Government isn’t (always) the enemy of free enterprise. From SpaceX to the Covid-19 vaccine, government money, combined with talent and entrepreneurship, is a potent combination that can bring about world-changing technological breakthroughs. For America, a country where many citizens value rugged individualism and hold that government is a beast that must be tamed, SpaceX’s success (among others) suggest otherwise.
SpaceX has achieved a great many breakthroughs and firsts in its relatively short existence. SpaceX was the first private company to launch into orbit using its own money and technology. It achieved the first landing of an orbital-class rocket back on Earth, and now regularly reuses rockets to reduce launch costs. For the American launch industry, this has been a godsend. The country was dead in the water in the commercial space launch industry just a few years ago, yet took the position as world leader almost overnight, thanks in large part to the success of SpaceX.
Technology Drives Economic Growth
Technology has always been and will always be the main driver that underpins long term economic growth. While it is possible to achieve economic growth by merely importing capital and exploiting resources (extractive growth), long-term growth requires growing labor productivity (inclusive growth). This labor productivity is enabled through innovation and technological advancement.
These days, labor productivity is the computer chips that do calculations faster. It is the fiber internet that makes downloading and uploading quicker. It is additive manufacturing that makes prototyping faster and cheaper. It is the drones that make insurance inspections safer and more affordable. The country that rules technology and innovation, rules the world.
The Myths of “Free” Enterprise
While Americans value the “free” market above all else, historically, many of the major breakthroughs that underpin the modern world, including many launched by startups, were initially funded with government money. It is a lesson that Americans are slowly forgetting as the “small government'“ ideological spin doctors have sought to convince Americans otherwise.
Take the iPhone, for example, a product that revolutionized communication, sharing, and the global economy. While many attribute the iPhone to the genius of Steve Jobs and the hard work of Apple engineers, this is a dramatic oversimplification. As Mariana Mazzucato writes, in The Entrepreneurial State, the technologies that culminated in the iPhone started with largely government-funded research.
The lithium battery that powers the iPhone can trace its roots to research done at the Department of Energy and National Science Foundation in the late 1980s.
The microchip which processes huge amounts of data arose from an industry that was supported in its infancy by the US Defense Department and NASA in the 1960s.
The GPS system that tracks your location and enables your phone to provide maps and other useful services is born out of a fully government-funded satellite network built for national defense.
The capacitive touch screen that enables your fingers to interact with the phone, can trace its roots to E. A. Johnson, who published his first studies on the topic while employed at Royal Radar Establishment (RRE), a British government agency for defense research.
Of course, the internet itself started as a Defense Department project as well, seeking to decentralize computing in the event of nuclear war.
Even SIRI can trace its roots to government research money. In 2000, DARPA tasked the Stanford Research Institute (SRI) to develop a ‘virtual office assistant’ to aid the military. With the emergence of the iPhone in 2007, SRI recognized the opportunity to use the technology as a smartphone application and commercialized it under the name “SIRI.”
This is all not to discount the importance of hard-working Apple engineers and the vision of people like Steve Jobs, but it serves as a cautionary tale for Americans who are increasingly convinced that “less” government is always better.
It is not clear that the private industry would have been able to fund the development of some of these technologies on their own. And don’t forget, Apple was also a direct recipient of government funds in its early years. Prior to its IPO, Apple was provided $500,000 from Continental Illinois Venture Corporation (CIVC), a Small Business Investment Company (SBIC) licensed by the Small Business Administration.
The story above isn’t an aberration either. From pharma to SpaceX, government money funneled through universities and other government programs help bridge the gap between struggling startups and venture capital funding.
SpaceX has received substantial aid, both directly and indirectly, on the taxpayer’s dime. SpaceX likely would not exist today otherwise. SpaceX received a cash infusion of $278 million under NASA’s COTS program, a program that was both wildly successful in saving tax dollars and helped foster a turnaround of fortune in America’s launch industry. SpaceX has continued to receive hefty government support through NASA and the DoD.
While Americans have a natural aversion to government money flowing toward private companies, government funding can serve a complimentary role to venture capital. The government can fill voids that the market cannot, targeting investments at basic research, groundbreaking endeavors, and those investments where the “payoff” is more amorphous, or too distant in the future (30+ years) for regular investors to consider.
For SpaceX specifically, this means the government should put its weight behind its Martian colony ambitions. A private company cannot sustain such a project on its own. The upfront capital required is too great and the returns on investment too distant in the future.
Remember, Christopher Columbus didn’t sail across the Atlantic to the New World on his own dime, he did so with the funding and backing of the King and Queen of Spain. No one could have foreseen what their investment could have unlocked at the time. We find ourselves in a similar situation with regard to Mars today.
Failure is an Option
As Elon Musk has often been quoted, failure is an option. Most new firms fail, and government-backed startups won’t be immune to this unforgiving reality. America’s growing aversion to funding startups and supporting groundbreaking research appears more rooted in political optics than logic.
High-profile failures, such as Solyndra, received enormous negative press coverage concerning how they “wasted” government money. Solyndra was one beneficiary of an $18 billion Department of Energy loan guarantee program. Solyndra’s failure was so widely known, it was used against President Obama’s reelection campaign.
What is often forgotten, however, was that Tesla was also a recipient of loans from this program. Tesla is now worth 33 times the entire program itself. If anything, this program was a massive success, but unfortunately Americans have been led to believe otherwise. The government itself may have lost money, but America as a whole gained.
Spin doctors and lobbyists are more than willing to spin these investments as failures because it is not in their interest for the government to invest in “new” things. Incumbent stakeholders, whether it be big oil, big pharma, big auto…etc have nothing to gain from government investments in startups or emerging technology, or anything that might disrupt their profits and their market position. So, they use their media influence and lobbying power to poison the nation against the idea of government taking an active role in innovation.
In Why Nations Fail, economists Daron Acemoglu and James Robinson illustrate how nations fall from grace politically and economically. Nations fall when their economic and political intuitions become “extractive,” that is, they extract wealth and funnel it toward incumbent interests. The SLS rocket, funded by NASA, is a prime example of this.
Nations grow and succeed, on the other hand, when their wealth and political institutions are “inclusive,” that is, they allow for the creative destruction of markets and innovation to run their course. In other words, nations prosper when they inclusively innovate, and they stagnate when they protect vested interests.
America risks becoming an extractive nation as the government continues its assault against university funding and research funding, on the false ideological basis of “small” government is always best. This leads no where except economic stagnation and political polarization.
Lesson For Us All
SpaceX can and does inspire millions of Americans every day. As Elon Musk says, his overarching mission is to make people excited about the future, and he certainly succeeds. But in SpaceX’s success comes valuable lessons for American policymakers. Government can and should compliment the market, especially by supporting startups in their early years and funding basic research. We need not fall victim to polarized zero-sum political ideology; government can be a force for good too.
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