TCS Daily

The Technology Edge

By Arnold Kling - November 13, 2003 12:00 AM

"General LeMay -- did you hear about this? -- said he wants to take a supersonic plane around the globe, to shake up the Russians. [audience laughter] Ahhh, skepticism, eh? You don't think it will? Well, I do. I think it will terrify them. [pause] Provided they look down of course.
-- Mort Sahl

(Note: the quote is from the album "The Future Lies Ahead," not from the show linked here)


Mort Sahl was a satirical humorist who was especially popular during the Sputnik era, from roughly 1957 to 1962. The Russians could look down on us in those days, because the Soviets launched the first satellite, called Sputnik, and the first astronaut, Yuri Gagarin.


Sputnik was a traumatic event in American politics, because it suggested that we had lost the vital technology edge. The Eisenhower and Kennedy Administrations were obliged to respond. One result was the space program, culminating in the first moon landing in 1969. Another response was a major infusion of funding into colleges and universities, culminating in what a satirical descendant of Mort Sahl has dubbed the educational quagmire. Many tenured faculty on America's campuses owe their positions to post-Sputnik government largesse.


Excuse for Industrial Policy?


Whenever policy wonks gather to discuss the need to maintain America's technological edge, as they are doing this week at a forum sponsored by the New America Foundation, I get nervous. Our technology edge is one of those topics, like energy independence, that attracts solutions that are worse than the problem.


One solution that is worse than the problem is industrial policy, in which the government picks technologies that supposedly are winners. President Bush's proposal to pump money into development of hydrogen-powered cars is thus doubly wrong, in my estimation. It tackles a false need for energy independence, and it uses a flawed approach of having the government pick winners in technology.


My fear is not that government will fail to pick winners. Government bureaucrats can, and often do, select good technologies. What government is incapable of doing is abandoning bad technologies. The failure rate in new technology businesses is very high. Markets discard unsuccessful innovations relatively quickly and cleanly. Stock market speculation takes place on the investor's nickel, and bubbles come to an end sooner or later. In contrast, once a government program gets started, it is almost impossible to stop, and its fuel of tax dollars never runs out. Everyone with a business idea would love to finance it with Other People's Money, and a government bureaucrat with a budget to spend on technology is like an entrepreneur with an endless supply of venture capital.


What happens when government picks a losing technology? Consider Minitel, the French communication system that was very advanced when it was launched in the 1980s. When the Internet came along, France stubbornly stuck with Minitel, stifling innovation and falling behind the rest of the world.


Consider high-definition television (HDTV). As late as the early 1990's, when the public was starting to learn about the Internet, our politicians were convinced that HDTV was the most important technology for the future. There was widespread fear that Japan's "lead" in HDTV would be disastrous for the United States. To this day, at the Federal Communications Commission fealty to HDTV continues to be observed.


The Government's Role


Most economists believe that the government has a role to play in funding basic research, leading to fundamental scientific discoveries, while leaving the application of technology to the private sector. There are two justifications for a government role in funding basic research. One is that a private firm may not be able to capture the "spillover effect" of basic research, so that it will underfund such research. Another reason is that if a private firm were to achieve a fundamental discovery, the results would not be in the public domain. This latter issue was invoked as a rationale to justify government effort on the human genome project in competition with a private effort.


Even if government should fund basic research, it may be that the current approach of making research grants is not the best. Perhaps issuing prizes would be better. Michael Kremer has proposed a scheme where by the government could buy out patents as a way of rewarding research and placing the results in the public domain. Kremer's paper is reprinted in Alex Tabarrok's Entrepreneurial Economics.


My guess is that if economists were to comb through the government's research portfolio, we would find more areas to cut spending rather than increase it. My guess is that if I were given authority over the Department of Energy's research Budget, I could save the taxpayers a few dollars -- or a few billion.


On the other hand, Tabarrok did a back-of-the-envelope analysis which suggests that the return to investment in better health care technology is quite high. Even though a great deal of government money already goes into health care research, Tabarrok's calculations seem to suggest that we should spend more.


Losing Our Edge


In doing the cost-benefit analysis on government funding of scientific research, one factor that should not be given weight is national competitiveness. I can see worrying about our ability to compete in military technology, but not in civilian research.


I really do not care if Japan "wins" in consumer electronics, or China "wins" in civilian space exploration, or South Korea "wins" in broadband connectivity. What I care about is earning a good return on investment in scientific research. If "winning" in one particular area requires spending money beyond the point where it is cost-effective to do so, then I would rather be the loser.


Incidentally, regulation can play as important a role as funding in determining where research takes place. If the United States bans stem cell research, then such research may be undertaken elsewhere. If Europe and Canada continue to limit prices for prescription drugs, then pharmaceutical research will continue to be dominated by the United States (as long as we can keep our own politicians immune from the drug price regulation disease).


Looking at the world as a whole, I think that we should be less worried about other countries gaining the technology edge than about their failure to take advantage of the best technology. Genetically modified crops could help alleviate African poverty. Modern automobiles could cut pollution in Mexico City or Bombay. More open societies could do a better job of fighting AIDS.


In an interview last year, Nobel laureate Robert Solow asked, "How do we intelligently and equitably deal with the part of the world that is now preindustrial or primitive industrial and is 'uppity' enough to think it has every right to live as well as Americans or Europeans?" Clearly, the answer is not to hope that we always maintain the technological edge that we enjoy today. Eventually, we would like other countries to join in the technology race, and to win wherever they have comparative advantage.

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