Government’s role in implementing technological capitalism
For technological capitalism to be implemented successfully, in other words, for the voluntary exchange principle to be realized and the transaction costs from using markets reduced, technology tools need to be widely distributed throughout the entire population. The question arises as to what extent this technology diffusion is a job for government, or will free market entrepreneurs bring about the same level of diffusion at similar costs and in the same time scales?
Interventionist politicians make loud calls for government activity in the area of science and technology policy. Technology policy involves "a set of policies involving government intervention in the economy with the intent of affecting the process of technological change". (STONEMAN, 1992). Interventionist politicians view the development of new technology as fundamental to the pace, direction and form of industrial development. As such, they claim that governments should be broadly involved. However, technological development is fundamental with or without government intervention.
Interventionists justify their call for policy by pointing out that market failures occur in research and development activities. This causes too little innovation to occur because free markets do not generate sufficient incentives to undertake investment in science and technology.
For example, "appropriability" occurs when private sector firms are unable to earn a private return equal to the social returns for society and the public as a whole. A further market failure is "spillovers" which arises when one firm benefits from innovations generated by other firms. When this occurs, both firms tend to under-invest in research. The innovator refrains from investing because it does not want to benefit uninvolved firms. Conversely, the other firms benefit from innovation without having to pay for it.
However, market failures in science and technology do not necessarily justify policy intervention. It remains to be proven that the benefits of government intervention outweigh the costs and that the costs of intervention outweigh the costs of market failure.
Such market failures can be alleviated, for example, by systems of intellectual property rights which encourage innovative activities. Such systems should give firms a way of ensuring that they benefit fully and exclusively from innovations they generate. Patents reduce spillovers by assigning clear legal ownership of intellectual property rights such as technology developments.
Governments often justify technology policies by saying that the private sector under-invests in research and development because of the risks involved. Innovating firms do face uncertainty in that they do not know in advance if research activities will generate a return that justifies the research costs. However, such uncertainty is part and parcel of the entrepreneurial function: the risks from research must be in a representative relationship with the possible benefits, otherwise a commercially aware innovator would rightly choose not to undertake that level of investment activity.
The only technology initiatives taken by the public rather than the private sector that I like are:
Global System for Mobile communications (GSM). The European Telecoms Standards Institute (ETSI) coordinated the development of this pan-European digital mobile phone standard, which soon became the worldwide standard adopted in over 100 countries worldwide. Unusually, this means that Europe leads the US in wireless technology development. That said, GSM is more the exception than the rule, as other pan-European technology initiatives have failed in the marketplace, such as high definition television and cordless phone standards.
The South African Community Services Programme. When the South African government issued mobile phone licenses it stipulated that the private sector operators run Community Services Programmes to put in community payphones to extend telecoms service to poorer people. The network operators were happy to do so, given the lucrative nature of the commercial contracts and the need for positive publicity and public relations.
European Union Biotechnology Policy. Aimed at removing the red tape involved in getting new drug treatments approved. Focused on developing an environment which encouraged employment and treatment development in the biotechnology sector in Europe.
Much can and should be learned from this approach. Governments should limit themselves to creating the environment and not developing the technologies themselves or the applications of them. Often, innovation encouragement takes the form of government withdrawal and its guarantee not to interfere by taking profits or censoring the Internet and so on.
Many countries especially in Asia are currently investing in information infrastructure such as telecommunications and computing capacity. Of course, this technology deployment is a positive event, but could be more efficiently provided by the private sector and should be limited to ensuring a free and favorable investment environment. Governments should not waste taxpayer’s funds making bets about the future importance of specific technologies such as multimedia, videoconferencing and entertainment on demand, all of which I am personally skeptical about the compelling need for and transformative effects of.
Free market friendly governments should aim to:
raise the overall investment momentum by creating an industrial climate favorable to research and development activities.
reduce barriers to entering industries and thereby increase competition. This spurs accountability and choice and leads to lower prices, increased service and increased services as operators aim to differentiate themselves.
encourage teaching of computing and communication skills and an understanding of new media. India employed this strategy well, with its educated workforce attracting investment. Education leads to more industry and innovation than industry leads to education through technology transfer.
Industrial policy in general, and science and technology policy in particular have been discredited over the past few years. As with government policies in general, it is proving ever more difficult for politicians to pick winning companies or technologies or industries in the dynamic and complex unorganized world.
Increasingly, policy making in science and technology is not only hazardous in developed economies, but also unnecessary. Venture capital firms help to finance innovations. The private sector venture capital model in the US encourages entrepreneurs by providing free or low cost services such as banking, legal and property to start up firms. In return, these service providers receive a share in any subsequent Initial Public Offering of that company’s stock on the stock exchange. There is a lot that other countries can learn from such a supportive model.
Additionally, consultancies help to diffuse process innovations and best practice between firms and industries. Outside expertise is also available to supplement managerial know how, for example, from business incubator units offering resources and advice to start up firms. Partnerships and strategic alliances are providing access to expertise and innovations from other firms which when combined with those other alliance partners spurs further innovations. Innovative activities are encouraged because they are the key to attracting alliance partners. Technology companies vie to establish industry standards; licensing and often giving away technologies causing rapid diffusion!
Entrepreneurs in free markets should be free to innovate. Technologies are rapidly getting both more powerful and simultaneously cheaper. This increased power makes for more flexible technologies which are easier to use. Private sector companies are always looking for ways to make their technologies more accessible to the whole market so as to maximize their return from technology development costs. For example, prepaid mobile phones take cellular into another sector of the market and Internet access via a television or network computer means that a high power and expensive personal computer is not needed to benefit from Internet access.
The best and cheapest way to encourage entrepreneurs to research and develop is for politicians to cease and desist.
Author: Simon Buckingham
What do you think?
- To make a comment to the author, send e-mail to simon@unorgan.com
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