State of Innovation

The U.S. Government's Role in Technology Development

Fred L. Block, Matthew R. Keller

• Publisher: Routledge
• Year: 2015
• Topic: Politics & International Relations
• eBook ISBN:
  9781317251422
• Subtopic: Government & Business
• Index: Politics & International Relations

The worst economic crisis since the Great Depression has generated a fundamental re-evaluation of the free-market policies that have dominated American politics for three decades. State of Innovation brings together critical essays looking at the 'innovation industry' in the context of the current crisis. The book shows how government programs and policies have underpinned technological innovation in the US economy over the last four decades, despite the strength of 'free market' political rhetoric. The contributors provide new insights into where innovations come from and how governments can support a dynamic innovation economy as the US recovers from a profound economic crisis. State of Innovation outlines a 21st century policy paradigm that will foster cutting-edge innovation which remains accountable to the public.

CHAPTER 1
Innovation and the Invisible Hand of Government

Fred Block

The long, deep U.S. recession of 2007–2009 seems very different from earlier economic downturns; it suggests a possible turning point in the nation's economic trajectory. Unemployment has been worse and more persistent in this downturn, and many venerable economic institutions, from Merrill Lynch and Bear Stearns to General Motors and Chrysler, have disappeared or undergone dramatic reorganization; many other firms have had to make fundamental changes in their business models. The crisis has also forced a sharp retreat from the governing philosophy that had been in place since the election of Ronald Reagan in 1980. That philosophy—market fundamentalism—insists that "government is the problem, not the solution," and its preferred remedies for economic problems are tax cuts, relaxed regulation of business and finance, and greater reliance on markets to solve economic and social problems (Block 2007).¹ George W. Bush, who had long championed this approach, had to make a U-turn in the fall of 2008. In the face of a financial collapse, he unleashed an unprecedented government rescue of Wall Street through hundreds of billions of dollars of direct support for firms like Citibank, Bank of America, AIG, Morgan Stanley, and Goldman Sachs (Wessel 2009).

Bush's successor, Barack Obama, continued these extensive government efforts to rescue and reshape major financial institutions, and he has proposed an ambitious program of new regulations for the financial industry. Obama has loaned billions to two out of three of the major automobile firms, reorganized their top management, and guided them through a dramatic reorganization in bankruptcy court. In its early days, the new administration pushed through a huge government stimulus bill devoting billions of dollars to shifting the U.S. economy from oil and coal to alternative energy sources, and the administration continues to pursue plans to reorganize the health care industry and the energy sector.

Moreover, the new administration understands that even as it attempts to pull the economy back from crisis and recession, it faces a number of deeper long-term challenges. One of the most important is the chronic weakness of the U.S. international trade position. For a generation, this trade balance has been strongly negative because of the U.S. appetite for both foreign oil and cheap manufactured imports from Asia. Because of its huge trade deficit, the United States has relied for many years on foreign borrowing to finance its balance of payments deficit, a pattern that many observers think is unsustainable (Obstfeld and Rogoff 2007; Mann and Pluck 2007).

The seriousness of the trade problem is indicated by a measure of the U.S. trade balance in high-tech products, which has also turned negative in recent years (data available atwww.census.gov/foreign-trade/Press-Release/current_press_release/ft900 .pdf).² Historically, the U.S. surplus in global trade for technologically sophisticated products helped offset the deficit for raw materials and basic manufactured goods such as small appliances and apparel. But if the United States is starting to import more high-tech goods than it exports, then the prospects for a significant improvement in the trade balance are even dimmer.

Two other long-term challenges reinforce this focus on the economy's capacity for innovation. The first is the imminent threat of global climate change resulting from rising levels of carbon dioxide in the atmosphere. Without significant shifts away from burning fossil fuels in the United States and other countries, the globe faces rising oceans and increasingly disruptive weather patterns. And it is now widely recognized that progress in this direction requires significant technological advances to bring down the prices for several different sources of renewable energy (Weiss and Bonvillian 2009). The final challenge is the one of assuring new domestic employment opportunities as the economy recovers from the recession. With many jobs moving abroad in both the manufacturing and the service sectors, the administration's political success rests on its ability to bring about vigorous employment growth at home.

For all three of these reasons, the new administration has strongly emphasized strengthening the U.S. economy's capacity for innovation. This focus is particularly clear in the stimulus bill—the American Recovery and Reinvestment Act—passed in January 2009. The idea is that if the United States can capitalize on its scientific and engineering resources to produce a continuous stream of new high-tech products and services, including "green" energy technologies, this would strengthen U.S. exports and expand domestic employment. Just as the U.S. global leadership in computer hardware and software and in biotechnology helped sustain the U.S. economy over the past three decades, it is hoped that building new high-tech and green industries will improve the U.S. competitive position. Moreover, innovations in new energy technologies, in particular, would strengthen the trade balance by reducing U.S. imports of foreign oil (Executive Office of the President 2009) while also reducing the production of greenhouse gases.

But in prioritizing the U.S. innovation economy, the Obama administration faces a series of difficult questions. How does innovation actually work in the current U.S. economy? What are the respective contributions of the private sector and the public sector in facilitating innovation? What policies can and should the government use to accelerate innovation in the private sector?

