Renegade Economist: The Michael Hudson Series

[c1ue]

Re: Could private sector do it?

There were a lot of elements early on in the creation of the Internet that either involved direct government subsidy or something approaching such.* By the time the major build-out of the Internet occurred during the tech stock bubble, most of the R&D and real-life deployment as a substantial proof-of-concept had already been completed.

The development of the core capabilities behind the Internet were certainly financed by government, but the build out was not.

For the electric power grid, wasn't it also done with private sector money, with utilities regulated by local governments? A lot of the "chaos" of the early grid was evolutionary--it took time for AC to demonstrate superiority to DC. Governments are not good at deciding technical questions like that. They would tend to decide in favor of existing interests, and prevent the creative destruction.

The build out of the utility grid was done with private money, but this money was guaranteed both by government loan guarantees and by government monopoly/regulation.

An interesting overview of the early build out of the electricity grid:

http://americanhistory.si.edu/powering/past/h1main.htm

[Polish_Silver]

Re: Could private sector do it?

An interesting overview of the early build out of the electricity grid:


http://americanhistory.si.edu/powering/past/h1main.htm

The link says that much of the early railroad and electric grid was done by the private sector.

However, since both had the characteristics of "natural monopolies" regulation was needed, but was often ineffectual. The article praises Roosevelts regulation of the utilities and the government led rural power program.

The "private sector regulator" of railroads was the automotive industry, which came decades later.

. . . executives had previously argued that electrifying rural areas would be too expensive and would not provide adequate returns on investment, but the Tennessee Valley Authority (created in 1933) and the Rural Electrification Administration (1935) proved otherwise. These and other institutions demonstrated that electrification of even the poorest households could raise standards of living of the inhabitants and produce good income to electricity suppliers.

If this paragraph is correct, the government should not have taken a loss on TVA--belying the justification for deficits. Same should apply to the interstate freeway system. It does indicate that the private sector "missed out" on a viable rural market. People are not perfect, regardless of what sector they are in. The article thinks that "holding companies" dominated power utility behavior. Possibly, the guys at the top could make more money by financial dealing than by expanding the grid into rural areas.
I'd say big finance is acting like that today.

I thought that railroads got land grants in return for laying rails, and that the deal was far too sweet--the railroads put in marginally useful rails just to get the land on both sides.

There are areas, such as public safety, sanitation, and environmental protection, which are "public goods" and "free rider" problems prevent a private sector approach. A major canal, even when economical, could not be done by the private sector because of environmental and legal hassles.

Individuals have more patience than either governments or corporations. Corporations demonstrate long term thinking when they are led by visionary people, which seems to be getting more and more rare.

The internet was more of an emergent phenomenon. It's constituents arose for other purposes: PC's,
telephone networks, and modems all existed for years before the internet. It cost relatively little to begin the internet, and it could be done incrementally. All were to some degree "regulated" , but I fail to see that any of these depended on public sector subsidies.

The IC industry was primarily driven by consumer electronics demand.

The US census bureau was an early user of computers, just as the military was an early user of some integrated circuits. Government institutions have deep pockets. They don't have to justify
their behavior on a profit/loss level because they use other people's money, and what they provide is supposed to be a public good. So it's not surprising that they become the "early adopters" of any costly new technology. However, that doesn't prove that the technology would not develop without public resources. The patents are one way to protect the big "up front" investment in new ideas, but they are very imperfect.

There was certainly a private sector market for memories, like Intel's early product. But perhaps only the military was willing to pay for Intel's higher performance.

[c1ue]

Re: Could private sector do it?

The link says that much of the early railroad and electric grid was done by the private sector.

This is correct with the following addition: what there was of it

The early buildout of the electrical grid was primarily to select industrial areas and wealthy neighborhoods.

The "private sector regulator" of railroads was the automotive industry, which came decades later.

Uh no. The "private sector regulator" of railroads was J.P. Morgan. As a banker to several competing railroads, he understood that it was better to collude than compete.

The subsequent paradigm shift was so powerful as to trigger the Sherman anti-trust act in 1890. Or are you saying the automotive industry was already a major player in 1890?

If this paragraph is correct, the government should not have taken a loss on TVA--belying the justification for deficits. Same should apply to the interstate freeway system. It does indicate that the private sector "missed out" on a viable rural market. People are not perfect, regardless of what sector they are in. The article thinks that "holding companies" dominated power utility behavior. Possibly, the guys at the top could make more money by financial dealing than by expanding the grid into rural areas.

I think it is interesting that this example, which specifically showed the extreme reluctance of existing private electricity companies to serve poor and rural people, is somehow indicative that private corporations are willing to invest in high capital investment speculative endeavors with long periods before payoff.

The Tennessee Valley Authority didn't just spring up full blown from imagination. From inception in 1933 to today, the TVA has been very active - ranging from consolidation of electricity distribution and production in that area and onwards to construction of ever greater projects to support industrial and residential demand. In order to do this, the TVA used considerable government power in order to relocate, to consolidate, to monopolize, to eminent domain and so on and so forth.

Blithely assigning a private corporation the capabilities of the TVA seems like a great stretch.

Individuals have more patience than either governments or corporations. Corporations demonstrate long term thinking when they are led by visionary people, which seems to be getting more and more rare.

