Should government play a role in innovation?

Fareed Zakaria published an interesting article in this week's TIME Magazine. He notes that:

"the ecosystem that encourages technological breakthroughs and their application does not develop in a vacuum. It requires great universities, vibrant companies that devote time and energy to research and — yes — large amounts of government funding." (TIME Magazine)

 Zakaria makes an interesting assertion in the article: he states that, in many countries such as Germany and even China, the public unquestioningly accepts the idea that government should play a role in research and development, and therefore in innovation in general. He compares that to the attitudes of many in American society who question the role that the state should play in funding research at universities and within government agencies.


Economics would generally have us believe that the government should interfere with economic activity under very well-defined circumstances, known widely as situations of "market failure." Markets can fail for several reasons, including the existence of externalities, transaction costs, or monopolies or the lack of property rights. When it comes to R&D, are any of the conditions which justify government intervention met? 

It's hard to point to any of the items listed under the causes of market failure that would justify government intervention in innovation. There are externalities from innovation, certainly, but these tend to be overwhelmingly positive rather than being something to avoid, such as pollution. The existence of transaction costs and monopolies doesn't really apply here, and the protection of property rights we enjoy in the United States is the envy of the world.

Instead, I'd argue that the real reason government should play a role in innovation has to do with risk.

A perfect example is NASA and the space program. In 1950, there were few -- if any -- private companies that could float the risk of beginning a space program. Sure, the potential benefits were astronomical, but so was the risk of catastrophic and spectacular failure. It's impossible to say without doing the benefit-cost analysis, but my guess is that the risk of failure made the expected value of success extremely low. Given that the goal of all firms is to keep existing, launching a private space program would be like telling your friend you'd give him $1 million if he made it through a round of Russian roulette; at the end of the day, the risks just aren't worth the reward.

Enter the U.S. Government, however, and the scene changes. The government will never fail to exist. Certainly, it can fail, but there will always be a government. Add to this nugget the fact that the government has an unholy amount of money (usually) available, and the risk of catastrophic failure seems much more trivial. The factor that prevents a private firm from entering the market for innovation -- thereby causing market failure -- is no impediment to a determined government.

Consider also the benefits of the innovation government -- and, particularly, the military -- has sponsored. The internet and GPS both revolutionized society in ways that were impossible to comprehend during their development. A friend from my department likes to cite the example of the interstate highway system. Originally built to move military equipment quickly around the continent, our highway system led directly to vast economic growth, whether through the establishment of countless roadside McDonalds' or the development of the sea of suburbs that surrounds our major urban centers, not to mention the boon to industry that arises from the ability to move goods quickly from coast to coast. No private firm would have supplied the interstate highway system on its own; it would be impossible to foresee the incredible economic value that would arise from its construction.

This is why I firmly believe that the government should play a role in innovation. (It also doesn't hurt that my livelihood will very likely depend on USDA, EPA, and NSF grants in the future) Looking back at recent history, no one would make the decision to cut the development of the Internet or GPS just to save a couple million (billion?) dollars in the short run. The benefits those tools have bestowed on society are innumerable, and, yes, the government gets the credit for them.