Elizabeth Warren Should Give Up Her Stake In A Bad Idea

Senator Elizabeth Warren’s “Plan For Economic Patriotism” is causing ideological convulsions on right and left. Yet one part of her controversial plan has so far largely gone uncommented upon: she wants taxpayers (read: government) to have stakes in companies utilizing government research and development.

Far from seeing knowledge and government R&D as some form of public good that can be freely commercialized by profit-making businesses, she wants government to benefit from its investments by being an equity investor in firms – being given shares in companies who utilize public research, retaining royalties on publicly funded innovation, or even keeping a golden share of patent revenue. The misguided idea here is essentially that there should be a return to taxpayers for their money being risked on government research projects.

Such a policy appears to have been lifted from Mariana Mazzucato’s The Entrepreneurial State. This book posits extensive evidence that public money has helped develop some of the technologies or advances that we see around us, including the internet, touch-screens, GPS, and, soon, the self-driving car.

Through its role in procurement, investments in national security technologies through DARPA, and direct support for research, government agencies no doubt have contributed to building knowledge that has then been successfully commercialized through products such as smartphones.

But Mazzucato’s view seems to be that the government can be much more mission-oriented and so contribute more directly to final products, rather than just happening to provide a form of public good that has been later commercialized in new or unexpected ways. That means she rejects the conventional economic view that says if the knowledge is indeed a public good, and not protected by IP, then a case for subsidy exists, but not ownership; and that if the R&D does not have a public good component, whether due to the technological features or IP, then government should not be engaging in it.

Let’s put aside for now the philosophical or empirical questions about the role of government and whether Mazzucato’s contention is correct (there’s a good free-market critique of her work here). Stian Westlake from NESTA has outlined good practical reasons why equity stakes for governments would be an administrative and economic nightmare.

First, in many cases it is near impossible to judge the extent to which public research has contributed to a final product’s profitability. High-tech manufacturers, particularly in areas such as aerospace and defense, use reams of research and different technologies in devising new products, some of which may have been publicly funded. Assessing what to chalk up as the share delivered by public interventions given this patchwork of contributions will be arbitrary and contestable. The question of who will assess it, and how, will be even more problematic in cases where the government procures the goods too, as with many defense products.

Second, granting the government a stake in the business will, in effect, be like an arbitrary tax hike on companies who do utilize public research. On the margin that will mean they find themselves unfavoured relative to low R&D businesses (which in some cases might benefit more heavily from publicly provided roads or education, but who are not expected to give up a business stake in recompense.) If companies are keen to avoid expanding the share of profits attributable to government, they may also curb collaboration with public entities in areas where it might otherwise have been beneficial for consumers.

In short, even if you think government should play an extensive role in technological innovation, then relative to direct and transparent taxation and spending, this idea would create a bureaucratic monster, while tilting the playing field away from exactly the sort of collaboration and product development you might desire.