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Why we need the government for innovation

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(Read caption) Sempra Generation's Copper Mountain Solar 1 installation in Boulder City, Nev., is the largest photovoltaic solar plant in North America, utilizing 775,000 panels to power about 14,000 homes. Bernstein argues that innovations like solar power cannot come to fruition without government help.

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This oped makes an important point, one I’ve also made in those endless, uninformed debates about why the government shouldn’t pick winners, and how markets know best, and all that gov’t can do is cuff the invisible hand, yada, yada.

In fact, you can’t find an important economic innovation wherein the federal government hasn’t played a key, developmental role.  This piece focuses on energy exploration, in this case, fracking for shale gas (more on that below):

Many often point to the shale gas revolution as evidence that the private sector, in response to market forces, is better than government bureaucrats at picking technological winners. It’s a compelling story, one that pits inventive entrepreneurs against slow-moving technocrats and self-dealing politicians.

The problem is, it isn’t true.

The breakthroughs that revolutionized the natural gas industry — massive hydraulic fracturing, new mapping tools and horizontal drilling — were made possible by the government agencies that critics insist are incapable of investing wisely in new technology.

You can go back to the Revolutionary War and find government’s fingerprints on innovations from machine tools to railroads, electricity transmission, transistors, lasers, the internet, GPS, and every aspect of energy exploration and development (this book is a great source for such information).

“We don’t pick winners” is not only a canard that reveals a lack of historical perspective.  It’s a great way to thwart American global competitiveness because there’s simply no question that other economies, advanced and emerging, are not the slightest bit hamstrung by such ideological myths.

Why?  Because there’s a market failure here:

..the private sector alone cannot sustain the kind of long-term investments necessary for big technological breakthroughs in the midst of volatile energy markets and short-term pressure to produce profits.

Let me be clear that I am not endorsing fracking, which is considerably more environmentally controversial than this article allows (they admit to worrying about its impact).  But if we don’t learn this lesson about gov’t’s role, or if we let the failure of Solyndra shut us down, we’ll fail to develop the energy alternatives that must ultimately replace fossil fuels.


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