Nine Government Investments That Made Us an Industrial Economic Leader

The history of U.S. government support of industry shows that, far from eschewing a developmental role, it is plausible to argue that from the 19th century up to the present the United States has possessed the world's foremost developmental state.
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The U.S. does have an investment problem, but the blame lies with Big Business, not Big Government.

Remember when the United States led the world in industrial technology? The peak of U.S. supremacy was back in the 1960s, when the "military-industrial complex" was in full force. Then in the mid-1970s the Japanese mounted a successful economic challenge to the United States in a range of industries, including steel, machine tools, memory chips, consumer electronics, and automobiles. Since then, among Asian nations, South Korea, Taiwan, China, and India have become major global competitors in industries that the United States used to dominate. In historical retrospect, U.S. industrial power has never been quite the same.

A prominent explanation for the competitive success of Japan and other Asian nations, first argued by the late Chalmers Johnson in the 1980s, was the crucial support for industrial investment provided by the "developmental state." In contrast, Johnson and others characterized U.S. government involvement in the economy as merely "regulatory." The United States was no longer number one, so the argument went, because its government would not invest sufficiently in the physical infrastructure and human capital that global competition now required.

The history of U.S. government support of industry, however, presents a very different picture. Far from eschewing a developmental role, it is plausible to argue that from the 19th century up to the present the United States has possessed the world's foremost developmental state.

Let's look at some highlights of that history:

  1. Railroads: Under the Pacific Railroad Acts of 1862 through 1866, the U.S. government handed railroad companies 103 million acres of public land that could be sold or used as loan collateral to finance the construction of transcontinental railroad lines. These land grants were equivalent to 5.34 percent of the size of the continental United States and greater than the size of California.

  • Universities: Under the Morrill Land-Grant Act of 1862, the U.S. government gifted every state in the nation 30,000 acres of land as an endowment for an institution of higher education for the "agricultural and mechanical arts." Besides many eponymous state universities, Cornell, MIT, Purdue, and Rutgers all originated as land-grant colleges. The Morrill Act of 1890 provided each state with annual federal financial support for the colleges. By the early 20th century, the success of "mechanical arts" education within this public system compelled elite private universities such as Harvard and Yale to launch engineering courses and degrees.
  • Agriculture: The Hatch Act of 1887 provided federal funding for agricultural experiment stations, most of them set up in proximity to land-grant colleges, to engage in state-of-the-art research that could increase the productivity of the nation's farms. The Smith-Lever Act of 1914 funded cooperative extension services, including the employment of thousands of "county agents," to diffuse the latest knowledge to farmers.
  • Aircraft: In the 1920s, the U.S. government played the leading role in not only supporting aeronautics research but also promoting air mail services. Under the Contract Air Mail Act of 1925, the U.S. Postmaster General gave subsidized air mail contracts to a select number of commercial airline companies to encourage the airlines to demand safer, quieter, and larger planes from aircraft manufacturers so that passenger travel would increase. Five years later, when little progress in the development of passenger-friendly aircraft had been made, the Air Mail Act of 1930 changed the subsidy from the amount of mail carried on a plane to the size of the plane in which mail was carried, even if the plane carried only one letter. This generous government incentive scheme worked: By 1933, plane manufacturers Boeing and Douglas had each developed the modern all-metal, two-engine monoplane for the airlines, and air travel for people took off.
  • Jet engines: The turbojet engine, invented in Britain in the mid-1930s by Royal Air Force officer Frank Whittle, was given to the U.S company General Electric (GE) in 1942 to develop for use in World War II. GE was not in the aviation business, but, as the leading producer of electric power equipment, had been doing gas-turbine research since 1903. The jet engine was not put into service during World War II, but after the war GE continued to develop it for the U.S. military and also shared the technology with Pratt & Whitney, the leading producer of commercial airplane engines. In 1974, GE entered the commercial jet engine business through a joint venture, CFM International, with SNECMA, a French state-owned company, to provide engines to midsized Airbus planes. GE is now the world's leading producer of commercial jet engines.
  • College-educated labor force: While the land-grant college acts created a national system of higher education in the late 19th century, it was only in the aftermath of World War II that a large proportion of the population gained ready access to it. In 1944, Congress passed the Serviceman's Readjustment Act, popularly known as the G.I. Bill of Rights, which provided funding to U.S. veterans of World War II to obtain college educations, buy homes, and start businesses. By the time the initial program ended in 1956, almost 50 percent of the 16 million veterans of World War II had received education and training benefits under the G. I. Bill.
  • Interstate highway system: Under the Federal-Aid Highway Act of 1956, the government committed to pay for 90 percent of the cost of building 41,000 miles of interstate highways. President Eisenhower justified this expenditure on the grounds that the highways were needed to defend the United States in case of a military attack on U.S. soil. Whatever the rationale for this investment, the system has provided businesses and households with a fundamental physical infrastructure for civilian purposes.
  • Computers and the Internet: A 1999 study, "Funding a Revolution: Government Support of for Computing Research," stated, "Federal funding not only financed development of most of the nation's early digital computers, but also has continued to enable breakthroughs in areas as wide ranging as computer time-sharing, the Internet, artificial intelligence, and virtual reality as the industry has matured." Among other things, the study details the now well-known role of the U.S. government in developing the ARPANET and the NSFNET for over three decades before it became available commercially as the Internet.
  • Life sciences: The 2010 budget of the National Institutes of Health (NIH) for life sciences research was30.9 billion, almost double in real terms the budget of 1993 and triple in real terms the budget of 1985. From the founding of the first national institute in 1938 through 2010, NIH spending totaled738 billion in 2010 dollars. The 2011 budget is30.9 billion, and the request for 2012 is32 billion. In addition, federal and state governments provide many subsidies to the medical field. For example, the Orphan Drug Act of 1983 has been critical to the development of the biopharmaceutical industry.
  • One could go on to talk about the U.S. government's support for nanotechnology and renewable energy, among other programs. None of these government programs is a secret. Indeed, prominent corporate executives lobby for them (and you won't find the Tea Party attacking them). Yet there is a widespread belief that the U.S. government plays at most a regulatory role in the economy.

