Government as an Investor in Capacity By contrast,

 

Government as an Investor in Capacity
By contrast, government is the actor in the economy best positioned to act with an eye to
the long run, undertaking investments that provide a platform for economic growth. Firms have
only weak incentives to invest in new technologies that are radically different from those that
already exist. Formerly radical new technologies required decades of public support to reach the
threshold of commercial viability. Direct government investment is essential, given the longterm, risky and commercially unpredictable nature of basic research. Entrepreneurial firms have
been most innovative when given the opportunity to capture economic rents opened up by
complementary public investment.

 These are far from being simply theoretical ideas; we have
exemplary cases of government investment in the development of nascent but transformative
technologies, such as radar, penicillin, atomic energy, the Internet, and space travel.
Rather than relying on the market-based rationales for public investment, it is important
to define the function of the public sector as building and bolstering the capacity for economic
actors to realize their potential. Rather than viewing individuals, firms, and communities as
objects on the receiving end of public initiatives, economic development requires that they be
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considered as active agents. This prioritizes improving quality of life and wellbeing by
enhancing capabilities and ensuring that agents have freedom to achieve their potential as
productive members of society. When every actor in society is capable of being an active agent
with the potential for full participation in economic and communal life, society makes better use
of available resources.
If we reconsider the rationale for government investment through a capacity building
lens, then government serves as a facilitator for the population at large, including the private
sector. By promoting capacity, the public sector’s contribution extends beyond improving
efficiency and equality towards bolstering a foundation upon which long-term growth and
development can be sustained.
Evidence suggests that at a time when market fundamentalism has come to guide policy
debates, government has actually become more and more immersed in the economy through its
technology policies (Block & Keller, 2009) and public institutions (Schrank & Whitford, 2009).1
Rather than being confined to the R&D labs of large corporations, innovative activity is now
embedded in networks of scientific collaborators between both public and private institutions.
This decentralization encourages organizations to work in concert and also fosters a greater
dependence on government programs that provide incentives to form networks and subsidies that
lower the costs of coordination. In their examination of the R&D 100, which catalogs cuttingedge premier innovations, Block and Keller (2009) observe that organizations have moved away
from vertical integration toward relying more heavily on complex collaborations that include
governmental agencies or government programs as important conveners and intermediaries.
Inter-agency collaborations like the United States’ Jobs and Innovation Accelerator Challenge
are a perfect example of this emergent practice.2
At the same time, bolstering capacity as a rationale for government intervention is as old
as the American republic. As Alexander Hamilton (1791) highlighted in his Manufacturing
Report presented to the House of Representatives, the government holds the responsibility to
1 While the most recent estimates of public investment in university R&D show slight declines, this is attributable to
financial constraints that resulted from the recent economic recession rather than a changing shift in public support
for R&D. Source: http://www.insidehighered.com/news/2012/01/23/state-funds-higher-education-fell-76-2011-
12#.Tx1RreVDRX4.mailto
2 http://www.eda.gov/challenges/jobsaccelerator/
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build a foundation so that the private sector can flourish. He emphasized the role of
manufacturing in leading the country toward economic growth and prosperity. Hamilton saw
manufacturing as a complement to other economic activities, providing for the “employment of
persons who would otherwise be idle (and in many cases a burden on the community), and
increasing the viabilities of communities.” Following Hamilton’s advocacy, tariffs were imposed
on imported manufactured goods. These tariffs were the major source of government revenue
until the imposition of the federal income tax. This infant industry policy supported the
development of U.S. manufacturing, which became the backbone the economy.
3
Capacity building has been instrumental throughout American history. From Alexander
Hamilton’s tariffs on manufacturing imports to John Kennedy’s space race and DARPA’s
investment in the early Internet, government has been critical to the American economy.
Investments in building the TransAmerican railroad or supporting the World Wide Web by the
Department of Defense and the National Science Foundation have served to enhance the private
sector abilities. In the United States, there have been cyclical debates about the role of
government with the waning and waxing of regulations, tariffs and social policies. Yet the role of
government in building scientific and research capacity has never been questioned. A long-term
contract between the public and private sector has been the foundation for American prosperity,
providing the opportunity for the private sector to create, build, employ, trade and innovate.
Arguably, this kind of active involvement in development characterizes most of the examples of
successful national catch-up during the 20th century (Freeman, 1987; Page, 1994; Rodrik, 1994).
Capacity is essential to innovation and entrepreneurship. Innovation relies on creativity
and we are never sure where genius originates. Our investments in building innovation capacity
come with a certain level of necessary risk because the results cannot be immediately observed
nor can we accurately predict how they will be affect products and processes over time. For
example, J.K. Rowling was a welfare mother when she wrote her first Harry Potter manuscript.
The result demonstrates the potential of small, seemingly inconsequential efforts (Bell 2012). It
took Rowling 12 attempts to find a willing publisher. Once published, the novel did well. It
created an entire new category of fiction for young teens – an audience that publishers felt was
moribund. Of course, Rowling had the capacity to pursue her ambition: she was well educated
3 Unfortunately, too often tariffs have been used to support mature industries.
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and public assistance gave her the chance to pursue her ambitions. As reported in the Financial
Times in 2003, J.K. Rowling became wealthier than the Queen of England.
4 Like a true
entrepreneur, her ideas have created wealth and jobs through subsequent films, video games,
toys, and now even, a theme park. The underlying idea from this simple example is that it is
impossible to predict which ideas will create the desired outcomes. But the greater the capacity
in the total population, the more likely that unexpected ideas can take hold and innovation will
propel the economy forward.