There’s a certain kind of person who upon hearing or reading any praise of markets or capitalism, immediately demands clarification or expansion. “Don’t forget the government!”
For instance: Mention Google or Amazon as great examples of American free enterprise, and they will immediately counter with “What about ARPANet?,” referring the Pentagon-backed predecessor to the modern internet. No ARPANet, no Amazon, no Google, no digital economy. Of course, no market-driven commercialization, no savvy entrepreneurs, no Amazon Prime, no amazingly efficient search engine.
Which brings us to Nikki Haley, former US ambassador to the United Nations and former governor of South Carolina. (Maybe also a 2024 Republican presidential candidate.) Yesterday, Haley tweeted:
When you consider that the antiviral drug Remdesivir was developed by biopharmaceutical company Gilead Sciences and that private companies are playing a critical role in developing a vaccine [see below], crediting capitalism doesn’t seem like much of a stretch to me.
Now as that chart shows, government is playing an important role by supplying market and funding certainty. And of course, government spends massively on medical research every year — maybe not enough! I mean, we all know this. We all know federal research spending is important.
And yet Twitter went crazy nuts about Haley’s tweet because she didn’t also credit government. (Some of this group even blames, bizarrely, capitalism for the pandemic.) ”What about NIH?” As if she thinks we are living in some minimalist government utopia where government doesn’t spend quite a bit on science research.
On the other hand, many capitalism critics seem to think the private sector really contributes nothing, that drug companies merely exploit government research and US taxpayers for filthy profit. Rep. Alexandria Ocasio-Cortez, for instance, has said that by funding federal research agencies such as the National Institutes of Health, “the public is acting as an early investor, putting tons of money in the development of drugs that then become privatized.” The American people get “no return on the investment that they have made.” Here is part of my 2019 podcast chat with biotechnology entrepreneur Safi Bahcall (also author of Loonshots: How to Nurture the Crazy Ideas That Win Wars, Cure Diseases, and Transform Industries):
There are three things that people who talk about this get wrong so often. … Number one, that federal dollars pay for new drugs. No. Federal dollars pay for ideas. Here’s the difference. I have an idea in the shower for a movie. Here’s my vision: Robots take over the world. That’s an idea. Here’s the product: the movie Terminator. The distance between an idea and basic research and a finished drug is roughly the distance between me having that idea in the shower and James Cameron making the movie Terminator. It’s a huge, huge distance. So no, federal research does not pay for drugs. Federal research pays for ideas, and there are lots and lots of ideas for biology and drugs just like there are lots of ideas for movies. And very, very few actually get turned into something useful.
Number two, that federal research turning into something commercial is a bad thing. As you just said in that sentence, that’s exactly the point of federal research. Federal research funds market failures, game-theory issues where it doesn’t make sense for any one company to invest but it does make sense for the entire society. Let’s say the invention of GPS or the internet or fusion power or nuclear power or genetic engineering. The goal of that is to create something commercial. Otherwise, what are we doing it for? Just for fun?
Number three, that the government doesn’t get any economic return. Of course it does. Once it’s created, whether it’s the biotechnology industry or the satellites that deliver GPS and it’s empowered every smartphone in the world or the internet which has enabled these trillion-dollar companies. What do those companies do every year? They pay taxes, a lot of taxes. And what do those individuals who work at those companies do every year? They pay taxes. So, of course they get an economic return.
And, finally, to ignore the indispensable role of the private sector in frontier-pushing innovation and tech progress is a massive mistake. As I have written:
The old Soviet Union, recall, had plenty of natural resources and an educated population. In his famous analysis of why the Soviet’s centrally planned economy failed, economist Joseph Berliner wrote, “It is only a slight exaggeration to assert that if the Soviet Union had succeeded in matching the technological attainment of the leading capitalist countries, there would have been no Gorbachev, no perestroika, and no retreat from socialism.” But the Soviet economy lacked the Darwinian struggle for market share and profits that otherwise would have compelled industry to seek and adopt new innovation, either technological or operational. There was, Berliner explains, no “invisible foot” of competition where firms faced the threat of failure from new rivals if they did not innovate.
And if you think China is powerful counter-evidence, think again.