    Recent research has exposed this myth. In "State of Innovation: The U.S. Government's Role in Technology Development," based on a project funded by the Ford Foundation, Fred Block and Matthew R. Keller have thrown the spotlight on the "invisible" developmental state. Also attacking the myth is a pamphlet, "The Entrepreneurial State," produced by Mariana Mazzucato, my colleague in projects funded by the European Commission and the Institute for New Economic Thinking. In a similar vein, the Breakthrough Institute has documented the history of U.S. government support for technology and innovation. Based on research on the microelectronics and biotech industries, I have argued that entrepreneurial ventures such as those found in Silicon Valley and many other U.S. high-tech districts could not exist without the U.S. developmental state.

    So why has the role of the state in the development of the U.S. economy been hidden from view? No doubt, many leading free market ideologues are just ignorant of U.S. history. But it's more than that. Back in the 1950s and 1960s, often with the Cold War as a motivation, business interests both provided a fairer share of taxes to support developmental expenditures by the U.S. government and invested complementary corporate resources in physical equipment and human capital in the United States. Today, business interests remain happy to have the government spend this money, but they refuse to pay a fair share of the taxes to support it, while the business investments in productive capability that build on U.S. government spending on science and technology are increasingly being made overseas.

    Meanwhile, the prime type of corporate investment within the United States over the past two decades has been the stock buyback. Trillions have been spent jacking up stock prices and, in the process, inflating executive pay. Yes, America has an investment problem. But the problem is big business, not big government.

    William Lazonick is director of the UMass Center for Industrial Competitiveness and president of The Academic-Industry Research Network. His book, Sustainable Prosperity in the New Economy? Business Organization and High-Tech Employment in the United States (Upjohn Institute 2009) was awarded the 2010 Schumpeter Prize.

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