Government and Innovation
2048 Tucker Flying Car by wunztwice. Source: Flickr
In my last article, Can profits prevent innovation, I argued towards the end that there needs to be a more active government in preventing monopolies. I also note that many of these monopolies are effectively government sanctioned through the use of patents. I received a comment noting that Government shouldn’t be involved in innovation in any manner, that industry does a great job with innovation on their own. I disagree with this point of view and I’m going to explain why this is a flawed argument.
In the United States there are discussions of how governmental regulatory policies can create uncertainty for business owners. There are definite cases where confusion over regulations can prevent businesses from investing. However, there are also times when government policies can increase certainty for investments in new technologies.
There are several ways that this happens.
Prizes, Contests & Policy
One is through prizes such as the DARPA Challenge or the X-prize foundation, which drive innovation through competitions. The winner of the prize wins a million dollars, which typically doesn’t cover the cost of the research, but creates a reputation effect that makes the research worth doing.
The government can positively impact innovation through creation of certainty in a market. For instance if the government wants to increase fuel efficiency in vehicles to 100 MPG equivalent (MPGe), for which X-Prize recently had a contest. Why would the government want to do this? Well, there are negative externalities to using a vehicle that aren’t covered in the cost of gasoline or vehicle, such as is pollution. As this is a general social issue the government needs to step in. They can do two things, tax the product that causes pollution or push for innovation which reduced such negative externality.
Government policies can work in two ways. First, they can issues tax credits to people that purchase a specific vehicle, like a hybrid. However, this selects a winner which may not be the most fuel efficient vehicle. For instance there are gasoline powered vehicles that achieve the same MPG as a hybrid. The owner of this vehicle wouldn’t receive any tax credits for the purchase of that vehicle. Neither would someone that bought a bicycle or one that telecommutes.
Chevy Volt MPGe EPA Official Lab; Source: WIkimedia
What else can the government do?
Governments can also create a market for a given product. So the governments can create a market for purchasing 20,000 vehicles a year. The governments can also create different requirement levels to continue pushing innovation, setting purchase levels at 40, 60, 80, and 100 MPGe for cars with similar dimensions to a Ford Crown Victoria. Whenever a company reaches a given MPGe the government will switch to only buying vehicles at that MPGe, this creates a reward for the first to reach that point, as they get a large market share the first year, giving them an advantage in the larger consumer market due to the higher visibility (their cars will be on the road).
Continual purchasing of vehicles creates a level of certainty within the market for a new innovation. Eventually regulations can be moved in underneath when the MPGe is set at 40 then everything is else must be greater than 20 for new vehicles. Part of the reason that car manufacturers fight regulations pushing the bottom up is that there is a great deal of uncertainty of demand. Creating a feeling of certainty within a market will help drive innovation in the direction that is best for a social good and remove a negative externality.
Toyota Prius; Source Wikimedia
Couldn’t this create other problems though? Hybrid batteries aren’t really the best for the environment and require rare earth elements. So, yes it could create other problems. However, the government isn’t selecting a technological winner. The government is creation a niche at different levels that require serious research. Any company that is able to hit the required MPGe will have vehicles purchased. If it’s hybrid, diesel, gas, electric or fuel cell doesn’t matter to the government as long as it’s requirements are met. These types of policies aren’t designed to find the best long term solution. It’s designed to create a market place with competition from many different actors that may use several different technologies. These technologies will then compete on the larger market which will select which ever technology meets their need best. For transportation there are other considerations such as fueling stations (electric or fuel cell or whatever). There may also have to policies directed towards that. However, these policies will work for many types of industries, including software and energy.
In a situation like this governmental policies can create a market which reduces uncertainty. Through creating an environment that encourages and rewards innovation the government can leave the innovation to businesses.
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