America Won’t Beat China by Becoming China
In the race for global tech supremacy, the United States will not beat China by becoming China, as many pundits today effectively argue it will. America should instead re-embrace and extend the innovation culture that made our nation’s information-technology sector a global powerhouse: open markets, skilled workers, vibrant capital markets, and flexible public policies that reward bold entrepreneurial endeavors.
The let’s-be-more-like-China crowd calls for a different approach: retrench and re-shore, break off global trade ties, massively boost government support for favored firms and sectors, and do a whole lot more bureaucratic steering of tech markets toward predetermined ends.
Writing in the American Conservative recently, Wells King of American Compass offers a concise articulation of this new thinking. Channeling President Barack Obama’s infamous 2012 “you didn’t build that” speech, King decries the so-called “founding myth” of the information-technology sector, and claims that “Silicon Valley was the product of aggressive public policy” and enlightened technocratic design. He also rails against the idea that America’s digital-era ethos of “permissionless innovation” had anything to do with the success of the internet, insisting instead that the system’s Cold War–era origin as a government-subsidized network constitutes “a remarkable success of industrial planning.”
This is revisionist history of the highest order. Science writer Matt Ridley calls this sort of thinking “innovation creationism,” or the notion that it basically takes a village to raise an innovator. Supporters of grandiose industrial-policy planning and splashy public-spending programs ignore all the inefficiencies, cost overruns, cronyism, and bad bets on economic-development gambits that were almost doomed to fail from the start. Revisionists such as King prefer instead to cherry-pick a few stories in which government seems to have helped, and then suggest that the economy be reorganized according to a grand new top-down blueprint, specifying which types of innovation will get public support.
While King blithely claims that, “The customer is always right—especially when the customer is the Pentagon,” in a great many cases the military-industrial complex has chosen badly when betting on future technologies. The three-decade, $1.7 trillion F-35 Joint Strike Fighter project managed to incur billions in cost overruns, while in the realm of space, the International Space Station’s price tag ballooned from the $17 billion to $74 billion.
Meanwhile, the internet only blossomed after its commercial opening in the early 1990s. Before that, businesses and the public were not allowed on the U.S. Advanced Research Projects Agency Network (ARPANET), the predecessor to what would become the internet. The network was a closed, insular club of academics, engineers, and government bureaucrats. A 1982 Massachusetts Institute of Technology (MIT) handbook for students warned them that “it is considered illegal to use the ARPAnet for anything which is not in direct support of government business,” and that sending private messages “can offend many people, and it is possible to get MIT in serious trouble with the government agencies which manage the ARPAnet.”
The network only became socially and economically valuable once government got out of the way. Thanks to a series of wise policy decisions in the 1990s, policy-makers essentially firewalled off digital technologies from the old Analog Age planning mindset and corresponding set of agencies and regulations. That, more than anything else, gave entrepreneurs, workers, and investors the incentive to go forth and revolutionize the modern economy.
The revisionists instead prefer to believe that someone high up in government was carefully guiding this decentralized innovation. In the new telling of this story, deregulation had almost nothing to do with it. King also downplays the role venture capitalists played in fueling America’s remarkable digital-technology triumphs, instead insisting that federal spending programs such as the Small Business Innovation & Research (SBIR) program “filled critical funding gaps for early-stage tech firms, investing where even the boldest venture capitalists would not.”
But nothing could be further from the truth. First, SBIR and similar state-based high-tech “research park” programs have historically mostly produced an endless string of pork-barrel duds, with economists finding that “neither SBIR funds nor research parks have significant impacts on regional technology indicators.” In 2009, Josh Lerner of the Harvard Business School documented these many shortcomings and showed how, “for each effective government intervention, there have been dozens, even hundreds, of failures, where substantial public expenditures bore no fruit.”
King is also wrong to downplay the role of private venture capital, which fueled the growth of almost every technology company he names. Aggregate private-sector research-and-development (R&D) spending has doubled over the last decade, far outstripping federal R&D spending in the process.
Moreover, King’s claim that “waves of innovation happen elsewhere” due to better state planning isn’t backed by any evidence, because there is none to support it. If economic nationalism and technocratic industrial-policy planning are so great, why aren’t European firms dominant in the many tech sectors that European governments have showered with generous support and endless planning efforts?
Instead, Europe is the poster child for industrial-policy failure, with an unending string of expensive, quickly abandoned boondoggles. In fact, an academic journal recently asked top experts how the European Union stacks up in terms of global innovation today. The symposium’s title — “The Biggest Loser” — concisely summarizes the consensus view that the continent is “lagging behind in the global tech race” (as one symposium contributor put it) and that “the future will not be invented in Europe” (as another stated).
Looking back further, it is worth remembering that many economic nationalists in the 1980s were panicking about how Japan was going to give America a run for its money because of its enlightened state industrial policy. Yet massive state spending on misguided technology bets did not pay off for Japan. Significant public resources were wasted on politically connected firms. By 2002, Japan’s grand experiments with top-down tech planning were viewed as such disasters that the Japanese government itself conceded that “the Japanese model was not the source of Japanese competitiveness but the cause of our failure.”
China is a more formidable threat, of course, but its industrial policy has had a mixed record as well. That record includes state-driven debacles as well as state-led constant harassment of corporate “national champions” that ran afoul of Communist Party diktats. Most of China’s economic gains over the past quarter-century came from opening the country up to both domestic and international trade. “Industrial policy played no role in it,” China analyst Barry Naughton notes in The Rise of China’s Industrial Policy, 1978 to 2020, “since industrial policies essentially did not exist before 2006.”
To be sure, government spending had an influence on America’s digital-technology development. There can be beneficial commercial spillover effects of government spending on various military, educational, and R&D-oriented priorities. America’s university research centers and science labs have also contributed to an innovation ecosystem that continues to be the envy of the world, although many today argue that the system is far too rigid and desperately needs more experimentation. Still, some of these more-general types of government support can have a positive influence on technological development.
But the role King envisions for government is something entirely different. He and many others believe the government can outperform markets. He summarily dismisses Friedrich Hayek and other critics of central planning in favor of far-sighted techno-bureaucrats carefully tinkering with the machinery of the state to optimize its use toward enlightened ends. But the economy is not a machine with dials and levers that can be scientifically manipulated, as countless failed central-planning efforts have shown.
Meanwhile, the economic revisionists say nothing about how all the big-government planning they envision will be financed. We’re expected to believe all these bureaucracies and lavish spending initiatives are a giant free lunch. When government rolls the dice on risky bets in the industrial-policy casino, however, it is putting taxpayer dollars on the table as the stakes. Every bad bet gets passed along in the form of defaults, stockpiles of debt, and burdensome taxes to pay for it all.
America’s world-leading digital-technology companies and technologies were not the product of intentional design or bureaucratic initiatives. Corporatism and central planning should be rejected as the basis for U.S. technology policy. And regardless of whether they happen to be trendy right now, economically illiterate arguments like King’s should be relegated to the ash heap of history.
