• Tag Archives innovation
  • Bitcoin Is a Great Counterpoint to Calls for Government Innovation Subsidies

    Bitcoin Is a Great Counterpoint to Calls for Government Innovation Subsidies

    Title: How Bitcoin Highlights the Problem with Innovation Subsidies

    Subtitle: The story of bitcoin shows us that true innovation follows its own path.

    Abstract: If bitcoin is a specific case that exposes the general flaw in innovation economics, what other opportunities are being suppressed or missed because capital is being misallocated by innovation subsidies?

    Dave Birnbaum

    Have you heard of “innovation economics?” This relatively new school of thought represents a shift away from traditional economic theories, and emphasizes entrepreneurship, technological innovation, and, you might have already guessed, government intervention as key drivers of economic growth.

    Since one of the members of the Federal Reserve Board of Governors subscribes to the concept of innovation economics, understanding this school of thought may help us interpret or even anticipate policymaker’s decisions that will affect us all.

    Rooted in the ideas of thinkers like Joseph Schumpeter, this framework seeks to recognize the importance of innovation to an economy, not just the management of resources, and provides a theoretical framework for how to encourage and accelerate the creation of new technologies, products, and services.

    Unlike classical economics, which focuses on equilibrium, innovation economics sees economies as dynamic and continuously evolving. While it’s true that the economy is a dynamic system, its proponents take this a step further, arguing that targeted government support can stimulate technological advancement, productivity growth, and economic progress.

    This approach has shaped policies in the United States over the past 20 years. Proponents point to the America COMPETES Act, STEM education initiatives, and technological research and development grants as notable outcomes.

    However, when you strip back the jargon, it becomes clear that innovation economics is just a new veneer on an age-old concept: government picking winners and losers. It is centralized industrial policy making updated with the trappings of the 21st century, and nets out to yet another form of state capitalism. The clear evidence for this can be found in an unlikely place: bitcoin.

    A decentralized digital currency that is radically improving the world economy, bitcoin’s story is remarkable. In 15 short years, a moonshot to create a universal honest ledger has been adopted by hundreds of millions of people, and even nation-states. It is sound money that can be sent anywhere in the world, and promises change that both sides of the political aisle could get behind, from healthy market competition in the financial sector, to protection from exploitation for the populations of poor countries.

    Ironically, bitcoin would be an ideal candidate for an innovation subsidy, given the tremendous positive impact it could have once key technical problems are solved. Its potential to revolutionize the financial system, enhance privacy, and democratize finance makes it a game-changer. And, although there is a robust commercial and industrial ecosystem evolving naturally around bitcoin, there is no question that the ecosystem would develop faster if it were subsidized.

    However, the benefits offered by bitcoin come at a cost to the power of state apparata, which depend on seigniorage (profiting from money-printing) as a key lever of power. Whatever you think of bitcoin and its long-term prospects, there’s no question that if it were to succeed, it would obviate the need for government-controlled fiat currencies and the central banks that issue them, and reduce the power of the state over the economy.

    Hence, even though bitcoin subsidies would seem to be consistent with the stated objective of innovation economics of helping people, bitcoin would never receive government support precisely because it works against the government’s interest in maintaining control over fiat currency. This exposes a congenital defect of innovation economics—it must be biased towards preserving the power and control of those who decide what to subsidize.

    This leads to a broader question that the reader must ponder. If bitcoin is a specific case that exposes the general flaw in innovation economics, what other opportunities are being suppressed or missed because capital is being misallocated by innovation subsidies?

    The story of bitcoin, an innovation that emerged and thrived without government support, serves as a sobering reminder that true innovation often follows its own path.

    Furthermore, it is not possible for the government to pick winners and losers in the innovation race without prejudice or self-interest. While innovation economics has alluring promises and can point to specific successes, it fails to escape the biases and conflicts that inevitably arise from government intervention.

    Despite its modern facade and claimed successes, the theory of innovation economics falls short of delivering an unbiased, effective path to technological innovation. The specific case of bitcoin, coupled with the general potential for missed opportunities due to biased capital allocation, calls into question the very foundations of this approach. Policymakers and economists would do well to carefully consider these flaws.


    Dave Birnbaum

    Dave Birnbaum is the product director at Coinbits, where he leads a team that is making Bitcoin user-friendly for the next generation of Bitcoiners.

