I linked to a Scott Galloway post about this topic recently, and have other posts about this topic (see this review of The Entrepreneurial State, and a post on R&D spends in an Indian context).
And the reason for another post about this topic is a recent Ezra Klein column about a new initiative out of the United States called ARPA-H:
Shortly after winning the presidency, Biden persuaded Congress to fund an analogue focused on medical technology: ARPA-H. Why do we need an ARPA-H when the National Institutes of Health already exists? Because the N.I.H., for all its rigor and marvels, is widely considered too cautious. ARPA-H will — in a move some lament — be housed at the Institutes, but its explicit mandate is to take the kind of gambles that Darpa takes, and the N.I.H. sometimes lets go. Wegrzyn, Biden promised, is “going to bring the legendary Darpa attitude and culture and boldness and risk-taking to ARPA-H to fill a critical need.”https://www.nytimes.com/2022/09/18/opinion/biden-invention-arpa-h.html
Please read the whole article, as always, but I wanted to use this post to talk about the three things that make up the title of today’s post: risks, investments and the government.
If you are a student of economics, how should you think about these three things, and why do they matter?
- Investment is necessary for an economy to grow. And investment depends on a whole host of factors, and for a variety of reasons, this investment isn’t always forthcoming at speeds which one would like. This is one way to think about macroeconomics as a field of study.
- Part of the reason the requisite level of investment isn’t forthcoming is because of risks. Not all investments bear fruit, and it is quite likely that some investments will fall by the wayside. If firms are risk-averse, they may choose to not invest.
- Risk aversion (whether on parts of firms or individuals) isn’t a constant. It keeps on changing, once again for a variety of reasons, and what makes this even more difficult is that the assessment of risk is a very subjective phenomenon. You can dress it up in the garb of statistics and models as much as you like, but you’d be wrong to assume that subjectivity can be eliminated entirely. Leave alone the difference between risk and uncertainty, and the discussions that follow from here on in. That’s a whole other topic!
- If private firms aren’t willing to make investments, or take risks, especially in the case of moonshot investments that other nations are making, governments might decide to step in and invest instead. Remember that there is no reason to assume that governments will get the judgment call of when to do so right. They are as prone to mistakes as they rest of us, and if you take into account incentive alignment, you might well be right in assuming that they are likely to do marginally worse.
- But remember always that all-important question: relative to what? That is, if the need to invest is pressing and urgent (strategic considerations, geopolitical considerations, the need to develop more rapidly than we are thus far), and if investment is not forthcoming from the private sector, it makes sense for government to step in and get things moving.
- When should government step in? How much should it fund? How should it recoup its investments, if at all? How long should it stick around? What are the metrics of success? What are the opportunity costs? How is continuity of such programs guaranteed across different political administrations?
There are no easy answers to these questions, and controversies galore are guaranteed.
- But the bottomline (to me) is that investments are necessary, they are risky, and they aren’t always forthcoming from the private sector. And there is therefore a role for government.
- But an economist should also worry about whether government will get it right or not, and if not, for what reasons. And to focus on making suggestions to make the processes associated with this better. This is hard, it is politically fraught, and it will go wrong more often than not.
- But it is necessary, and often unavoidable.
- If you are new to economics, and are wondering how principles of economics are applicable in “real-life” problems, I guarantee you this – you can spend entire careers thinking about these issues. And no matter when you start, your timing couldn’t be better.