12/08/02016

Jason's Notes

For every Tesla grant success story you will see a half dozen Solindras. Without that government investment you will never get Xerox, micro computers, the Google search algorithm, or the Internet. These concepts became singularities that changed how business is done, but as singularity were wholly unpredictable with very high risk.

It's difficult to write out the question for the government versus entrepreneurial elements until you examine the risk factors. The simple easy truth is that big business has no interest in high-risk. The foundation of a good business is to outsource your risk to others. The entity that can take on big risk is big government. This has been shown over and over with major innovations in technology and pharmaceuticals in the last 50 years. You have no interest as a big business in taking those big risks and why not capitalize on a government program that allows you to upgrade and market basic research.

Countries that invested in themselves. Germany for example has a higher debt than Italy does. The issue for Italy is not its debt load, but rather its lack of income because it does not support basic research which leads to innovation which leads to market share. Germany, on the other hand, has consistently been riding a wave of innovation after innovation starting with becoming the preeminent tool and die makers to the world. Finland has been capitalizing on the concept of providing services to the Alternative Energy Market not the actual technologies.

The caveat is the necessity to share innovation with other innovators. The USSR had three times thee research funding as Japan. Japan's system of lateral sharing of ideas created a multiplier effect that outperformed the USSR's hierarchy of research silos.

Mariana Mazzucato

From the Long Now Foundation :

Government as radical, patient VC

The iPhone, Mazzucato pointed out, is held up as a classic example of world-changing innovation coming from business.

Yet every feature of the iPhone was created, originally, by multi-decade government-funded research. From DARPA came the microchip, the Internet, the micro hard drive, the DRAM cache, and Siri. From the Department of Defense came GPS, cellular technology, signal compression, and parts of the liquid crystal display and multi-touch screen (joining funding from the CIA, the National Science Foundation, and the Department of Energy, which, by the way, developed the lithium-ion battery.) CERN in Europe created the Web. Steve Jobs’ contribution was to integrate all of them beautifully.

Venture Capitalists (VCs) in business expect a return in 3 to 5 years, and they count on no more than one in ten companies to succeed. The time frame for government research and investment embraces a whole innovation cycle of 15 to 20 years, supporting the full chain from basic research through to viable companies. That means they can develop entire new fields such as space technology, aviation technology, nanotechnology, and, hopefully, Green technology.

But compare the reward structure. Government takes the greater risk with no prospect of great reward, while VCs and businesses take less risk and can reap enormous rewards. "We socialize the risks and privatize the rewards." Mazzucato proposes mechanisms for the eventual rewards of deep innovation to cycle back into a government "innovation fund"---perhaps by owning equity in the advantaged companies, or retaining a controlling "golden share" of intellectual property rights, or through income-contingent loans (such as are made to students). "After Google made billions in profits, shouldn’t a small percentage have gone back to fund the public agency (National Science Foundation) that funded its algorithm?" In Brazil, China, and Germany, state development banks get direct returns from their investments.

The standard narrative about government in the US is that it stifles innovation, whereas the truth is that it enables innovation at a depth that business cannot reach, and the entire society, including business, gains as a result. "We have to change the way we think about the state," Mazzucato concludes.

--Stewart Brand