This book is intended to provide answers to these questions. Each chapter is based on careful, in-depth research on how the innovation economy actually works both in the United States and in other nations. Through a series of detailed case studies—of particular industries and of specific government technology programs—the chapters are designed to illuminate the landscape of effective innovation and suggest the lessons that have been learned from recent innovation efforts.

This introductory chapter is designed to set the stage for the more detailed arguments of the following chapters by tracing out the history of innovation policies in the United States and by providing an overview of the complex institutional structure of the current innovation system in the United States. The introduction will elaborate the key finding that emerges from the chapters—that the United States, particularly over the past three decades, has developed a sophisticated and complex innovation system in which the government plays an absolutely central role. The current administration in Washington does not have to begin from scratch; it has the opportunity to refine and improve a system that has been developing for some time.

The introduction will also explore the intersection between the book's findings and the question of governance philosophy with which the current administration and the larger society are currently wrestling. The severity of the 2007—2009 financial and economic crisis and the fact that it was precipitated by significant regulatory failures in the financial sector has discredited the market fundamentalist views that have dominated U.S. politics since the 1980s. But the new administration has not yet advanced an alternative governing philosophy. On the contrary, the president has repeatedly affirmed his commitment to the free market and has argued that the measures he is taking are simply designed to make markets work more effectively. Obama has repeatedly invoked his commitment to pragmatism—a search for solutions unconstrained by any ideological commitments.

However, there are many reasons for doubting that pragmatism will be sufficient to guide the nation through a series of difficult transitions. It is a basic law of politics that you cannot beat something with nothing. When opponents endlessly recycle the familiar claims of market fundamentalism that government must get out of the way of the private economy, the administration has to explain that these are stale and outmoded ideas. But it is very difficult to do that without articulating an alternative governing philosophy and a roadmap of where the country is headed.

This is where the innovation economy looms large. The historical experience with the innovation economy provides powerful arguments against the core assumptions of market fundamentalism. For many technologies, it has not been Adam Smiths invisible hand, but the hand of government that has proven decisive in their development. Moreover, the innovation economy depends on a series of principles that are at fundamental variance with market fundamentalism. In fact, careful study of the innovation economy helps us see some of the outline of a new governance philosophy that could provide a durable foundation for prosperity in the United States in the twenty-first century.

The introduction will address these different tasks in three parts. The first shows how the dramatic changes in the innovation economy of the last thirty years have been built on top of a set of institutions that have a much longer history. The second part describes how the different elements of the current innovation system fit together. The third part extracts the principles of governance on which this innovation economy rests.

Historical Overview

From World War II to the early b, theorists of market fundamentalism were largely on the margins of economic and political debates in the United States (Block 2007; Leopold 2009). The prevailing Keynesian consensus insisted that government had a fundamental role in guiding the economy and maintaining high levels of investment and employment. However, as the U.S. economy experienced growing economic difficulties in the 1970s, the market fundamentalist critique of Keynesianism and "big government" gained traction. Starting with the election of Ronald Reagan in 1980, market fundamentalists returned to power and their ideas dominated policy debates in the United States until the financial crisis in 2008.

Market fundamentalists argue that the best policy is to rely to the greatest extent possible on allegedly self-regulating markets while keeping the government's economic activity to a minimum. The thinkers who were most important in popularizing these ideas, particularly Milton Friedman, George Stigler, and other figures from the Chicago School of Economics, long insisted that the United States had taken a wrong turn during Franklin Roosevelt's New Deal in the 1930s, when the government role in the economy was significantly expanded through both increased regulation of business and expanded public provision through old age and unemployment assistance.

These thinkers wanted to go back to the pre—New Deal regime of limited government, and they argued that the dynamic economic growth that the country enjoyed for most of the century and a half from the founding of the Republic to the start of the New Deal was a direct consequence of reliance on markets and small government (Friedman and Friedman 1990). Their vision of a halcyon American past meant that they had to ignore or downplay the poverty, misery, and mass unemployment that was widespread as industrialization progressed during the course of the nineteenth century (Katz 1986; Keyssar 1986).

But even more importantly, they had to create a fictive American past in which the substantial economic role played by government—from the founding—was made to disappear. The history of the United States is no different from that of other modern countries; fighting wars and preparing for wars have been an absolutely critical spur to economic growth and development (Roland 2003; Ruttan 2006). Many of the key industrial and organizational breakthroughs of the late eighteenth and nineteenth centuries came in industries that were developing weapons or other supplies, such as ships or uniforms, that were being procured on a large scale by the military (Smith 1985; Ruttan 2006). Starting with the Revolutionary War, continuing with the War of 1812, the wars against the Native Americans, and the Civil War, some of the most important innovations in production and organizational technologies came in the manufacture of guns and other weapons. In fact, the rifle figures prominently in manufacturing history as one of the first instances of the use of interchangeable parts to facilitate expanded production (Hounshell 1984; Ruttan 2006; Smith 1977). Moreover, the machine tools developed for weapons production then migrated to industries producing sewing machines, bicycles, and ultimately automobiles (Rosenberg 1963; Ruttan 2006).

