Free Markets Fail To Prosper – History Shows That Government Is Key To True Growth


If you listened to the Laissez Faire capitalists so dominant in our discourse, all innovation and growth comes from the private sector. The confidence in this claim held by the so-called ‘free market’ libertarians has been shaken as our economy has suffered through the worst crisis since the Great Depression. Now, like then, despite the lack of government regulations and spending, the innovation simply is not there.

Instead, the nations which relied upon private industry for innovation are stagnant. Private companies, instead of innovating, are rehashing old ideas and old tricks, and pairing them with a shiny new paint job and ad campaign. While the materials are improved for the iPhone 5 over the iPhone 4, it is not as revolutionary as the original iPhone was. But why?

When you break down the revolutionary technologies, the industry changing ones, they all have something in common – they relied on technologies not developed and supported by private enterprise, but those funded by the government. The iPhone, for example, used a touch screen, GPS, and even the processor, all funded by one nations government or another.

If this holds true, nations which do a significant amount of government support should be doing well.

It turns out that they are. From Brazil to China, nations which maintained public investment have proven to be more innovative than those which cut programs. While the US may spend more on R&D overall, a large amount of it is on refinement of existing technologies, while China for example is on developing in new directions.

Studying the history of innovation, the great leaps in technology did not come from private investment, but from public will. Let us take the Concorde for a moment. It was the result of a joint UK/French effort to deliver a supersonic transport. The Soviets similarly delivered the Tu-144 Charger. Both planes flew until a decade ago, a roaring success both in transport, but also in the derived technologies which emerged from the programs. The US Effort, the 2707, similarly made leaps in technologies, effectively introducing the wide-bodied airframe concept which would later be utilized to much success with the 747. But it was stillborn, killed off before launch in a wave of government R&D cuts which also killed the Apollo program that had brought men to the moon.

Nobody knows what other technologies may have been discovered and developed had the 2707 continued. Boeing was looking into organic composite materials which could have revolutionized construction techniques in a similar manner to what carbon fiber has done today. It was developing new ways to fabricate the titanium components needed. Those ideas, those innovations, were just small bits of what could have been tapped had the program come to completion. And this is but one program.

The great leap forward in technology comes not with the profit motive, but in the drive for innovation for innovations sake. Private industry is focused on profits, short-term immediate profits. Companies which focus on long-term innovation often times find themselves under attack by their own shareholders. This breeds an environment of stagnation, where innovation becomes nearly impossible out of fear. A few small, but bad ideas, and a company can be written off entirely. This is not the environment within which to go boldly forward to the future.

Instead, to progress, you need public, state funded efforts. Imagine for a moment that the money invested into Solyndra or A123 was instead invested into public R&D into the same technologies. Instead of the firms bankruptcies locking away any innovation forever, the technologies would then be available to license for anyone. Improved solar, better batteries, no worries about an R&D budget you need to pay back in order to make investors happy. That is how you innovate. That is why nations like China are effectively taking over whole industries worldwide. Divorced from the profit motive, they developed new technologies, techniques, and innovations, which now are changing the entire marketplace.

We have a few signs that we remember this era. The DARPA Grand Challenge resulted in the appearance of self-driving cars on our roads. But for the most part, instead of developing technologies, we seem more likely to develop high profit turkeys which never seem to work right.

The US used to be a nation of ideas. Now we are a nation adrift. Our failure to innovate has cost us, and continues to cost us. How long will we put up with this, and will we chance our course in time?