In This Issue
Authors
  • Tim O'Reilly
The Bridge: 50th Anniversary Issue
January 7, 2021 Volume 50 Issue S
This special issue celebrates the 50th year of publication of the NAE’s flagship quarterly with 50 essays looking forward to the next 50 years of innovation in engineering. How will engineering contribute in areas as diverse as space travel, fashion, lasers, solar energy, peace, vaccine development, and equity? The diverse authors and topics give readers much to think about! We are posting selected articles each week to give readers time to savor the array of thoughtful and thought-provoking essays in this very special issue. Check the website every Monday!

Reimagining Government and Markets

Monday, January 25, 2021

Author: Tim O’Reilly

O'Reilly.gif“A victory small enough to be organized is too small to be decisive,” wrote Eliot Janeway (1951, p. 16) in his history of the mobilization of American industry during World War II. A great victory required an upwelling of energy from all parts of society. That energy could not be organized, but it had to be summoned forth. And it had to be led.

During the war President Franklin Roosevelt set an urgent agenda, but, with a few exceptions such as the forced conversion from automobile production to airplanes, the government did not command. It created the con­ditions for success by establishing priorities and making them stick, providing expansion capital where necessary, and making commitments to buy the resulting products. But it was the genius and initiative of American industry that increased the production of airplanes from 3000 to 300,000 over the course of the war, and got the production of each Liberty ship down from a year to a single day.

That history is a powerful demonstration of the way decentralized ­markets can be harnessed by centralized leadership that directs them toward overcoming great challenges. Government and markets are both ways of coordinating human effort at scale, and at their best they work together. As Doris Kearns Goodwin (2001) observed,

One almost totally forgotten lesson of the [Second World War] is that deep government involvement doesn’t have to mean a command economy.… The things we revere about capitalism, the parts that spur energy, efficiency, and entrepreneurial skill, were still in place. What the war did was tap that energy, not constrain it....

Throughout our nation’s history, there have been critical moments when the government’s relationship to private enterprise had to change, allowing both economic expansion and the flourishing of democracy. Now is one of those times. The World War II experience shows just how bold that effort has to be.

Now is indeed one of those times! The entire thrust of the global economy must be redirected—as is happening today in response to the coronavirus pandemic, but even more urgently in years to come to stave off the ills attendant on climate change. Societies must

  • unwind dependence on fossil fuels while simultaneously preparing for sea level rise, crop failures, and mass migrations as some parts of the world become uninhabitable;
  • stop propping up the stock market by pouring capital into phantom paper assets held by a small fraction of the population; and
  • invest instead in upgrading and reinventing real-world infrastructure and in more evenly distributing prosperity through higher wages and robust ­employment.

A fully electrified economy would create millions of jobs, save consumers billions of dollars, and require half as much total energy as today’s fossil-fueled economy.

Roadmap to Improve Energy Efficiency

The work of Saul Griffith, Sam Calisch, and ­others, including data studies with the US Department of Energy,[1] which produced the energy and economic ­policy plan Rewiring America (Griffith et al. 2020), outlines a comprehensive government plan to shape one sector of the economy.

Rather than suggesting scattershot market interventions like the loans that kickstarted Tesla and the electric vehicle market, it lays out a detailed information roadmap that shows how and where energy is used and how a fully electrified economy would create tens of millions of jobs, save consumers billions of dollars, and require only half as much total energy as today’s fossil-fueled economy. And it specifies interventions that will spur the market to reach those goals, much as Roosevelt did during World War II. For example, it proposes that the government create a guaranteed market for insured, low-interest loans for electrifying the privately owned, de facto electric infrastructure represented by cars and homes, much as it spurred home ownership with guaranteed mortgages after World War II.

Too many people think addressing climate change requires miracles and that the answer is technological moonshots. This wasn’t true for WWII nor is it true for climate. Technological innovation is certainly needed but it is far from sufficient. These are challenges of industrial policy and infrastructure, and most importantly of scale and urgency.

Management of the Market

Economic leadership to spur the market is not only necessary, it is achievable, thanks to advantages that were not available to Roosevelt and his team. For all their flaws, the algorithmically managed platforms of the internet have demonstrated new ways to manage markets at a scale and speed exceeding those of many real-world economies.

In many ways, companies such as Google, Amazon, and Facebook can be thought of as centrally planned economies that exercise control not by managing production but by managing demand. They build systems for understanding in detail what consumers want using signals not only from the content itself (or in the case of Amazon, from product descriptions and other metadata such as availability) but also from the collective preferences of millions of other consumers. Uber and Lyft apply similar techniques to transportation and logistics. Each of these companies runs its own “invisible hand,” directing markets to satisfy those needs, shaping production by making consumer preferences visible, and ultimately deciding who gets what and why.

