So You Think Private Sector is More Innovative Than Public Sector?

It’s the taxpayer money that creates an environment for private enterprises to flourish

Photo by Mateusz Dach from Pexels

Silicon valley spewing out tech billionaires is a common occurrence now. It’s considered the crown jewel of the American economy. The Galt’s Gulch of 21st century.

But what if the laissez-faire economy that the “hub of innovation” champions built its foundations in a not so laissez-faire way?

What if the quaintly glamorous leaders, championing individualism, proponents of free markets and capitalism are only the cover story and not the entire book? What if the silicon valley idea of how the world should work is as hollow as the happiness that people derive from their social media apps?

What if the capitalistic, for-profit ideology suppresses innovation instead of encouraging it? What if public institutions create more breakthrough inventions than private ones?

Can we then stop glamorizing the “move fast and break things” fad and start talking about the “move however you want, but build real things” industry?

Can we then work towards creating a better world where “creating a better world” is no more a cliche?

Laissez-faire for you, not for me

The Silicon Valley of today is a result of years of grants, investments, and nudging by the American government. The funding began right after WWII when the cold war was still hot, and kick-started the engine of innovation.

Margaret O’Mara, the author of The Code: Silicon Valley and the Remaking of America, writes in her book how the race to space during the cold war spurred demand for silicon components. The Federal government provided an unending stream of funds to Stanford and their research projects, while the administration at Stanford focussed on creating courses in cutting-edge technologies.

The government push, along with the ingenuity of the researchers, and the curriculum at Stanford spurred conditions for ideas to thrive and turn into valuable businesses. Now, five of the largest companies in the world are housed in Silicon Valley.

As O’Mara says in this interview with OneZero says,

“No one was sitting behind a desk in Washington saying, ‘Oh, this is how we’re going to build a tech industry.’ But that is what happened.”

And if this public-private partnership worked back then, and as we will see how it has worked throughout history, why shouldn’t it now?

If you don’t deny that free markets were responsible for the creation of Silicon Valley, then you also shouldn’t deny the fact that the government was the shoulder standing on which the entrepreneurs created their empires.

Public funding backed not only Silicon Valley, but most of the greatest inventions of our time.

The concept of the internet, for instance, started taking shape in 1970 at the Pentagon-backed Defense Advanced Research Projects Agency (DARPA). After a decade, they handed over the technology to the National Science Foundation (NSF), from where the technology trickled down into universities, and finally, the internet became mainstream around the 1990s with the development of Mosaic and Netscape.

Vincent Cerf and Robert Kahn created the TCP/IP protocol, which forms the backbone of the internet while working on a government grant. Tim B. Lee created the World Wide Web at CERN, which is a government-funded research laboratory.

Even Google finds its roots in federal support. Apple, which if it would have been a country, would be the 8th largest, got a government push. Tesla, the quintessential “made in America” story, the story of the self-made genius, got loans worth $465 million in government aides. Not to forget the recent government aid it received as the COVID relief package.

The explosion of innovation

Now you might say that I am cherry-picking companies to prove my point. But if you dive into the past, and plot breakthrough innovations of the past two centuries on a graph, you will find that the public institutions have a greater share of innovations in their kitty than private ones.

Steven Johnson in his book Where Good Ideas Come from did exactly that. He grouped innovations into four quadrants.

  • First Quadrant: Market/Individual — Innovations that were driven by individual/private corporation’s desire for profit. Example: Air conditioning that was invented by Willis Carrier.
  • Second Quadrant: Market/Network — Innovations that were for profit, but were created because of networks, or groups of people sharing their expertise. Example: The light bulb. It was invented by Edison, but many people contributed to the invention.
  • Third Quadrant: Non-Market/Individual — Individual scientists or researchers working without a profit motive and sharing their ideas freely. Example: Einstein’s e=mc².
  • Fourth Quadrant: Innovations made possible because of a large network of people building on each other’s ideas and sharing their findings freely. Example: Wikipedia.

The free-market proponents would be confident that the first quadrant would have most of the innovations. After all, the 20th century marked the beginning of the industrial revolution and the rise of the self-made man.

