Our free enterprise system is what drives innovation. But because it’s not always profitable for companies to invest in basic research, throughout our history, our government has provided cutting-edge scientists and inventors with the support that they need. That’s what planted the seeds for the Internet. That’s what helped make possible things like computer chips and GPS. Just think of all the good jobs — from manufacturing to retail — that have come from these breakthroughs. Barack Obama
The foundational figure in the development of the iPhone wasn’t Steve Jobs. It was Uncle Sam. Every single one of these twelve key technologies was supported in significant ways by governments—often the American government. Tim Harford Fifty Inventions That Shaped the Modern Economy
In my blog post last week featuring my favourite parts of the latest Tim Harford book Fifty Inventions That Shaped the Modern Economy I included part of his essay on the iPhone. What was interesting about this piece was the importance of government spending on this iconic symbol of capitalism. The essay was based on the work of Mariana Mazzucato. This Italian economist, an eloquent exponent for an activist state industrial policy, believes that that the government should play a key role in directing investment. This is what is known in economics as picking winners. She states her case in a famous 2013 book The Entrepreneurial State. Along with other left-leaning economists, such as Joseph Stiglitz, Simon Wren-Lewis, and Thomas Piketty, she also served as an advisor to Jeremy Corbyn.
I think that there are a number of fallacies here. In Obama’s famous “You didn’t build that” speech he asserts that says Government research created the Internet so that all the companies could make money off the Internet. No, the military created the internet as a way of communicating in a nuclear war. It was the genius of the market system that found uses that its inventors would never have imagined. Technological progress in itself does not add new products to the shelves by itself. This is confusing technology with actually bringing a product that consumers will actually want to the market. Entrepreneurship involves much more that inventing technology. The feedback mechanism of the market is what directs investment. Ultimately, as economist Don Boudreaux has pointed out, market entrepreneurship is far scarcer than is infrastructure.
I am not blind to the role that the government can play in correcting market failures. It may well be true that the private sector will be reluctant to invest in the kind of basic research which will not produce immediate results. And I do think that big companies should pay more taxes. They should not be able to get away with the arbitrage; their tax avoidance schemes are an outrage. But beyond this I am sceptical about the further role of the government.
I can think of plenty of examples of governments picking winners. In my youth we had such things as British Leyland and Concorde. Indeed there was a threat to put Marks & Spencer into public ownership. Governments face perverse incentives. In Spain we have had a number of airports with no passengers. This is what happens when you are spending other people’s money. It’s easy to idolize government. You just need to focus on what it claims it will do, rather than what it actually does.
I am not a market fundamentalist. The government does have an important role in creating an environment where ideas can flourish. The kind of basic research I mentioned above is an example of a role a government can play. You could also give companies tax incentives to do their own fundamental research. I am, however, sceptical of the role that those such as Mazzucato want to give government. Her research has undoubtedly been influential. A headline in the Huffington Post last year proclaimed: The Real Creator of the Apple Watch Wasn’t Steve Jobs, It Was Uncle Sam. I would argue that that is fake news.
Here is Obama’s famous “You didn’t build that” speech:
If you were successful, somebody along the line gave you some help. There was a great teacher somewhere in your life. Somebody helped to create this unbelievable American system that we have that allowed you to thrive. Somebody invested in roads and bridges. If you’ve got a business — you didn’t build that. Somebody else made that happen. The Internet didn’t get invented on its own. Government research created the Internet so that all the companies could make money off the Internet.
The point is, is that when we succeed, we succeed because of our individual initiative, but also because we do things together. There are some things, just like fighting fires, we don’t do on our own. I mean, imagine if everybody had their own fire service. That would be a hard way to organize fighting fires.
So we say to ourselves, ever since the founding of this country, you know what, there are some things we do better together. That’s how we funded the GI Bill. That’s how we created the middle class. That’s how we built the Golden Gate Bridge or the Hoover Dam. That’s how we invented the Internet. That’s how we sent a man to the moon. We rise or fall together as one nation and as one people, and that’s the reason I’m running for President — because I still believe in that idea. You’re not on your own, we’re in this together.