The Entrepreneurial State, Technology and the China Threat

Regardless of what one thinks about tariffs on Chinese goods, there are surely other ways we should be dealing with the competitive threat from China. One way is old-fashioned but worked quite well for our country when we did it. Farhad Manjoo explains:

"Not long ago, when Americans faced the possibility of being left behind by other countries’ advancing tech, the federal government stepped in with nearly endless resources to stimulate the creation of vast new industries.

Thanks to government funding, we got the nuclear industry, the space program, the aviation industry and the internet, which was initially sponsored by the Defense Department. Just about every key component in a smartphone, from the battery to GPS, is based on research first done for the American government. It’s not an overstatement to say that, for better or worse, the American government invented the modern world.

But today in the United States, venture capitalists and multinational corporations lead the development of — and will own — tomorrow’s technologies. Meanwhile, the Chinese government is playing the role the United States once did. Over the last decade, China has pushed an aggressive series of plans meant to gain dominance in technological areas it considers crucial to the global economy....

The Trump administration objects to China’s tech visions. It has cited Chinese government support for tech as a primary reason for imposing tariffs on Chinese goods. But its objections only put the disconnect in stark relief. If the United States is worried that the Chinese will win the future because they’re actually spending money to win the future, why aren’t we doing the same?

“It is a waste that we are not using the rise of China as a galvanizing cry to invest more in science and technology in America,” said Yasheng Huang, an economist who studies Chinese politics and business at the Massachusetts Institute of Technology’s Sloan School of Management. He has argued that rather than imposing tariffs to respond to programs like Made in China 2025, Americans should respond as we did in 1957, when we sharply increased government spending on science after the Soviet Union launched the world’s first man-made satellite, Sputnik 1.

You might argue that the modern world bears little resemblance to the Sputnik era. Today, we have vibrant tech industry. Amazon, Apple, Google, Facebook, Microsoft and lots of venture capitalists are already investing heavily in the future. Why should the government step in?

But that is a shortsighted view. Mr. Huang points out that the established tech industry is mainly funding the most immediately applicable technologies. “Life science and software get a lot of money,” he said.

More speculative technologies that don’t offer any obvious payoff aren’t as lucky. “Everything else is underfunded,” Mr. Huang said, noting that as a percentage of the overall economy, federal spending on research and development has fallen since the 1970s."

Essentially what Manjoo and Huang are calling for is a revival of "the entrepreneurial state", as economist Mariana Mazzucato terms it. She points out that the role of the state is not just to supply public goods [like infrastructure] the private sector ignores but needs (though this is very important) but also to be an entrepreneurial agent investing in areas that are far off the private sector’s radar screen because of extreme uncertainty in economic returns. This is particularly the case with fundamental knowledge generation and very early investments in new technological sectors. Current theories of economic growth assign such innovation a key role in economic growth and it is the entrepreneurial state that can afford—and is willing--to bear the inherently immeasurable risks of such innovation.

This has been the case in the United States where pretty much all research underlying the internet and modern computing was funded and initially capitalized by the US state. For example, the immensely profitable Apple corporation’s signature products, like the iphone and ipad, rest on fundamental innovations developed by government funding . This includes everything from the internet to GPS to touch screens to Siri voice recognition. In other words, no entrepreneurial state, no Apple.

More generally, a Brookings Institution study found that 18 of the 25 most important breakthroughs in computer technology in the seminal 1946-65 period were underwritten by the federal government . And it’s not just information technology where the role of the state has been critical: between 1971 and 2006, 77 out of the 88 most important innovations outside of computing/communications , as rated by R&D Magazine, were heavily dependent on government support, especially in their earliest developmental stages.

The role of the entrepreneurial state has been critical to growth in the past and there is no reason to think it will not be critical in the future. Progress in such emerging fields as AI, robotics, biotechnology, nanotechnology and, of paramount importance, green technology will continue to depend on the entrepreneurial state being willing to provide support in areas where the private sector sees only unknowable risks. And without such progress economic growth will fall well short of potential--and certainly leave us far behind the Chinese who understand very well the role of the entrepreneurial state.

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NYTIMES.COM

How to Combat China’s Rise in Tech: Federal Spending, Not Tariffs

The United States government once invested mightily to build the modern world. Now it has abdicated that role to a foreign rival.