mainstream economics is in the business of spinning the old entrepreneurial tale over and over, in spite of the evidence. Otherwise, the "job making" plutocrats might get all depressed that they aren't innovators, creators, poets and gods. We can't have that!

Dryly 41 said in reply to Roger Gathman...

But the "job making plutocrats" aren't making jobs. Setting the stage for the "shareholder value" approach, and led by "Neutron Jack" they began to slash research labs, offshore jobs and cut payroll for short-term supposed benefits and were praised for doing so by the commercial media industry. I don't think this aspect of the decline since 1980 has been explored enough.

kievite said...

Great discussion. I think Matt Young is slightly myopic in his assessment of the government role in the development of VLIC, despite his own involvement in the industry. My impression was always that it was ballistic rockets guidance systems needs that had driven the research so fast and so far. See also

Actually Robert Shiller always left impression to me of a highly intelligent, diplomatic person who is preferring to sit between two chairs and don't chose sides unless it is clear which side is winning. So, in a way, this is a testament of how he evaluates the current political situation...

As for the term corporatism I think the standard meaning is somewhat reflected in Mussolini quote: "Fascism should more properly be called corporatism because it is the merger of state and corporate power." So the key here is the symbiosis of large corporations and government when it is difficult to say where a large corporation ends and where the government starts ("revolving doors" policies, subsidies for key projects, etc).

The same phenomenon the term corporatism reflects was called "military-industrial complex" by President Eisenhower. As such it is the dominant social model of the second half of XX century.

From Wikipedia:
Military–industrial complex, or military–industrial–congressional complex,[1] is a concept commonly used to refer to policy and monetary relationships between legislators, national armed forces, and the military industrial base that supports them. These relationships include political contributions, political approval for military spending, lobbying to support bureaucracies, and oversight of the industry. It is a type of iron triangle. The term is most often used in reference to the system behind the military of the United States, where it gained popularity after its use in the farewell address of President Dwight D. Eisenhower on January 17, 1961,[2] though the term is applicable to any country with a similarly developed infrastructure.[3][4]

In a way "casino capitalism" we have now represents an evolution and the next stage of a classic corporatism. See
Noug Noland interesting analysis at

Ecomedian said...

Neither Shiller nor Jared Bernstein (BA Fine Arts-double bass, MA Social Work, MA Philosophy, PhD Social Welfare) even know what "corporatism" is because they've never worked in the private sector a day in their lives. Phelps wasn't strictly talking about government, he was talking about soul-deadening corporate culture as parodied in the movie "Office Space", a culture that shows up in both government and big corporations.

Lasers were a meaningless novelty until entrepreneurs figured out what to do with them. Xerox PARC famously invented the mouse, but it took Apple to lift it out of Xerox corporate obscurity. Even the Internet itself languished for 20 years until telecom deregulation overrode the academic researchers, who even in the early 1990s lamented the encroaching tide of "crass commercial interests" that threatened to pollute the academic purity of the Internet.

Yes government funds basic research, but entrepreneurs make the applications work, and the winners get bought out by corporatists, completing the cycle. Philips was talking about the importance of entrepreneurs in this cycle.

cfaman said...

"My points are that a) many important innovations have involved government support somewhere along the way..."

It's probably more "most" than "many". Really. Think about any major technology and usually the early investment hand of government is all over it. Maybe not the telephone, the generator, the sewer or the printing press, but it's discouragingly hard to find many recent technologies that are clearly totally private. 

Dryly 41 said in reply to cfaman...

I think you are totally correct about the positive impact of the U.S. government role in economic development. But what about the diminished role of non-cyber private research and development?



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