12 May 2017

Why government could never invent the 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.

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 organises stuff in a new manner. An entrepreneur collates capital, labour, 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 per cent 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 an odd useful result.

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 defence 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’s, 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.

Tim Worstall is senior fellow at the Adam Smith Institute