I don't disagree with your observation on individuals. I'd like to see some examples of corporations led by visionary people with long term loss making in order to achieve an otherwise unattainable and profitable result.

The internet was more of an emergent phenomenon. It's constituents arose for other purposes: PC's, telephone networks, and modems all existed for years before the internet. It cost relatively little to begin the internet, and it could be done incrementally. All were to some degree "regulated" , but I fail to see that any of these depended on public sector subsidies.

As I noted above, one great reason why the Internet was largely developed privately is that the switchover from copper/analog to digital (i.e. packetization) was already underway. Thus both the technology and the infrastructure build out were both already being funded by telecom companies.

You'll note that the buildout ended at the substation level - which is why broadband adoption in the US is so poor. The last mile tends to be copper still.

The IC industry was primarily driven by consumer electronics demand.

This is true now, but this was not true for the first 3 decades of the IC industry.

Without those first 3 decades and the Cold War, it is highly debatable whether we would have the same capabilities as we do now.

[Polish_Silver]

Re: Could private sector do it?

The subsequent paradigm shift was so powerful as to trigger the Sherman anti-trust act in 1890. Or are you saying the automotive industry was already a major player in 1890?

I meant that trucks and buses compete directly with trains, and thus prevent price gouging. Granted, this did not work until the mid 20th century.

So the TVA did pay for itself, just over a longer period than investors wanted. But with today's low returns, you would think that would not be a problem.

I wonder what other investments were available in the 1930's, that made rural electrification look so poor? Definitely makes sense that "legal powers" would only be available to a government agency.
It is not only the "short sightedness" of the private sectors, but differences in legal position.

I'd like to see some examples of corporations led by visionary people with long term loss making in order to achieve an otherwise unattainable and profitable result.

The corportion has sufficient profits to fund projects which only pay off on a long term basis.
The corporation as a whole cannot run at a loss for obvious reasons. Just as a society as a whole could
not go into debt to fund long term research. Lots of companies spend several percent of their
gross revenues on research, and these projects take years to reach fruition.

Through the 1980's many large firms had extensive research laboratories devoted to far flung
research. (like Bell Labs, where they measured the cosmic background radiation from the big bang)
Some, but not all of this was under written by defense spending. However, by 1990's,
the cold war was ending. Also, "bean counters" seemed to get much more influence in corporate policy,
and far flung research was cut back at most places. That was a big disappointment to me, because I
wanted to work in an industrial lab like that.

On the other hand, bio tech companies run on IPO capital for years without marketable products.
And many of them fail. So clearly investors have some appetite for risky technological development.

A company I interviewed with, Picor, has been pioneering a circuit architecture for years.
It was run by a visionary founder, who invested much of the company's profits in his "intellectual progeny".

Some examples:
invention of transistor at Bell laboratories

Invention of STEM (scanning tunneling electron microscopes) at IBM. IBM never made a dime on this.

Invention of Transmission electron microscope at Siemens. (It may not have been that costly, but I'm sure it took years for revenue to recover development costs. It's not exactly a big volume item.

research on superconducting computer at IBM. (A technical flop, in retrospect, a total waste of money)

Development of incandescent light by edison. (Don't know how long this took. it was not an especially original idea but it was a huge amount of trial and error on Edison's part)

Trinitron picture tube at sony. The difficulty was in the production, not the "proof of concept".


An interesting example is Hewlett Packard

Their research model used to be something like this:

Basic Research...........................Applied research .........................Development
long term..................................... medium term ..........................short term
gov & univ lab................................ HP labs .................................HP divisions

That was when HP was more like Agilent is now.

Nuclear power is an interesting case. The isotope enrichment was very difficult. The whole nuclear power industry benefited from the Manhattan project. However, not only was Manhattan very expensive,
we are stuck using a uranium fuel cycle, with enrichment technologies the same as those used to make weapons. A most unfortunate coincidence.

Another aspect is that government funded research is generally available to the whole world, since it
is published in journals. It doesn't necessarily benefit the society funding it. The idea is that you attract key people, and get an edge that way, but it's hard to prove that empirically.

[c1ue]

Re: Could private sector do it?

I meant that trucks and buses compete directly with trains, and thus prevent price gouging. Granted, this did not work until the mid 20th century.

Not sure why this is relevant, since the railroad buildout was in the mid to late 1800s. Somehow a 60+ year headstart on the part of the railroads without competition from automobiles should just be overlooked?

So the TVA did pay for itself, just over a longer period than investors wanted. But with today's low returns, you would think that would not be a problem.

Given that the era in question was literally the opposite of ZIRP, again not sure how this is applicable.

The corportion has sufficient profits to fund projects which only pay off on a long term basis.

You keep bringing up examples of corporate funded R & D - I have never disputed that corporations can and have funded research which ultimately proved of benefit though of no immediate profitability.

However, funding corporate R & D - which historically is in the minority of corporate spending - is different than other forms of corporate capital spending like building factories, products, infrastructure and so forth.

My point was that there are extremely few, if any, historical examples of corporate capital spending where companies made highly speculative, low short/medium term return investments of the second category without explicit government guarantees or subsidies.

Even your Bell Labs case contains the government angle: Bell Labs was for over 50 years a part of AT & T - which was the monopoly purveyor of telephony.