Second-Guessing the Market; J. A. Sparks

John Sparks is chairman of the department of busi ness administration, economics, and international management at Grove City College in Pennsylvania. Winning Proposals What kinds of projects command the feder al cash? Here are some examples from the most recent awards. General Electric received over $1.5 million to develop "amorphous sili con devices" for use in medical imaging sys tems. It also got $482,000 to work on using synthetic sand to produce fused quartz, a component of semiconductors. A California outfit called DemoGraFx managed to win a $2 million grant, which it promised to use to develop systems that will help digitize motion pictures. Another business, Seaward Interna tional, Inc., will use its nearly $2 million to develop plastic railroad ties to replace the old fashioned wooden creosote-soaked variety. Taxpayers also footed the bill for research and development work in the realms of microturbines, superfingerlings, spinal cord injuries, propane fuel cells, and a host of other endeavors.

Why do these companies need taxpayer money to further their research and develop ment efforts? Recipient firms say that they would not be able to raise enough capital from private sources to finance such unproven ven tures. DemoGraFx is typical. In its successful bid for government funds to finance research for digitizing theater films, it said that "the high-risk nature of developing a system that meets industry's needs for quality and securi ty has deterred investment."3 How does this claim stand up to economic analysis? The economics of capital convertibility, which is what companies engage in when they consider new technological ideas, is relatively simple. Every kind of enterprise, from the simplest to the most complex, possesses cap ital goods (machines, tools, and equipment) that are based on certain technological ideas. As Ludwig von Mises pointed out, production is always being carried out with the "then pre vailing ideas concerning ends and technolog ical procedures."4 However, new technologi cal ideas are always surfacing that present the businessman with a dilemma: Should he con tinue to use existing capital goods to produce his product or service, or should he adopt the new technology and either scrap the old capi tal goods or use them less? Again, as Mises 35 36 THE FREEMAN/IDEAS ON LIBERTY • APRIL 1999 argued: "The choice rests, as it always does in the market economy, with the consumers."5 Will consumers recognize the superiority of new products promised by the advanced tech nology? Will they pay a price for the "new, improved" version that will be sufficient to compensate the businessman for the costs of the technological change? "The absence of a sufficient degree of superiority to make the cost of transformation possible," Mises wrote, "is proof of the fact that consumers are more intent upon acquiring other goods than upon enjoying the benefits of the new invention."6 Now back to the ATP applicants. Each business-applicant presumably went through its own internal review to determine if the response of consumers to the new technology would warrant the added capital investment in the idea. For example, the managers of DemoGraFx undoubtedly asked themselves how movie houses would respond to digitized motion pictures. Would they be especially attracted to the truer reproductions and to the reduction in fading over time? More impor tantly, would they pay enough more for the digitized copies to cover the increased capital costs? The answer to that question appears to have been no.

Undoubtedly, the other businesses that sub mitted requests for ATP funds went through similar calculations and came to similar con clusions. Their own boards apparently refused to use internally generated capital to bankroll the R&D projects at levels that would move them forward. If the firms then sought capital from outside investors, they too gave the research project a thumbs down-at least at the levels of funding sought. Now, these facts reveal the first objection to AT~ Businesses that submit their ideas to NIST for financing present projects that they themselves have already determined to be unpromising according to ordinary market criteria. Accelerating Development But, counters NIST: "ATP support signifi cantly accelerates potentially important R&D projects .... [A]ccelerated R&D is critical to eventual economic success in the highly com petitive global market."? ATP does accelerate the research projects that receive the govern ment money. However, this acceleration should not be confused with economic progress. The "acceleration" is not in response to true consumer demand. Neither is it consistent with the true costs of capital. The market counsels postponement of these pro jects until conditions of demand and cost are more favorable. ATP ignores this counsel and denies the true configuration of demand and capital costs. ATP nullifies the assessment mechanisms by which the rest of the business world determines which projects are worth pursuing. Therefore, ATP of necessity wastes precious capital on projects that applicants have already denominated as unripe, prema ture, and unsuitable for development at this time.

The second objection to ATP is related to the first. Not only is capital forced into pro jects that realworld conditions have branded as uneconomic, but that capital must first be confiscated from other citizens through taxa tion. To the extent that they win ATP grants, business firms make all U.S. taxpayers, including other small, medium, and large businesses, into unwilling investors in their shaky undertakings. The managers of the ATP recipient firms mentioned here would not think of taking funds by force directly from their fellow industrialists to help finance their research projects. Yet when they participate in ATP they are doing that by indirection and political means. D 1. Project Briefs describing each successful project by General Electric, General Motor, DuPont, Armstrong World Industries, and the other enterprises mentioned in this article can be found at the National Institute of Standards and Technology Web site at http://www.atp.nist.gov.

2. "79 New R&D Projects Selected for 1998 Advanced Technol ogy Program Awards," http://www.atp.nist.gov/www/press/ g98-74.htm. 3. "Integrated Layered Compression System Prototype: Project Brief," http://www.atp.nist.gov/www/compsibriefs/98040006.htm. 4. Ludwig von Mises, Human Action (New Haven: Yale University Press, 1949), p. 504. 5. Ibid. 6. Ibid., p. 508. 7. "79 New R&D Projects."