In Praise of Government Investment

How many times have you heard cautionary admonitions against government investment?

Government shouldn’t be in the business of picking winners (or supporting losers) …

Government investment displaces private sector activity …

Government investment warps market forces …

A new book, reviewed in the Financial Times on August 4, 2013 and described as “brilliant,”  takes these bromides to task and concludes that without government intervention and active participation in the innovation sector, we’d be in a world of hurt.

The book is “The Entrepreneurial State: Debunking Public vs. Private Sector Myths,” by Marianna Mazzucato, a professor of economics at Sussex (UK) University, and it highlights the crucial role that government investment has played not just in particular successes, but across entire spectra and disciplines. For example:

  • 75% of new molecular entities approved by the FDA between 1993 – 2004 trace their research to the NIH labs in the US
  • The National Science Foundation (NSF) funded the algorithm that drove Google’s search engine
  • Early funding for Apple came from the SBA’s Small Business Investment Company program

According to Mazzucato, the more competitive and finance-driven the economy, the less the private sector is willing to bear risk. Scale also enters into the discussion. Thus, only the government (and often the military) has resources to invest over a long period of time and with the big picture in mind (read, DARPA.) As the FT’s Martin Wolf notes, “The days of AT&T’s path-breaking Bell Labs are long gone.”

Among the most interesting take-aways from the book may be the impact that the conventional wisdom (i.e., that government is the enemy of innovation) could have on future innovation.

If policy makers believe the myth that the state is an obstacle to innovation, funding will be cut, and future innovation on the order of that described above will be very much at risk. Moreover, the “scorn heaped on government” may deprive policy makers of the will and capacity to take risk.

We need to have the guts to say that wise, big-picture investment in innovation is important. We need to say, “If you want growth, fund the research.” We need to say, “It is worth spending public money to build a better future.”

We also need to be big enough to say “This research did not pan out. Not everything does, and not everything will.”

In the end, you miss 100% of the shots you never take. That’s the nature of risk, and we should embrace it.