It's the white heat of the tech revolution, again!

The white heat of scattershot government investment

The third problem is a more theoretical one from the hinterlands of economics. The thinking man's Marxist, Chris Dillow, makes this defence of the basic idea:

This is good economics, because it's likely that the market under-supplies investment in innovation.

As William Nordhaus famously pointed out, the social returns to innovation far exceed the private returns to producers. Innovation thus has a positive externality.

This means private firms will under-invest in it and so there is a case for state intervention. As Mariana Mazzucato has shown, state investments in technology can have positive spillovers to the private sector.

Remember what Mazzucato is really arguing: not that the state should subsidise such investments, but the state should profit from having subsidised in those investments. Apple should cough up the wonga, that is.

Now the Nordhaus stuff is absolutely correct, as I've mentioned around here before. The finding is that entrepreneurs only manage to hang on to a little under 3 per cent of the value that they create. Pretty much all the rest flows to us consumers in the joy and value of the new stuff we get to use and do.

The value of Google is that we get to Google, of Apple that we've got Jesusmobes and of Facebitch... well, something or other. And thus there is indeed that positive externality and thus the economics of public goods comes into play.

If you can't capture some decent portion of the value you create, then people will produce less of those things and thus that value. That makes us sad. So, yes, it's entirely consistent that there could or even should be public subsidy, because that's one of the things we have governments for and pay taxes for: to get public goods that we wouldn't have without them.

All of which is fine, except, of course, the one piece that Mazzucato is adding to the argument: that government should retain a stake in the technologies funded. For three reasons again: one being, as Orlowski pointed out above, that government in general is pretty shit at being able to work out what value is and how to have a slice of it.

Secondly, as Nordhaus points out, almost none of the value actually goes to the innovators in the first place. So arguing about what slice the government, for funding, should take is pretty meaningless. And thirdly, this is what we've paid taxes for in the first place: to get those public goods which the subsidies have secured for us.

What really worries me though about all of this is not the intellectual confusion – the "we must destroy corporate welfare in order to be able to create corporate welfare" stuff – it's that they're missing the basic point about what works. Markets do work, even if we have to tip or slap them a bit sometimes.

The reason they work is because we just don't know. We just don't know which new technologies will work, what unmet desires humans have or what the societal utility function is.

As such, if we are to slap and tip that market we've got to do it in an even-handed manner. Meaning that we've got to have standard allowances for R&D, capital allowances, things that anyone in any line of business can use in exactly the same manner. Rather than having someone in an office directing who may get that aid or help.

And yet the current argument is that we should get rid of the individually neutral tip and slap in favour of the directed ones from the Man in Whitehall.

It doesn't work.

Bootnote

* "The white heat of the technological revolution" is actually a slight paraphrasing of the contents of Harold Wilson's 1 October, 1963 speech to the Labour Party conference. A full transcript of the speech can be found here for those so minded, while a more entertaining video of a modern recreation of the speech – with a bit of introductory historical context – can be found here. ®