Trading anecdotes back and forth about particular private-sector and public-sector [innovation] successes and failures is not constructive…
I like to break down innovation into experimentation, evaluation, and evolution. I think that government has a disadvantage at all three.
Any one organization is limited in the number of experiments on which it can focus. When the government was focused on landing on the moon, it succeeded. But it is hard for any one organization, not just government, to focus on a lot of experiments at once.
When it comes to evaluating experiments, everybody is overly optimistic about their own projects. But in the private sector, the subjective evaluation of the project champions is subordinate to the third-party evaluation of consumers. In the public sector, the legislators and bureaucrats who champion a project also are doing the evaluation.
Finally, when it comes to evolution, government has no natural mechanism to shut down unworthy projects. When a private-sector project is not producing value, it loses money and gets terminated.
That was an insightful post by Arnold Kling responding to the EconTalk episode with Mariana Mazzucato, who apparently wants higher taxes to fund more gov’t led innovation.
I generally agree with Kling, but will push back a little:
(1) The gov’t can and does push out on many experiments simultaneously at places like DARPA. Its problem is transitioning experiments into full-scale developments. It’s knowing what to do with scientific or experimental results.
(2) Very true that the private sector uses subjective evaluations from consumers. But that is way down the line. Again, the issue is evaluating experiments, not fully produced and distributed goods/services. The consumer feedback comes much later. But private sector also uses subjective evaluations to decide what experiments should be scaled.
While consumers are a critical evaluation-feedback mechanism, another one is the investor who scales the experiment to a real consumer product. Venture Capital, for example, makes their bets based on talent evaluation, intuition, and deep technical knowledge. It is often non-consensual. But that evaluation cannot happen in Government, which must only use articulated reasoning found in business plans and cost estimates. Government requires a massive consensus before any significant money is spent. That is a key difference: who scales the technology and how.
Now, for many innovations funded by the Government you can still have consumer feedback. But for the DOD, DHS, NASA, etc., the consumer is merely government agent “users”, who often have little say in what technologies they are provided (or, their input comes years earlier in the requirements phase).
(3) The evolution piece makes sense, there is no natural mechanism to shut down bad projects. I mean, just look at CVN-78, F-35, SBIRS High, and a huge host of other programs. They simply survive because officials career plans depend on it. But then, FCS, TSAT, NPOESS, EFV, and others actually did get canceled.
The evolution actually is built in because there are always requirements or technology staff looking to get a new project funded. They are always thinking the next generation. The scramble for the budget is the biggest factor in Government decisions. Usually cost growth on previous programs squeezes out new evolutionary ideas.
But several imperatives have shown evolution to occur. When an enemy counters our technology (e.g., IEDs exploding under Humvees), the Government responded quickly with MRAPs (which relied on Israeli technology, a growing trend in DOD).
Arnold made some very good points. Government is disadvantaged in many respects to private sector innovation. But, its pitfalls are in some cases a source of strength. It is a source of patient capital, and a lot of it.
Another thing I disagree with is when Arnold says that “middle managers should not be encouraged to take more risks” because they lack “skin in the game.”
OK, and the various higher echelons of bureaucracy in any corporation or gov’t agency would choose better? In fact, they would most likely choose WORSE! These people might have less “skin in the game” because often CEO or political appointees are so short term. And it is far more likely that they have far less “soul in the game” when it comes to specific technologies. The middle managers are closer to the ones doing the actual work; they have the best information.
Someone has to choose. Giving middle managers no discretion means you have preplanned everything. There is no uncertainty. That means, there is no innovation outside of whoever it is that’s making the plan. But that person is “innovating” without interacting with the real-world.
If everyone were their own island, funded at arms length through VC, then we are saying the corporation and middle management is dead. Perhaps additive manufacturing will kill the corporation at some point. But for now, these VC startups focus on the relatively simple iPhone app. You don’t see them making bets on major physical projects. Elon Musk built up corporations to compete in space launch, electric vehicles, and high-speed trains. He didn’t VC-style invest in some rocket scientists.
When I look around, companies like 3M are still very competitive, and so are new corporations like Amazon, Google, Facebook, and so forth. And at tech firms, that is exactly what they do — delegate more decision rights to the teams and their managers. “Skin in the game” comes from socio-cultural aspects, as well as prospects for huge salaries if they perform. It is interesting to see all the unique ways firms create “skin in the game” for managers.
There is a tension between internal administration in large offices and the use of market-based coordination. I think anyone who says it is all one way or another must be wrong. Instead, we want an ecosystem of private and public, large and small, innovative and sustaining, with all manner of different arrangements of organization and management. I think the very presence of one kind of innovative structure opens up opportunities for another.
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