Wednesday, August 22, 2012

Hayek vs. Hi-Tech

How Did we Actually Develop our Technology?

Evidence from the US and Israel

While the standard economic paradigm concerning innovation is based on the Schumpeterian view that technological advances are brought on by entrepreneurs and that this is best maximized by relying on the private sector for innovation as much as possible. Another aspect of the Austrian view on this issue is that the state is simply incapable of efficiently developing new technology.

The fact is, despite what established theories about technological innovation predict and recommend, several of the world's most technologically advanced countries attained their current technological level there by relying on taxpayer-funded R&D. While the role of private industry cannot be denied concerning bringing to market recently- developed technological leaps forward, nor in the micro-innovations which make said technology more flexible and user-friendly, the underlying macro-innovations, such as computers, mobile phones and the internet are based on state-discovered innovations, funded at taxpayer expense.

As for the Austrian school's views on the state, remember that Schumpeter, von Hayek, and von Mises came of age during the Austro-Hungarian monarchy. In those times the state was a bureaucratic  instrument of the monarchy. Autocratic, Arbitrary, Un-Democratic, and not a Meritocracy. It was only natural not to want to have (that particular) state involved in anyone's lives. Today however, most states have governments elected by the people on the promise to improve people's lives in a number of ways. Most of today’s leading contemporary states have a least some interest in pursuing policy which would improve R&D and technology levels.

In the US
While the role of the US government in developing the largest macro-innovations of our time, the computer and the internet are widely understood, the role of the US intelligence community in the development of Silicon Valley has just recently come to light.  The support came in the form of a public venture capital fund aimed at improving the survivability of technological start-ups. Google Earth was among the clients. NPR covered the story last month.

In Israel
The story of Israel’s role in the development of Israel’s technological level – particularly concerning the country’s booming IT sector – has been more widely reported and is more openly understood. The IDF’s role in particular has been documented as being a vitally important source of innovations for Israel’s IT startups. In particular, a disproportionately large share of Israel’s IT and communications technology industries owe their heritage to the IDF’s School for Computer Related Professions and MAMRAM, the IDF’s central computer unit.

According to the 2002 MIT study, these results have been achieved by the Israeli state primarily by providing a semi-public good in the form of a mechanism for collective learning and diffusion of IT knowledge, high-skilled training, fostering technological startups, providing a tangible link between the IT sector, policy circles, and academia, in much the same way as results achieved by the US state.

Israel’s story has nevertheless been almost wholly ignored by the economics profession in its quest to try to understand what sort of policy is needed to maximize a country’s potential for technological innovation. It’s an unfortunate case of ignoring whoever does not fit the ideological narrative. 
Max Berre is an economist at the EDHEC-Risk Institute (Ecole Des Hautes Etudes Commerciales du Nord) who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands.