Innovation and Government Spending

Innovation is and has always been at the center of all human endeavors. People those who are able to perform more complex tasks with relatively fewer resources have often captured world markets and gained the maximum wealth. Every economic textbook acknowledges the value of innovation. It also explains how the printing press made scribes obsolete and now digital technologies are making the press obsolete itself. They correctly conclude that the world and technology are rapidly changing. However, there seems to be confusion.

Mainstream economists believe that market change doesn’t usher innovation. Instead, many economists argue that innovation is the byproduct of government policies.

The Argument for Government Funded Innovation

The argument that government funded innovation is better than market innovation has an underlying assumption. The assumption states that the markets are short sighted. On the other hand, research projects are long term in nature. Sometimes research projects may burn cash for several years before they generate any return. Mainstream economists argue that private parties may just abandon the efforts as they will be unable to wait for so long. Hence, the government should realize matters of strategic importance and take them in their hand.

The example often cited is the widely popular Internet technology. This was not developed by the market but was instead developed by the United States Army for communication purposes. Once the technology gained critical mass, it was released to the markets. This is when the private parties improved upon the underlying technology that was offered by the government. The result we have today is the life changing mission-critical technology that we have today in the form of the internet. The private behemoths of today i.e. Google and Facebook have been built on a platform that was first designed and developed by the government!

Confusion #1: Technological Innovation vs. Economic Innovation

Mainstream economists are making several mistakes with this argument. The first mistake is that they are confusing technological innovation with market innovation. Technological innovation is an improvement to the current technology being used. However, the costs of using this advanced technology are so prohibitive that the better technology cannot be put to use in the market. On the other hand, economic innovation is all about providing better value for money for the consumers. Technological innovation without any market use is wastage of resources. For instance, cars can be built with very advanced safety features. However, if these cars are so expensive that no one can buy them, then what is the point of introducing the safety features! Whether the government is better at creating technological innovation is itself a matter of dispute. However, one can be pretty sure that the government cannot accelerate economic innovation. Government innovation is run purely on the basis of grants and has no forces of the market backing it.

Confusion #2: War and Innovation

Economic theory fosters another misconception. This misconception is that war somehow fosters innovation. The logic is that war forces military to find new technologies. A lot of these technologies have widespread civilian applications later. For instance, automobile, telecom, and communication industry is largely influenced by advances in the field that happened during war time. However, this is a fallacy. This is like looking at only one side of the coin. No attention is paid to the incessant costs that are incurred during the war in general as well as to develop specific technologies. The resources, if available to the market could have been utilized much better. This is akin to the broken window fallacy wherein the destruction component is not considered at all whereas the addition to the economy is counted.

Confusion # 3: Is All Innovation Good ?

A Government led innovation fosters needless advances in technology. These advances have very little civil application. Also, the government is riddled with corruption. As a result, private parties are able to take over the benefits of government-led innovation for a fraction of the cost. This is what happened with the internet. It is also rampantly going on with the pharmaceutical industry. Corporations use taxpayer money to influence research. Once the research gains critical mass, they take it over. On the other hand, if the research fails the taxpayer bears the cost. This is like privatization of profits and socialization of losses.

The Role of Market Tests

The innovations produced by the government do not face any market test. As such, there is no way to determine if they are as good as they are claimed to be. Also, one needs to consider the massive inputs that were given to create this output. True that private parties did not build the Internet and the interstate highways! However, one can only guess what private parties would have accomplished had that money not been taxed from their hands and provided to the governments to give research handouts to the people.

To sum it up, central planning has always been a failure. It failed the Soviet Union, and it fails us today. The reason it exists is that it allows private corporations to socialize their research expenses. It is a corrupt method of bringing down costs. It is about time that the transfer of wealth from unsuspecting taxpayers to powerful corporations be stopped.

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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to and the content page url.

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