Technology × Freedom

Debunking “America has become so anti-innovation – it's economic suicide”

May 19, 2017 nitsuj

When Juicero – a $400 juicer backed by $120 million in venture capital (VC) funding – was outed last month for doing little more than squeeze expensive juice packs about as well as you can with your hands, the internet had fun poking fun at it for a few days. Ben Tarnoff, however, wasn’t laughing for long. What he saw was much more menacing, with significantly higher stakes. The headline he wrote under says it all: America has become so anti-innovation – it's economic suicide.

Unfortunately, Tarnoff’s article is about as misguided as the story of Juicero he begins with.

His line of thinking goes like this (being as unbiased as possible here):

  1. Juicero is yet another example that America has become anti-innovation, the result of which is economic suicide.
  2. The root of the problem is the incorrect belief that entrepreneurs in the private sector are great innovators. In reality, VCs want a big payday on a short timeline, and corporations don’t invest much in R&D.
  3. The truth is government and the public sector is where innovation, and the money that fuels it, comes from.
  4. Austerity and tax cuts have gutted funding for government and the public sector to innovate.
  5. Capitalism has failed to produce economic growth and “works better in theory than in practice.”

Other than Juicero and some sweeping statements about the technology, energy, and pharmaceutical industries benefitting from government research, Tarnoff offers little evidence to back up these claims. He instead defers to Mariana Mazzucato’s The Entrepreneurial State, the theme of which appears to have shaped the entirety of Tarnoff’s theory. To critique Tarnoff, then, is to critique Mazzucato. And many have.

In his article The “Entrepreneurial” State is Anything But, Tyler Kubik explains that Mazzucato falls for both the broken-window fallacy and the unbroken leg fallacy. The broken-window fallacy, as Kubik quotes Henry Hazlitt,

is the persistent tendency of men to see only the immediate effects of a given policy, or its effects only on a special group, and to neglect to inquire what the long-run effects of that policy will be not only on that special group but on all groups. It is the fallacy of overlooking secondary consequences.

Kubik then explains how Mazzucato falls for the fallacy:

The special groups referred to above by Hazlitt are those industries Mazzucato focuses her case studies on, most notably green energy and the solar and wind power industries. It is easy, but meaningless, to discuss the effects of policy in a positive light when one’s sole focus is on the industry being subsidized, in the case of green energy to the tune of billions of dollars each year. The unseen of these policy prescriptions, however, is what would have happened had these resources not been consumed by the inefficient green energy industry. No one can say where the funds would have ended up or how they would have been spent, but it is certainly true that by subsidizing green energy, it meant that the money was not available for other industries to grow and innovate; nor was it left in the pockets of taxpayers to decide where they wanted their money to go for themselves.

To explain the unbroken leg fallacy and its effects, Kubik defers to Robert Higgs:

This is the presumption, which underlies all sorts of state intervention, both macroeconomic and microeconomic, in the market system, that the participants in markets are perfectly capable of acting more productively but, owing to various “market failures,” are not doing so on their own and require state action to repair the situation. The fallacy is that this reasoning completely ignores the countless ways in which the state’s own intrusions and engagements in the economic system in effect “break the legs” of private-sector actors by distorting prices (including interest rates), penalizing productive actions, and subsidizing destructive actions. Having invaded the economic order like the proverbial bull in a China shop, the state’s kingpins … blame “market failures” for the wreckage they themselves have created — an ever-changing hodgepodge of bad incentives.

Peter G. Klein, in his article Government Spending on "Innovation": The True Cost Is Higher Than You Think, continues the critique of Mazzucato and others who believe research is a “public good” that only government can provide:

First, it confuses technological innovation (impressive to engineers) and economic innovation (valuable to consumers). Second, it confuses gross and net benefit — of course, when government does X, we get more X, but is that more valuable than the Y we could otherwise have had? (Frédéric Bastiat, call your office.) Third, it confuses treatment and selection effects of government spending — government typically funds scientific projects that would have been undertaken anyway, such that a main benefit of government spending on science and technology is to increase the wages of science and technology workers. Fourth, as writers like Terence Kealey have pointed out, if you look carefully at the details of the sorts of programs lauded by the [New York] Times, you find they were grossly inefficient, ineffective, and potentially harmful.

