Business Models

President Obama received a lot of outraged criticism from the right during the 2012 campaign for his remark, “You didn’t build that.” What he meant, though he uncharacteristically said it in a fairly clumsy way, was that for every proudly self-made entrepreneur there is a huge web of supporting institutions and infrastructure built by the government. These essential supports include the obvious – the courts, the Interstate highway system, police and fire departments, etc. – but also a tremendous array of investments undertaken by national governments, many of which have provided a platform on which entrepreneurs can build. A recent article in The Economist, reviewing a new book entitled “The Entrepreneurial State,” by Mariana Mazzucato of Sussex University in England, makes this explicit. And nowhere is this investment activity more influential than the United States, supposedly the cradle of unbridled individual enterprise.

Beneficiaries of these investments include Apple: “The armed forces pioneered the Internet, GPS positioning and voice-activated ‘virtual assistants.’ They also provided much of the early funding for Silicon Valley. Academic scientists in publicly funded universities and labs developed the touchscreen and the HTML language. An obscure government body even lent Apple $500,000 before it went public.” They also include Google, which received early funding from the National Science Foundation. Pharmaceutical and biotechnology companies benefit from the $30 billion in annual funding for biomedical research from the National Institutes of Health.

As Ms. Mazzucato argues, “The entrepreneurial state does far more than just make up for the private sector’s shortcomings: through the big bets it makes on new technologies, such as aircraft or the internet, it creates and shapes the markets of the future. At its best the state is nothing less than the ultimate Schumpeterian innovator—generating the gales of creative destruction that provide strong tailwinds for private firms like Apple.”

There are reasons to be skeptical of some government investments. The Solyndra debacle, in which the Federal government provided $500 million in loan guarantees to a California manufacturer of solar panels, which promptly went bust in the face of low-cost competition from China, is a cautionary example of the dangers of bureaucrats playing at being venture capitalists. But the rallying cry of the Tea Party – the Randian (Ayn and Paul) notion that the state is essentially a parasite feeding on the efforts of bold and visionary individual entrepreneurs – is a pure fairy tale.

The Economist article asks “why are some states successful entrepreneurs while others are failures?” and it provides an answer:  “Successful states are obsessed by competition; they make scientists compete for research grants, and businesses compete for start-up funds—and leave the decisions to experts, rather than politicians or bureaucrats. They also foster networks of innovation that stretch from universities to profit-maximizing companies, keeping their own role to a minimum.” This sounds much like the blueprint for Silicon Valley, or any other successful technology-based industrial cluster.

In our current budget-cutting environment, these essential investments are under threat. According to a recent article in The Huffington Post, sequestration will cost the NIH 5% of its budget, or $1.7 billion, forcing the cancellation of 700 competitive research grants in the current Federal budget year. Similarly, the National Science Foundation is expected to issue 1,000 fewer research grants this year as a result of sequestration.

According to a statement by the Congressional Budget Office, the Federal Highway Trust Fund, which is funded by taxes on gasoline and diesel and which provides a substantial portion of the money states use to maintain state and national roads, is essentially insolvent and will run out of money completely by 2015. The only way to avoid this would be to cut transportation funding by 92% or raise the Federal gasoline tax by 50 cents a gallon, and it’s hard to imagine the Republican-controlled House of Representatives going along with the latter.

In the current political environment, much of the public investment that enables American businesses to innovate and prosper is under threat, mainly from ideologues who refuse to recognize the essential role that government initiative and funds have played since the founding of the Republic, from the Erie Canal to the interstate highway system, to nanotechnology research.

It is worth considering these facts in the context of the current legal battle between Verizon and the Federal Communications Commission. Verizon is challenging a net-neutrality order adopted by the FCC in 2010, which states that internet service providers (ISPs) cannot block lawful content and mobile broadband providers cannot block lawful websites. Verizon contends that the order violates its First Amendment rights. More to the point, Verizon and its competitors, including Comcast and AT&T, maintain that they spent billions of dollars to build their networks and should be able to grant or deny access as they please, or charge different customers different rates for transmitting on their networks. This is a spurious argument. The broadband companies are “common carriers,” a term that applies not only to telecoms companies but also to airlines, railroads, and trucking companies: they offer their services to the general public under a license or authority granted by a public regulatory body. Common carriers are subject to licensing requirements because they are using a public resource: radio spectrum, rights of way, public roads, or air traffic control systems, without which they would be unable to operate. In the case of the telecoms company, they are also using a resource – the Internet – that was developed by DARPA, the U.S. Defense Advanced Research Projects Agency.