    This article was originally published on FEE.org. Read the original article.


  • Don’t Thank the Government for Your iPhone

    Don’t Thank the Government for Your iPhone

    There is much chortling in economists’ circles at this tweet from Marianna Mazzucato:

    Yes, I know, but then economists don’t have much in the way of jokes. The laughter is because Ms. Mazzucato is the economist who insists that government is responsible for innovation in this world of ours. Yes, that’s right, the same government that took four months to notice a typo on a visa application, she argues, is the one which made the iPhone possible.

    She’s written an entire book on the subject of the entrepreneurial state and is setting up an institute to propagate the idea.

    Invention vs. Innovation vs. Government


    The problem with her assertion is that she, and her acolytes, have forgotten the basic economics of invention and innovation – something which we really should remember given that William Baumol, the man who explained it all to us, died this past week.

    The essential point is that we must distinguish between invention – the creation of new things – and innovation – the combining of extant things to enable new things to be done. Baumol was insistent that the state was equally good, or equally bad, if you prefer, at that invention part in comparison with the market unadorned. But the market performed heroically in comparison with the state with regard to innovation.

    This is a hugely important distinction – don’t forget that the word “entrepreneur” is not meant to mean someone who invents new stuff, it’s meant to mean someone who organizes stuff in a new manner. An entrepreneur collates capital, labor, and technology in order either to sate some human need or to do so in a different manner. The state, as Baumol insists, is bad at being the entrepreneur.

    It’s not even, as a series at The Register shows, very good at supporting the invention either.

    Mazzucato’s basic observation is that the varied underlying technologies which go into an iPhone were all backed by government money. The touch screen, for example: it was, in a small way, state-funded in America. But the Register story is all about how the British state invested in an earlier solution to the same problem and entirely messed it up.

    You’d think that if the state were taking 40 percent of everything everyone does every year, then, as with the blind monkey who occasionally finds a banana, we should get some useful tech out at the other end. However, the broad point is that this isn’t an efficient way of doing it – whether or not it produces the odd useful result.

    Where Government Funds Start and Stop

    And even this is to miss Baumol’s point. Let us concede, for the sake of argument, that all of the iPhone technologies did come from government paid research. GPS, for example, was designed to let soldiers know where they were and where the enemy was assumed to be. We can call that invention. But no government ever thought to put that same technology into a smartphone so that we could be sent an ad by the doughnut shop we just walked past. That’s innovation, a new use for an extant piece of technology.

    Nor has any government ever designed a successful smartphone. Even if the basic technologies all were tax-supported, government didn’t do the innovation. Apple designed and made the iPhone, not government.

    As for our government, we wanted to have a slice of the equity in what was being developed with tax money – the touch screen technology. The American version of the same sort of thing was also developed with tax money through Darpa, the defense research agency. But the one thing that Darpa never does do is take equity stakes in technologies it funds. That’s why any old entrepreneur can pick up a Darpa-funded technology, play with it, and see if it can be combined in some useful manner into something people want.

    Mazzucato, however, insists this sort of government invention must be run the British, unsuccessful way, not in the successful and American manner.

    This is to misunderstand economics at an even more basic level than Baumol’s ideas, for the reason that we ask government to fund basic research is because it is a “public good,” something that the private sector will not fund because it is almost impossible to make a profit out of it. Thus there will be too little production of public goods and we’ll be made richer if the state overcomes this problem.

    Mazzucato is now insisting that the state must take ownership of the public goods it creates. Yet the very reason we ask the state to create them is because it’s damn near impossible to usefully own them. This is not a notably logical line of reasoning.

    The very analysis which leads to us asking the government to tax-fund certain research is the very reason why the government shouldn’t be trying to own the results.

    Inventions are public goods. Gaining access to public goods is one of the reasons we have government – because ownership of such isn’t really possible. Which is why, if the state does produce them, it should give them away. We’ve paid our taxes, we’ve got our public goods, what’s the problem here?

    And no, the state did not invent the iPhone. That’s innovation, the one thing government is provably, ridiculously, bad at.

    Republished from CapX.


    Tim Worstall

    Tim is a Fellow at the Adam Smith Institute in London

    This article was originally published on FEE.org. Read the original article.