Klein’s first point is particularly significant in light of Tarnoff’s assertion that the U.S. is committing economic suicide. Tarnoff assumes that government innovation directly leads to economic growth, when in fact there are myriad examples of such research simply being a waste of money with no positive economic impact. Like the $2.6 million the government spent to train Chinese prostitutes to drink responsibly. Or the more than $100 million they spent building an airport (with no airplanes) and harbor (with no roads) in an Alaskan town with almost no people. Or the $856,000 they spent to teach mountain lions how to walk on treadmills to better understand their instincts. I could go on, and on, and on.

My point being, these examples show that, without market forces, the government has no indicator as to what’s worth allocating resources to and what’s not. Tarnoff understands that the government is insulated from market forces, but fails to see (or ignores) where that logically ends: the government funding hundreds, if not thousands or tens of thousands, of their own Juiceros.

Unlike Juicero, however – which had no negative economic impact on me, as I did not invest in the company or purchase the product – failed government research is paid by me (and you) through taxes and monetary expansion, the latter of which causes prices to go up and the purchasing power of the dollars in my pocket to go down. Even when a project is successful – yes, that happens sometimes – if I don’t agree with or benefit economically from said project, I’m still on the hook. I can’t pick and choose whether my money goes to green energy or the bombs that kill innocent civilians in nations the U.S. government has chosen to overthrow.

Shifting focus from the public sector to the private, the idea that entrepreneurs and corporations are somehow worse at innovating, or don’t invest enough in R&D, is also called into question by many examples to the contrary. Like SpaceX, the aerospace company founded by Elon Musk with the goal of one day colonizing Mars, which recently accepted a $1 billion investment from Google and Fidelity. Or Apple, which just announced a $1 billion U.S. manufacturing fund. Or all of the investment and innovation happening around artificial intelligence (AI), machine learning, and self-driving cars. One of the most successful VC startup incubators, Y Combinator, launched an entire research division focused on innovation, with their first venture being OpenAI. And don’t forget Bitcoin and the underlying blockchain technology that has the potential to decentralize everything from web apps to logistics. Finally, when the rich aren’t spending their money on “sports cars and superyachts” as Tarnoff puts it, they sometimes donate their wealth to innovation benefitting the common good. Like the Bill & Melinda Gates Foundation’s endowment of $44.3 billion, or the Chan Zuckerberg Initiative, to which its namesakes have pledged 99% of their Facebook shares (valued at $45 billion). As before, I could go on.

So if Juicero isn’t yet another example that capitalism has failed – that government and the public sector innovates better than entrepreneurs in the private sector – what is the explanation? I’ve actually already touched on it: monetary expansion. When the government floods the economy with cheap money printed out of thin air, it distorts market indicators, making many unprofitable projects appear profitable. Perhaps the investors in Juicero had so much cheap money at their disposal that it lowered the bar of what they considered a good investment.

In the end, Tarnoff is correct about economic suicide occurring, but points the finger in the wrong direction. It’s not entrepreneurs in the private sector, the free market, or capitalism causing this – it’s the economic policies of the U.S. government. And his prescription is even worse, handing more control over the economy to the killer. As Ludwig von Mises so eloquently put it in The Economic Consequences of Cheap Money:

All this amazing wealth is fragile, a castle built on the sands of illusion. It cannot last. There is no means to substitute banknotes and deposits for nonexisting capital goods. Lord Keynes, in a poetical mood, asserted that credit expansion has performed "the miracle … of turning a stone into bread.” But this miracle, on closer examination, appears no less questionable than the tricks of Indian fakirs.