Consumers Drive Innovation, Not Government

What causes a consumer to buy a new, untested product?  A sense of adventure? Curiosity?  Whatever it is, it’s these purchases that drive entrepreneurs to provide products to consumers, and in turn create new industries and generate more commerce that helps the economy.

Apple didn’t create the iPod, iPhone, or iPad because of a government mandate or because of tax credits for building these devices.  Apple saw a market and a potential demand from consumers for these devices, and then built them.  Consumers responded by buying them faster than Apple could make them.

We can’t say the same thing about government-subsidized industries.  How is the so-called “green economy” going?  Have the billions of dollars in tax subsidies help to motivate people to “go green?”  Mostly, the answer is no.  The same goes for ethanol.  There are plenty of companies lining up for their tax credits, but few consumers are clamoring for their E85.

The New Yorker had an excellent article stressing that consumers are the drivers of innovation.  Where there’s demand from consumers, companies will gravitate:

The American public, meanwhile, has thrown caution aside in its desire for novelty.  Automobiles were dangerous, polluting, and, even after Henry Ford pioneered the assembly line, pricey.  But by 1920 Americans were buying more than two million of them annually, and the American market accounted for ninety per cent of the world’s cars.  Appliances like electric irons and vacuum cleaners were commonplace in American households in the nineteen-twenties, when they were still rarities in most European countries. Early jet travel was both perilous and expensive, yet by the mid-fifties American airlines were carrying fifty-five million passengers a year, and by 1960 they were handling nearly sixty per cent of global air travel.  Television, the personal computer, the DVD player, the iPod: all became very popular here very quickly.

From a business perspective, the willingness of consumers to take risks means that new technologies can see profit faster here than they can elsewhere.  That encourages inventors to invent, and investors to pour money into startups.  (It’s no coincidence that the modern venture-capital industry got its start here.)  And the speed with which successful products are taken up also allows companies to benefit from economies of scale sooner, bringing prices down and making it easier to reach even more customers.

There were no government subsidies for Henry Ford, or the consumers who bought his cars.  The same goes for television, DVD player, home computer and the Xbox.  It was all driven by consumer demand.

The tech sector is brimming with innovation and generating billions of dollars in commerce and thousands of new jobs. Billions of dollars of venture capital are being poured into new companies, and places like Groupon, Facebook and LinkedIn have sprung up, employing thousands of people and generating billions in revenue for the economy.  If we want this to continue, its best government keep its hands off and let the market run its course.  Onerous regulations and job-killing laws such as net neutrality will only serve to stifle the innovative tech culture, and protect entrenched edge companies.  Government doesn’t create jobs, because government doesn’t innovate.  Companies innovate, and they do so to satisfy the needs of consumers.

More often than not, government is an inhibitor of innovation rather than an incubator of it.  If many in Congress get their way, the federal government would impose a sales tax on goods sold over the Internet.  The maze of rules and laws governing each individual state’s sales tax is enough to make any entrepreneur get out of the business.

Want another example of onerous government regulations inhibiting startups?  Websites such as Kickstarter allow people to raise large sums of money for their small projects (think documentaries, art projects, etc.) through small dollar donations.  This model of raising capital could be a boon for burgeoning entrepreneurs looking to raise money for their fledgling startups.  Currently, only about 1-2% of ideas pitched to venture capitalists are funded, so there are plenty of ideas out there with nowhere to go.  Wouldn’t it be great to democratize the process and allow anyone, even those with only a few thousand dollars to invest, to start funding new ventures?  It would be great, except SEC rules don’t currently allow it.

When government does try to spur innovation, it usually falls flat on its face.  Most of the time, it’s attempting to subsidize something that no one seems to want.  The recent bankruptcy of Solyndra, which was the recipient of over $535 million dollars in government loans and grants, is a great example.  It developed a product no one seemed to want, at a price no one was willing to pay.  Electric car companies like Fisker Automotive and Tesla have received $529 and $465 million in loans and grants, respectively.  And what are they producing with this money?  Very little—few cars, and most in the luxury range ($80,000+).

Very often, letting government dole out money to private companies devolves into crony capitalism.  Looking at the list of individuals behind companies like Solyndra, Fisker, and Tesla is like a who’s who of Democratic donor bigwigs.  And when you don’t play ball with the current administration?  You might get your factory raided for an outdated, archaic law you may or may not be violating; such was the case with Gibson.  Or, if you run foul of playing ball with favored left-leaning groups such as the labor unions, you might get a government agency sent after you to tell you where you’ll be building your new factory, whether you like it or not, as has happened to Boeing.  When the government acts on behalf of the public good, the outcome is never better than the self-interest actions of the private sector.  As Adam Smith wrote in the Wealth of the Nations, it is the private sector that benefits consumers and the economy:

By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.  I have never known much good done by those who affected to trade for the public good.

Bottom line–whenever government gets in the way of business and consumers, innovation, commerce and freedom are eroded.

Zack Christenson is a Chicago-based digital strategist who writes on tech policy.

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