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America’s Stealth Industrial Policy

• May 30, 2008 • 11:05 PM

Free marketers want the government off business’s back, notes a University of California sociologist, but they may not realize how much of the spine is government funded.

Back in 1998, Bill Gates bragged about the dynamism of the U.S. computer industry and claimed: “There isn’t an industry in America that is more creative, more alive and more competitive. And the amazing thing is that all this happened without any government involvement.” — cited in Glenn R. Fong, “ARPA Does Windows: The Defense Underpinnings of the PC Revolution,” Business and Politics (2001).

Gates’ anti-government vehemence is understandable; his statement was released as the Justice Department was filing its major antitrust case against Microsoft for abusing its dominant market position. Still, Gates was deliberately invoking a false story line about innovation in the U.S. economy.

The story line has been endlessly repeated by the ideologues of the free market. The dynamism of the U.S. economy allegedly springs only from the entrepreneurial energy and imagination of the people who run large, medium and small firms. Government’s role is almost entirely negative; its mindless and unjustified regulatory efforts and its burdensome taxes only make the job of entrepreneurs harder. If government would only get off the back of these businesspeople, then we would truly see dramatic technological innovation.

But Bill Gates’ specific claim and the general story line are simply false. The rise of the computer industry in the U.S. was, at every stage, orchestrated by major government initiatives and even to this day large federal investments are being made to keep the U.S. computer industry ahead of foreign competitors. Nor is the computer industry atypical. Virtually all U.S. industries have become heavily dependent on scientific and technological advances that are financed primarily by the federal government’s support of university and government laboratory researchers.

Moreover, these advances are nurtured and shepherded into commercial products through the efforts of dozens of different government programs. In a word, the U.S. has a dynamic and highly effective industrial policy.

The conventional wisdom, of course, is that the U.S. doesn’t have an industrial policy. The U.S. did have a serious policy debate in the early 1980s when advocates of industrial policy urged the U.S. to emulate the Japanese model and set up a centralized agency that would “pick winners” by channeling substantial government funds to particular firms and industries. However, these advocates were defeated by the proponents of the free market who insisted that only markets could “pick winners.”

It is true that the U.S. rejected the Japanese model of industrial policy in the 1980s. But in that period, leaders in the legislative and executive branches who were concerned about U.S. competitiveness took initiatives that helped the U.S. to develop its own highly decentralized form of industrial policy that takes advantage of U.S. global leadership in scientific and engineering research. This new model drew heavily on the highly successful efforts of the Advanced Research Projects Agency in the Department of Defense.

Historians recognize that ARPA played an indispensable role in advancing the computer and microelectronics industry in the U.S. The agency funded the initial creation of computer science departments in major universities, financed many of the most important hardware and software innovators, and its ARPAnet ultimately became the Internet. ARPA’s program officers identified key technological challenges and funded different research groups whose work showed promise of meeting that challenge. When the key innovators were university-based researchers, ARPA officials helped them to make the connections to get their innovations into the marketplace.

Policymakers in the 1980s and 1990s built on ARPA’s successes by diffusing them to other agencies and by accelerating the movement of innovative ideas from publicly funded laboratories to the commercial marketplace. One key mechanism is the Small Business Innovation Research program that provides more than $2 billion a year of support to small firms, many of them newly created startups. Grants that come with no strings allow these firms to push forward thousands of different innovations, many of which have achieved success in the marketplace in literally every corner of the economy.

Other U.S. agencies have also followed ARPA’s model of setting technological targets for groups of researchers in industry, universities and government laboratories. At the Department of Energy, the Advanced Technology Program at the National Institute of Standards and Technology, and at the National Institutes of Health, it has been standard practice for years to focus the energies of researchers on surmounting key barriers that block commercialization of particular technologies.

The importance of this system of industrial policy is indicated by the R&D 100 Awards announced each year by R&D Magazine. These have been called the Oscars of technology: They go each year to 100 innovations that are incorporated into actual commercial products. In 2006, 88 of the awards were given for innovations developed in the United States. For 77 out of these 88 innovations, there is evidence that federal dollars helped to finance the specific technology.

In short, the government is deeply involved in many of the most exciting new products that U.S. industry is putting into the marketplace.

But why isn’t the existence and success of this decentralized industrial policy better known? One answer is that decentralized industrial policy is much harder to study or report on than the Japanese model, where many of the key actors are assembled under one roof and produce voluminous reports on their successes. There are some excellent case studies of the federal role in certain key technological breakthroughs, but it is easy to dismiss the results as atypical.

Another answer is that we have been fooled by the free market story that Bill Gates invoked when he was at war with the Justice Department. Relentlessly pushed by the Republican right and its big business allies, the market narrative leaves no room for a positive governmental role. The results are evident in even the best newspaper accounts of recent technological breakthroughs. The New York Times, for example, might report that Intel or IBM has made a major breakthrough in developing a new optical chip that portends much faster computing speeds. Only in one of the very last paragraphs will they disclose that the research was funded by ARPA or another government agency, and they never report systematically on the research efforts being supported by that agency.

But the risks are great if we continue to let our industrial policy lie hidden in the shadows. Solving the linked problems of high energy prices and global climate change requires a dramatic expansion in federal efforts to accelerate the diffusion of green technologies.

The good news is that we have a system in place that is up to the challenge. But if we continue to be fooled by the free market narrative, we will be unable to save ourselves or the planet.

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Fred Block
Fred Block is professor of sociology at the University of California at Davis and a senior fellow with the Longview Institute. His current research on U.S. technology policy is supported by a grant from the Ford Foundation.

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