Innovation Nation

I recently finished reading Innovation Nation by John Kao. I actually read most of this book months ago, feverishly and late at night, because I knew I was going to meet Mr. Kao the next day.

First of all, I was very surprised to see a quote from Eric Best, who is, of course, my ex-girlfriend's father.

Secondly, the book was fairly good, and has caused me to slightly tweak my understanding of what constitutes good governance of the economy. Since roughly 1997, when I took economics, learned about Milton Friedman, and read Hayek's The Road to Serfdom, I have been an ardent supporter of free markets. I have never, however, been a market libertarian. It is obvious that government has a role to play in building infrastructure, the common defense, and generally, in addressing externalities, both positive and negative.

My studies in political economy under Beverly Crawford at Cal taught me a lot about how exactly governments have done this, and I became an avid student of Alexander Gerschenkron and what I might dub the modified linear stage theory of economic development. In essence, the modification to the theory is that governments play a keen role in helping nations "skip" stages of development, but only when they start out behind and are catching up.

The change I'm now making to this theory, partly inspired by Innovation Nation, is the idea that "infrastructure" extends beyond physical, legal, or organizational things. While I still think that the government should not be in the business of "guessing" which technologies are going to make it and seeding them with massive investments, I have come to believe that there is an aspect to technological infrastructure that I had not previously considered or understood. Governments must explore technology to create a framework for its commercialization. This framework is a combination of trained and accessible labor (and appropriate laws), an intellectual property scheme, and working capital markets willing to invest in high-risk ventures.
The government need not be the investor, but it does have a role in making sure this infrastructure exists, because there is a positive externality to "things" such as The Silicon Valley. The value of the Valley is larger than the sum of the profits enjoyed by its participants and residents.

I am going to write a letter to Mr. Kao and explain my thoughts on this subject. Helping him couch his concepts in more "sound" economics-y language will help lend his ideas credibility.