The struggles of social media companies notwithstanding, the information management capabilities of the Silicon Valley giants are truly staggering. What if these capabilities could be put to work on stuff that matters more than getting people to click on provocative content and the ads that accompany it? What if government had the kind of capabilities, information flows, and partnerships between humans and machines that distinguish the best of technology companies? What if government thought of itself as the enabler and manager of its markets, rather than a reluctant participant?

In the naïve economic thinking promoted by free market fundamentalists, “the market” operates as if by magic, with self-interested negotiation by independent parties the invisible hand that coordinates it. Any attempt by government to intervene is seen as a departure from the ideal. In reality, government’s essential role goes far beyond ensuring the rule of law, national defense, and providing shared infrastructure. Even in ordinary times, the market is profoundly shaped by government and central bank policy.

Tax rates, interest rates, and regulatory policy play much the same role in shaping the direction of the economy as Google’s or Facebook’s algorithms play in shaping their marketplaces. And when those algorithms fail to produce the desired results, quicker and more robust action is needed to correct them.

Facebook’s engineers believed that showing people more of what they wanted would bring people together. They were wrong. Instead, Facebook’s algorithms have driven us apart.

Economists told policymakers that encouraging businesses to put profit before people would spur growth and spread prosperity. They were wrong. Instead, these economic algorithms produced extreme inequality in income and wealth and dire consequences for social mobility.

Why do we cry out for social media platforms to rein in their algorithms run wild, yet fail to do the same for government tax incentives and rules of corporate governance that are so clearly not yielding the expected or desired results?

Government Responsibility in the Digital Economy

Public health challenges like covid-19; repairing the fractured US marketplace for health care, riven by rent seeking and plagued with inefficiency; building a truly distributed electric grid able to incorporate a variety of renewables and accelerate the transition away from ­fossil fuels; improving distribution systems for increasingly scarce water; helping immigrants find the most productive place to move and find jobs; managing the insurance risks associated with wildfires and rising seas—all of these are information problems as much as they are matters of physical infrastructure.

The US government has long set a gold standard for data collection. Where it falls down is in making the data usable. That is left to the private sector, which often adds little value but instead sees private exploitation of government data as an opportunity for rent extraction.

What if government had the capabilities, information flows, and partnerships between humans and machines that distinguish the best technology companies?            

As Michael Lewis (2018) warned so presciently, the current US administration has drastically reduced state capacity, including on the data-gathering side. Even since before the Trump administration, the IRS, SEC, DOJ Antitrust Division, and FTC have been persistently and cumulatively underfunded. Basic state capacity to execute needs to be rebuilt (Lewis 2018). And government needs to use data to actively manage national priorities, not simply to observe and intervene only in a few egregious cases long after the damage has been done.

The US government is taking halting steps into the 21st century digital economy. The United States ­Digital Service (part of the White House) and 18F (part of the General Services Administration), as well as public sector–facing nonprofits like Code for America and US Digital Response, are staffed with Silicon ­Valley veterans who are bringing digital thinking to bear on an increasing variety of public interest problems, much as Roosevelt brought auto industry veterans like William Knudsen into government as “dollar-a-year men.”[2]

But these groups are just nibbling around the edges. Policymakers and government agencies are still largely using slow 20th century tools and processes for understanding and managing the impact of fiscal and monetary policy, taxes, and market-shaping regulations.

If civilization is to survive the challenges of the 21st century, we need a robust government that builds state-of-the-art real-time information capabilities for purposes other than surveillance, understands itself as the custodian of the public interest, and sets clear priorities for the market in areas that are essential to that interest.

References

Goodwin D. 2001. The way we won: America’s economic breakthrough during World War II. American Prospect, Dec 19.

Griffith S, Calisch S, Fraser L. 2020. Rewiring America: A Field Manual for the Climate Fight. San Francisco: ­Otherlab.

Janeway E. 1951. The Struggle for Survival: A Chronicle of Economic Mobilization in World War II. Chronicles of America, Vol 53. New Haven: Yale University Press.

Lewis M. 2018. The Fifth Risk. New York: WW Norton.                                                                                   

 

[1]  www.energyliteracy.com

[2]  https://en.wikipedia.org/wiki/One-dollar_salary

About the Author:Tim O’Reilly is ­founder and CEO of O’Reilly Media.