But most of the innovations were scattered everywhere in the fourth quadrant. The first quadrant was no match to the third and the fourth quadrants, where innovations were not driven by a profit motive.

This meant that somehow, the private ownership or for-profit mentality chokes innovation. But how can that be possible? Competition, incentives, free markets are supposed to unleash creativity.

Long gestation periods are disincentives for the private sector

Breakthrough inventions, that create tectonic shifts in our lives, don’t materialize overnight. They require years and years of nurturing to become useful at scale. Decades possibly.

The idea of the internet, for instance, was born somewhere in the 1970s, but it wasn’t until the creation of Netscape and Mosaic in the nineties that it became a mainstream technology.

Let’s take another example of the Pharma sector. It takes decades and billions of dollars to concoct a medicine that would be helpful to humanity. But even after years, and after pouring in billions, there is little chance of success. Would the private enterprise dabble in such risky affairs? No, they can’t and they don’t.

The government does major research and development in the pharma sector. For instance, the National Institute of Health in the United States funds most of the Research and development in the pharma sector. In a study by CISI, they found NIH contributed to every one of the total 210 drugs that were approved by the FDA from 2010 to 2016. The total funding totaling more than $100 billion.

Self-interest is inefficient

There are no Eureka moments. There is no one-man show. Every invention is an amalgamation of the ideas of many individuals who worked tirelessly to solve the same, or maybe different problems. So for innovation to happen, ideas should flow freely in society. And that is where the capitalist idea of protecting and patenting erects walls that curbs the sharing of ideas.

Paraphrasing Steven Johnson from his book,

“The utility of building on other people’s ideas often outweighs the exclusivity of building something entirely from scratch…”

He goes on,

“If ideas were fully liberated, then entrepreneurs wouldn’t be able to profit from their innovations, because their competitors would immediately adopt them. And so where innovation is concerned, we have deliberately built inefficient markets…”

The incentive of a financial reward is alluring, and it does drive many people to find innovative solutions to nagging problems. But it also forces the inventor to protect his or her idea from others, to make the most of the reward. This coops up the idea, negating its potential use for other entrepreneurs.

Why was there an explosion of inventions in the fourth quadrant? Because people didn’t care about financial rewards and thus the ideas were shared freely. Newton, Einstein, Locke, Jefferson had few incentives. But did that stop them from unearthing the truth?

Trust is important

“Within profit-obsessed market economies, self-interest crowds out other motivations, making the world a more selfish place — and potentially a less resilient and prosperous one, too,” argues Mark Carney, governor of Bank of England from 2013 to 2020 in his book Value(s).

When people are concerned only about profit, the fabric of society breaks. Morals, ethics, environment, society takes backstage. These questions, which philosophers spent years arguing about, suppress the hockey stick growth that entrepreneurs are looking for.

But the larger point that Carney is trying to make in his book is that this kind of growth leads to a trust deficit that fuels instability. Not only in our society, but also in the financial markets. After all, the currency derives its value from the trust that people have in it.

When there is a lack of trust in society, shaking hands, closing deals, building bridges, collaborating, sharing ideas, and therefore innovation, takes a hit.

Striking a balance

It doesn’t mean that private enterprises are duds. The pace of innovation has tremendously increased since people started taking Adam Smith seriously. Free markets, incentives, competition, rewards and recognition of creating something valuable, does spur creativity in society. Additionally, the pressure of increasing profits pushes capitalists to become more efficient. Reducing prices and benefiting the consumers.

There is no denying the importance and contribution of private enterprises. But governments and taxpayer-funded institutions also play a vital role in developing our economy. We need to recognize it. We need to appreciate it.

And instead of asking why governments are meddling in private businesses, we should ask what is the right balance of government intervention in our economy. How can public institutions create environments for private enterprises to flourish?

As Darwin said,

“It is the long history of humankind (and animal kind, too) that those who learned to collaborate and improvise most effectively have prevailed.”

If the father of evolution, the man behind the idea of survival of the fittest spoke so much about collaboration, why can’t we?

Curious about the dark side of the moon and the other side of the story.

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