Tuesday, November 18, 2014

Response to "Mariana Mazzucato: Government — Investor, Risk-taker, Innovator"

      The Talk can be Accessed  HERE.
     The most interesting part of the Mazzucato talk was the nugget that the drug companies were returning more of their capital to shareholders in terms of buybacks than they were using for research and development (4:41). I write this as I was thinking before seeing the talk that governments and large monopolistic corporations are the seat of innovation because they have something that short-term focused public companies do not have: time. There is a long history in the United States if innovation, from the railroads to Menlo Park to mass electrification to harnessing atomic energy to the microchip. Most of those were done through the government or with government facilitations. The transistor was developed at Bell Labs when AT&T was a behemoth of its own before the break-up and it was able to play the long game because its monopoly was protected as some sort of natural monopoly.
I was under the understanding that the drug companies were acted somewhat like AT&T. The argument is often made in public that one of the reasons that prices are so high for pharmaceuticals is because the cost of R&D is so high. Consumers pay so much because they have to find the molecules and then usher them through the FDA testing process. The costly drugs are not monopoly rents, the argument goes, but they are instead compensation for all the drugs that the companies tested but have failed. I had known that a lot of the fundamental research has long been funded by the federal government through grants to scientists, but that little nugget surprised me more than it should have. It is as if by not reinvesting the excess profits generated by longer patents, the drug companies violate the public trust.
   Like Mazzucato, I hope that the next revolution will be green (11:46), but in terms of green technology, I can only think incrementally. Solar panels are going down in price, to the point where electricity generated through the sun is reaching price parity with electricity generated though the burning of hydrocarbons. The first world will need to lead though, because solar power, as well as other green electricity generating devices, have their weaknesses. The biggest for solar power is that battery technology is the limiting factor. Research into capacitor or battery technology could help run the world of tomorrow.
The big issue is that a big part of the politicians in the world’s biggest economy believes some version of the idea that there is no climate change; there is climate change but it is part of a natural cycle; climate change is nothing that we can do anything about, even if it exists or was caused by human activity. The political resistance at this point where the United States needs to lead makes me think that if the next big innovation is a green innovation, it will be in spite of and not because of the US Public sector. There is a good chance that it will happen, as even some of the larger developing countries recognize the climate as an issue. If it does happen in spite of US political intransigence, it will ironically be that that US will be locked out and miss out on the gains and it will be the fault of the party that pays much lip service to the idea of American exceptionalism.
I hope that some green technology will be the next big thing, because as a planetary society, there is nothing that is needed more and has the potential to save the most lives than refiguring the global energy system. Either that or it will be something for people in the developed world to forget themselves for a minute, such as an immersive virtual reality with strong artificial intelligence.
       Broadly, entrepreneurship and innovation are positive for the economy’s continued growth. For example, even if many of the technologies existed for outside of Apple for the iPod, which led to Apple’s resurgence, and the fact that other companies had already, released portable digital music players, Steve Jobs came along and resurrected his mythos. He was able to put the elements together that existed already to make a product that was accessible to the masses.
In the same way a century earlier, Thomas Edison was able to grow his name and his company by finding novel ways to take advantage of the scientific discoveries of the age. James Clerk Maxwell was able to codify the equations that showed the relationship between electricity and magnetism: it took Edison to make the phonograph. Edison was able to formalize his innovation in his Menlo Park lab as the forerunner to GE, a founding company on the Dow Jones Industrial Index (Krugman & Wells, 2013, p. 255). People like to romanticize Tesla, as the lone inventor with suppressed genius ideas, but Edison got the lights shining in street.
This innovation is not without its risks. Before Edison got the lights shining in the street, there was an occupation called a “Lamplighter”. This man had the responsibility of going through the streets at dusk on the main thoroughfares and he lit the lamps in the streets. They were first oil lamps and then later the infrastructure in places turned to pressurized gas. When Edison perfected the electric incandescent light bulb, that man’s job was immediately threatened. There is hope that he would be able to be retrained to a different position at the department of public works. However, the efficiency gained by having bright, consistent light was greater than the loss of the poor lamplighter’s job. Let us hope that he did not find a new position driving a horse-drawn cart.
   Two things that the government can do to help promote grow are to set rules and to spend money.
Less glibly, one of the things a successful country has is property rights. This is not just being able to set up fences at the border of your property and know that the government and other private parties will acknowledge them. Some of the most useful property for encouraging growth is intellectual property. By providing a temporary monopoly on the fruits mental labor, the state can provide incentive for individuals and firms to create new things in the world, and to make gains form the mental work (Krugman & Wells, 2013, p. 257).  . There is a fine line though, as some patents and trademarks can serve not to facilitate innovation and thus impede growth. If the state makes the lengths of patents too long, then those who want to use the technology can be locked out. If the patent is too broad, then the potential exists for competing firms to inadvertently violate the patent exists. In short, the setting of these rules is very important to get right to provide innovators with the right amount of carrot, but not too much that they are bogged down in nonproductive litigation.
`           The second way to facilitate innovation is by helping the growth of human capital. In the United States, a majority of the funding for primary and secondary school comes from the local municipality. The institutions of tertiary education are funded by the state and federal government directly. Alternatively, even the private universities receive funds through government grants for research or through financial aid in the form of grants or loans. By helping the development of human capital, the state can let those gaining the capital in the form of greater education attainment go out in the world and be more productive.


Krugman, P. & Wells, R. (2013). Macroeconomics. New York, NY : Worth Publishers

Mazzucato, M. (2013, June). Mariana Mazzucato: Government — Investor, Risk-taker, Innovator [Video file]. Retrieved from http://www.ted.com/talks/mariana_mazzucato_government_investor_risk_taker_innovator.html