Economist, venture capitalist, and co-founder of the Institute for New Economic Thinking Dr. William Janeway stopped by ITIF this week for a discussion about his new book, Doing Capitalism in an Innovation Economy. Dr. Janeway presented a compelling view of the economy and touched on a number of important issues along the way.
Janeway explained that the government plays a critical role in innovation by providing research funding through institutions such as DARPA and the NIH, by leveraging the buying power of the federal coffers, and by creating policies that encourage business investment in R&D. Economists have long understood that private markets fail to allocate adequate resources to innovation and research: the benefits are too hard for individual corporations to capture. For this reason, policies like the R&D tax credit and public investment in basic research have long been uncontroversial.
Contrary to what recent high-profile failures like Solyndra might lead people to believe, government policies to spur innovation in the United States have had great success. This is apparent in the vast amount of money the private sector has poured into IT and Biotech businesses based on initial government investments, and the importance of government funding for nearly all the current growth industries and new technologies. We are still reaping the rewards. Hot startups like SnapChat are derived from technologies and software ecosystems enabled—initially—by government investment.
However, the public consensus that existed in support of our innovation architecture has eroded. Policymakers and lawmakers have forgotten the theoretical rationale for public support of new technologies, and the knee-jerk anti-government position of a minority of voters has made reasonable positions increasingly dangerous for elected officials. We can’t rely on market “efficiency” to create innovation because innovation requires “wasteful” trial and error. Worse, as Janeway puts it, recent calls for austerity have joined the misplaced emphasis on static efficiency as “the enemy of innovation”.
This lack of government involvement may not be a problem immediately, as we can expect the IT revolution to continue improving productivity and national wealth for years to come—by Janeway’s estimation we are less than halfway through its effects. But eventually we will come to wish we had enlisted more public support of innovation. This is because government is a key player at the distant start of the innovation pipeline. Without public funding the next Google and Apple will lack the new technological platforms upon which it can build its future products.
If the U.S. wants to remain a competitive force in the world economy it needs to make innovation its national mission for the 21st century, as national development was in the 19th century and national security was in the 20th. Without the recognition that government is a key player in our national innovation system, and without the political will for government to actively support research and development, the future will be an uphill battle. If we can come together and give public action its due, though, the sky is the limit. (Only figuratively, though—public support for innovation has quite literally passed through the sky years ago.)