The government has long played a role in driving technology innovation, creating a range of technologies that have underpinned economic growth and American competitiveness.
There is a solid justification for the government’s role in science and technology innovation. In Structuring an Energy Technology Revolution, a brilliant book by Charles Weiss and William Bonvillian, the authors see the government’s role as correcting for several market failures that the private sector cannot address.
First, the benefits that result from bringing a product all the way through the innovation process – R&D, prototyping, demonstration, commercialization, market maturity – cannot be fully captured by the firm that spends the time and money to do so. Much of the benefit accrues to competitors that simply imitate the idea, as well as to end users who use the product. This conundrum prevents firms from investing in risky technologies to begin with.
Second, the well-known “valley of death” is the stage between when a technology has been proven to work, and its ultimate commercialization. There is a dearth of financing in this stage, as venture capital can setup pilot projects, and large debt financing helps scale-up technologies once they near maturity. But, in between, large firms will shy away from investing in unproven technologies that may ultimately not become profitable.
Third, legacy technologies prevent barriers to entry. Technologies that currently occupy the market hold a distinctive advantage, and may even receive certain preferential treatment in public policy. This makes it very difficult for new technologies to gain a foothold.
Based on this logic, the government can step in to smooth the transition for new technologies, ultimately facilitating innovation.
There are two main innovation theories outlined by Weiss and Bonvillian – supply-push and demand-pull (there is a less-developed third theory that I won’t get into here). Supply-push innovation involves investments in basic scientific research, demonstration, and deployment of new technologies that help get them into the marketplace. Demand-pull consists of policies that send price signals, ultimately creating demand for new products. For example, a carbon tax would increase the price of dirty sources of energy, creating demand for new clean technologies.
While demand side policies often garner much attention (cap-and-trade, carbon tax, CAFE standards), the government has long played a crucial role in supply-push innovation. The Defense Department, in particular, has played a critical role in driving innovation, ultimately being responsible for new technologies like GPS, the internet, and microprocessors, to name a few. In the energy sector, government-backed innovations include nuclear power, hydraulic fracturing, and advancements in renewable energy.
This is important because several actions from Congress this year threaten to undermine the American innovation system. First, the House cut funding for scientific R&D in its Energy and Water Appropriations bill.
Third, the Obama administration has proposed cutting funding for fusion energy, a promising technology that could solve many energy problems. Only the government can play a role in developing fusion energy, which is making great progress but will require long-term investments in research.
Innovation ultimately creates new opportunities for American businesses and generates new wealth, improving American competitiveness. Government investment in R&D, demonstration and commercialization for new technologies is indispensable to our long-term prosperity. Both political parties should be able to agree upon this vision.