The government began to invest in technological expertise for military purposes in the first years of the Republic (Angevine 2004). The Army Corps of Engineers was created in 1802, and military academies such as West Point, the Naval Academy, and the Citadel were the earliest instances of government investment in higher education. As early as the 1820s and 1830s, army engineers were at work building canals and lighthouses, and improving river navigation—projects that had both military and commercial implications (Shallat 1994).

This same pattern, of course, continued into the present century. World War I dramatically accelerated the development of automobiles, airplanes, and radio. The government directly mobilized the research laboratories of major corporations for the war effort, and important scientists and engineers, drawing on the wartime experience, began to argue in the 1920s for the creation of a national research endowment through which the U.S. government would adopt a permanent role in financing key scientific and technological research. While that idea gained little political traction, the government did establish the Naval Research Laboratory in 1923, which was the military's first venture in creating a permanent peacetime laboratory (Wise 1985).

But the market fundamentalist version of the pre–New Deal past also has to ignore a very long history of deliberate state initiatives that did not have an immediate military justification.³ This goes back to Alexander Hamilton's famous Report on Manufactures (1791) that insisted, against the laissez-faire orthodoxy of that day, that the young Republic needed to use policies such as tariffs and government procurement contracts to nurture new industries to make the nation competitive with the advanced nations of Europe (Bourgin 1989; Chang 2008). While Hamilton's report was never fully implemented, it still provided valuable arguments for those eager to use the state to pursue industrial ends, and U.S. industrialization proceeded behind high tariff walls through the nineteenth century.

Hamilronian ideas helped inspire the aggressive role of state governments in building canals and railroads in the first half of the nineteenth century. Sometimes these efforts were directly financed out of state funds and sometimes state governments would organize and subsidize newly created private entities to do the work (Angevine 2004; Dobbin 1994). Either way, these transportation innovations played an important role in driving economic growth in the antebellum period.

With Lincoln's presidency and the start of the Civil War, the initiative in economic policy shifted definitively toward the federal government. Lincoln launched the building of the intercontinental railroad, which probably ranked at the time among the most ambitious efforts in human history b 2000). Lincoln also presided over the creation of the Department of Agriculture and the start of the land grant colleges, which were conceived as efforts to modernize society's dominant economic sector—farming. In fact, the first permanent government laboratory was established in the 1860s in the Department of Agriculture to do research on plant and animal diseases and soil quality (Harding 1947). Lincoln also recognized the growing role of scientific knowledge when he signed the legislation for the National Academy of Sciences—a nonprofit organization designed so that the organized scientific community could provide continuous input and advice to the government (Kleinman 1995).

The steps taken in the Civil War period laid the foundation for rapid economic growth and the creation of an integrated national economy in the last three decades of the nineteenth century. But the volatility and other dangers generated by this new industrial economy produced a new wave of federal initiatives in the first years of the twentieth century. In search of greater stability, Progressive Era reformers extended the reach of the national government. The first federal laboratory with expertise in the physical sciences was started in 1901 in the newly created National Bureau of Standards. This bureau was created to emulate what the USDA had done for agriculture—to promote expertise that would accelerate industrial development. The NBS (later renamed the National Institute of Standards and Technology, or NIST) played an important role in radio and telephony (Allen and Sriram 2000; Needell 2000).

A series of new federal regulatory institutions were also created in this period. The Pure Food and Drug Act of 1906 created the agency that would ultimately become the Food and Drug Administration (1906), and the Federal Reserve Board (1913) and the Federal Trade Commission (1914) were also products of this period. These agencies came to play a dual role. On the one side, they acted as regulatory police to prevent businesses from pursuing strategies that could be economically destructive. On the other, they often acted as partners or collaborators helping businesses to stabilize markets, maintain competition, and adopt more effective business practices (Hilts 2003; Greider 1987; Berk 2009). Berk (2009) conceptualizes this approach as "regulated competition" and gives Louis Brandeis much of the credit for bringing this idea into the policy arena.

In short, the market fundamentalist history of the U.S. economy before the New Deal is basically fanciful. Leaving warfare and armaments out of the history of IJ.S. industry is like the proverbial production of Hamlet without the prince. But even beyond that, economic development in the nineteenth century and in the first decades of the twentieth depended on an ongoing partnership between the government and business. Government provided necessary infrastructure such as roads, canals, railroads, and harbors, and helped train the labor force and build the society's technological capabilities; government agencies worked to facilitate the diffusion of productive innovations in agriculture, industry, and services.

But if this government-business partnership has been a constant of U.S. history since the founding of the Republic, there is no question that the intensity and importance of the government role in dri...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• Foreword by Peter Evans
• Acknowledgments
• 1 Innovation and the Invisible Hand of Government
• Part I Telling the Stories What Are the Instruments and How Have They Been Deployed in Different Parts of the Economy?
• Part II Scale, Significance, and Implications
• Appendix A Composition of R&D Magazine 100 Award Winners
• Appendix B Examples of Budget Estimates, 2003–2008
• References
• About the Editors and Contributors
• Index