Innovation and Free Markets in America
Posted September 28, 2012
The Washington Post reported recently that “Entrepreneurs Run Into Roadblocks” in France that prevent them from bringing innovations into the market. The article contrasted this problem to the situation in America, where entrepreneurs are more likely to succeed.
Promoting innovation is one of the areas of strong American leadership. America is the best place in the world to start a new company, whether a profit-seeking company or a nonprofit. America is the leader in entrepreneurialism both as a result of government policies that make it easy to incorporate and business policies or cultures that make raising capital and hiring workers easier than in most other countries. Just consider how the global Internet speaks American English as its primary language due to the dominance of American-based companies, or how the social media developed first in America, or how American retailers such as Amazon or Wal-Mart are expanding globally.
I have seen this strength first hand, as I have started or co-founded three nonprofit corporations that have grown to employ over 50 people.
Having an innovation-friendly economy is one of America’s undersung strengths, since innovation and new technology are the basis for economic development in the 21st Century. But America cannot simply rest on our laurels in this race; it must also develop policies that actively encourage innovation. These policies are not limited to removing bureaucratic barriers to new companies and new products, as the Post says the French need to do. They should also include policies aimed at correcting market failures that stifle innovation.
America may be #1 at promoting innovation, but we need to work hard to maintain our leadership. Both the private sector and the government must strengthen market forces and make markets work better.
Clean energy is an area where market failures stand in the way of innovations being accepted in the marketplace. For clean energy technologies, it simply is not true that if you build a better mousetrap, the world will beat a path to your door. For many new technologies, economics says that markets will only work when a dozen or more assumptions are made, and for green products and services, the assumptions are false.
One of more than a dozen of these is the hidden assumption that consumers can act on their economic preferences. For example, suppose I want to reduce the energy consumption of my set top box for my TV. I can’t do that because the cable company owns the box, not me. And they don’t pay the electric bill—I do—so they don’t care how much energy the box uses.
This false assumption causes even bigger problems, in addition. Let’s assume that I want to add new high-technology windows to my house, along with advanced duct sealing and draft reducing improvements. The whole project will cost $8,000 and the energy savings will pay for the entire costs of an $8,000 loan every month. But I still need to come up with the $8,000 and no bank makes home energy improvement loans. Or suppose that I run a convenience store and I want to use advanced lighting and controls and a new combined heating and refrigeration system. The owner of the chain doesn’t want to borrow the money for it because even though the savings would pay back the loan fourfold, the additional borrowing would hurt the corporation’s credit rating.
To make it worse. four different categories of market failures make innovations harder to succeed that one would think. I discuss them in Saving Energy Growing Jobs. Undoubtedly clean energy is not the only field where there are barriers to the acceptance of new and better products.
For clean energy, we know how to solve this problem, and have been making progress in implementing this knowledge. New technologies for windows, for example, were developed in a government-funded research program, and their acceptance was spurred by building codes, recognition programs such as Energy Star, and financial incentives provided by many leading utilities. As a consequence, the example discussed in the Post article—a clean energy technology to power streetlights—would stand a better chance in America than in France. There are likely to be other areas where America’s leadership in innovation can be expanded even farther: where policy can make markets work better than they do now.
There is a flip side to this situation as well. America’s leadership in developing an innovation-friendly economy means on one hand, that business people have more opportunity here: they can make more money in America than they could in, for example, France. The flip side is that if the same person with the same intelligence and the same work ethic makes more money from being in the American infrastructure, then the fruits of this success—the income and the profits from innovation—were not produced by the entrepreneur alone. If the innovation could only succeed in America, then the entity that deserves the profit is not only the innovator but also the American economy as a whole. The success is a shared success: the personal efforts of the individual combined with the public provision of a business and legal climate that promotes and rewards such personal efforts.
This distinction is important because many of the policies that are needed to promote innovation—in the case of clean energy these include temporary tax incentives and energy production targets—cost money to implement. If successes are shared in monetary terms, our government can fund such interventions and still gain revenue and reduce our government deficit.