Panic, revulsion and American innovation

Science|Business CEO and Editor Richard L. Hudson

From President Chavez in Venezuela: “The crash of capitalism…”  From President Medvedev in Moscow, a call for “a new system to sustain a global economic balance.” President Sarkozy in Paris: “Laissez-faire is finished.”

Well, hang on. It’s the US political system that’s bankrupt, not the economic system. Petty legislators, weak leaders, opportunistic media and grasping lobbyists have all been embarrassing themselves on the world stage for the past month.

Because of this politically dysfunctional system, the historical balance in America between Wild West capitalism and New Deal regulation took a disastrous lurch westward in our generation – and that isn’t the fault solely of Republicans. It was, after all, a Democratic president under the influence of Wall Street lobbyists who, in the IPO bubble of 1999, repealed the one Depression-era statute that could have prevented this train wreck: the Glass-Steagall Act of 1932 that banned investment bankers and commercial bankers from sticking their hands in each others’ pockets. (Disclosure: I am an ardent Democrat and, before Science|Business, a Wall Street Journal reporter and editor.)

But, as John McCain was ridiculed last month for saying when the crisis was building, the “fundamentals of the economy are sound”. What he meant by it nobody knows; but what I mean is the fundamental American system of enterprise and innovation. And for anyone who’s in the business of buying or selling technology, that’s a very important point to bear in mind. It means that when the financial dust is swept up there will still be a solid American scientific, technological and entrepreneurial system.

What works in the US is innovation – yes, even financial innovation (if only it had been properly regulated).

American innovation begins with a university system that is the world’s biggest producer of scientific discoveries, and dominates international academic rankings by a wide margin. It has an intellectual property system, conceived in the Constitution, that costs a tenth as much to navigate as that in Europe. It has, in just the past generation, taken a good technology-transfer system and, through the Bayh–Dole Act and university reform, turned it into an economic power, producing more licensing revenues, spin-outs and industrial research contracts than any other (in the rest of the world only the UK system comes close – and that’s in numbers of spin-out companies, not in their value). And then there’s its dominance in revenues and trade for most high-technology sectors.

Of course, one link in the innovation chain, finance, is what has broken in the past month. And, as Science|Business correspondent Paul Meller reports in another article this week, that’s bad news for anybody trying to fund a new technology company, whether in the US or anywhere else in the world. But as the article also points out, some pretty amazing enterprises have emerged in even the worst US financial crises – whether 2001, 1987, 1929 or 1907. (It was in the Panic of 1907 that the House of Morgan attained its greatest power since, well, last month. That was also when Henry Ford and Alfred P. Sloan Jr. were creating the American automobile industry.)

So this is just a reminder that nothing about the fundamentals of innovation is altered by the Panic of ’08. There will still be one dominant model for what works when trying to get ideas efficiently from lab to market. But I’d be quite happy to arrange a political lobotomy.