The Internet and the public airwaves are not the property of those companies to use as they please, free from any oversight or interference. It is time to tell them, “No, you didn’t build that.”

 

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In principle, the decision by House Republicans to strip the food stamp program out of the current farm bill is not a bad thing. In practice, it may not be so bad either.

For the past 40 years or so, agricultural subsidies and supplemental nutrition programs (food stamps) for poor people have been joined at the hip, the idea being that combining the two, otherwise unrelated, initiatives could help win bipartisan support for an omnibus bill that contained something for every constituency: farmers, agribusiness, advocates for the poor, etc. The problem with such an approach is that it embodied the worst of interest-group politics, legislative back scratching, and pork barrel giveaways. No liberal legislator would vote against subsidies for rich sugar or cotton or tobacco farmers for example, if it meant cuts to the food stamp program. No Florida conservative would vote to cut food stamps if it also meant cuts to subsidies for his or her rich, sugar-growing constituents. Everyone got pretty much everything they wanted, and no serious policy debate ever occurred. So separating the two makes profound sense. But encouraging a serious policy debate is the last thing on House Republicans’ minds.

In drafting and voting on a pure farm bill, House Republicans have laid bare their hypocrisy by showing, in black and white, the hollowness of their claims to budget-cutting rigor. It turns out that it’s not government spending per se they object to: as long as it benefits the wealthy, they are quite okay with it. Indeed, in drafting the new farm bill the House Republicans rejected all calls to cap or eliminate subsidies to wealthy individuals and corporations. [click to continue…]

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For all its faults, the pharmaceutical industry remains one area in which the United States is still a competitive world leader. But without drastic changes in the way the FDA regulates the industry, this advantage may not last.

Back in the early 1980s I worked for one of the major airlines, a company you have probably heard of, even though it hasn’t flown in over a decade. This was shortly after President Jimmy Carter had deregulated the airline industry. My employer, a pioneer in commercial flight, had grown accustomed to doing business in a certain way and lacked the foresight and skill to adapt to the new environment. Prior to deregulation, airlines needed to have lots of lawyers, whose main job it was to lobby the federal government to get and keep valuable landing slots at major airports. Once you had those, you could count on a steady stream of profits, since the Civil Aeronautics Board limited competition on most routes, thus ensuring high load factors, and also set fares the airlines were allowed to charge. Overnight, things changed 180 degrees, and airlines had to pay attention to things like customer service and efficiency. My employer failed to make the cut.

We may be seeing the opposite phenomenon in the pharmaceutical industry. According to a recent report by KPMG, industry returns on R&D spending have fallen from 18% in 1990 to 10% in 2010, and annual growth in R&D spending has slowed from an average 10% between 1999 and 2006 to just 1% since 2007. Pharmaceutical companies may be turning to lawyers and the regulators to make up the difference. [click to continue…]

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AskyI recently joined a new frequent flyer program, which is not something I expected to do. I am already a member of several, covering each of the three major airline alliances, and I thought I was pretty well set. But as I sat in the departure lounge in Lomé, the capital of the West African nation of Togo, waiting to board a flight to Abidjan, Ivory Coast, a pretty young lady in company livery invited me to join the ASky Club. ASky is a new, mostly private, airline that serves a substantial West and Central African route network, operating Boeing 737 and Bombardier Dash-8 aircraft. It is affiliated with Ethiopian Airlines, which offers connections to North and South America, Europe, and Asia.  [click to continue…]

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If any event could illustrate the fragility of the BRICS conceit, it is the recent blackout in India, which left as many as 600 million people without power for up to two days. More than anything else, it reveals the sorry state of India’s governance. Yes, there are some extenuating circumstances: an unusually hot and dry monsoon season, which has reduced the available flow in hydroelectric plants while also causing the wealthy to use more power to run their air conditioners, while at the same time farmers are using more power to run pumps bringing up irrigation water from deep wells.

But the real story is under-investment in power generation, in coal production, and in transmission and distribution infrastructure, which in turn are attributable to monopoly pricing, hugely inefficient subsidies, endemic corruption, and political stagnation. The power outage was unique only in its extent and duration. Businesses, households, and public institutions all rely on diesel generators, which to a large extent have gone from a backup to the primary source of electricity, as “load shedding” – the system of rolling blackouts that utilities impose to reduce the strain on an overtaxed network, which often deprive whole areas of a city of power for as much as 14 hours a day. The event, and the global publicity it has attracted, has put a dent in India’s self-image as a nascent superpower. India has nuclear weapons and a space program – it launched a lunar probe in 2008 and has announced plans to send an orbiter to Mars next year – but it can’t keep the lights on. [click to continue…]

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