Kenneth Green: Government Is a Lousy Venture Capitalist

While government has a legitimate and valuable role in basic science, technology, engineering, and mathematics research, it is a lousy venture capitalist and is largely incapable of picking winning technologies in the market.

In their article, “Lessons from the Shale Revolution,” Ted Nordhaus and Michael Shellenberger suggest that the success of hydraulic fracturing validates the idea that government “investment” is a reasonable and effective way to advance technology and to outperform market actors in finding and bringing cool new things to fruition. President Obama made the same argument in his 2012 State of the Union address, giving almost complete credit for hydraulic fracturing to Uncle Sam:

The development of natural gas will create jobs and power trucks and factories that are cleaner and cheaper, proving that we don’t have to choose between our environment and our economy.  And by the way, it was public research dollars, over the course of 30 years, that helped develop the technologies to extract all this natural gas out of shale rock–-reminding us that government support is critical in helping businesses get new energy ideas off the ground.

Nordhaus and Shellenberger come down unequivocally on the president’s side of this argument:

In fact, virtually all subsequent commercial fracturing technologies have been built upon the basic understanding of hydraulic fracturing first demonstrated by the Department of Energy in the 1970s.

They also suggest that the same approach will foster the development of renewable energies such as wind and solar power:

Indeed, once we acknowledge the shale gas case as a government success, not a failure, it offers a powerful basis for reforming present clean energy investments and subsidies.

This argument is a direct contravention of the conventional wisdom that while government has a legitimate and valuable role in basic science, technology, engineering, and mathematics (STEM) research, it is a lousy venture capitalist and is largely incapable of picking winning technologies in the market.

Critics of the government’s claim of credit argue, in essence, that the government pulled a Ferris Bueller: They saw a parade in progress, hopped up on a float, and started singing loudly and gesturing broadly. Now, they claim credit for the entire parade. This is a fairly common practice. Quite recently, President Obama claimed credit for increased oil and gas production in the United States, despite it being blatantly obvious that the increases came from state and private, not federal, lands.

But for argument’s sake, let’s stipulate to the premise that hydraulic fracturing technology represents a great government success. What can we learn from this shining example?

The American

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