Allowing the best technology to bubble up

The next big topic is the massive interest in electric vehicles. Kudos to Elon Musk—he wasn’t the only one, but he was a big part of making electric cars mainstream, not just in the media and in consumer sentiment but as part of policy-making circles around the world.

The theme I want to talk about is titled, “Does Science Need an Industrial Policy AKA Protection?” It’s almost as if the world has decided that we’re going to go all-in on electric as the predominant technology to become carbon neutral and protect the environment. There are many alternative technologies to electric cars, like hydrogen. I’m sure there are technologies I haven’t even heard of that are being incubated in a lab somewhere at Stanford. Policymakers are making implicit decisions to subsidize one technology and erect barriers to protect that technology. By doing so, they make it more expensive and raise the entry costs for alternative technologies.

If one technology is better than another technology, why do we need to increase barriers to protect it? Isn’t the better model to fund as many technologies as you can? That way, the one that is best at solving the problem bubbles up to the top. That’s how capitalism works. There isn’t one sector or company chosen. Everyone is given as much support as possible, and the best rises to the top.

COVID-19 is a good example of this. When the virus came along, many people said it would be practically impossible to make a vaccine available in less than two years. Certain CEOs of major pharmaceutical companies went on the record saying that getting a vaccine within one year would be impossible. The government was involved but purely in funding or bankrolling initiatives. It never said, “This technology is better. We’re going to fund this, so everyone stop working on something else.” By getting companies and technologies to fight against each other and by funding it, they allowed the best technology to bubble up—and it worked. We had a vaccine in less than a year. Unprecedented achievement. We have multiple vaccines, not just one. These vaccines are now competing to see which is best. That’s the principle of capitalism.

Deciding which technology is going to grow is Soviet-style planning. The issue is how do we know that those who are picking that technology are impartial? How do we know those people aren’t politicians funded by executives who have something to gain by having their technology selected? How do we know that the deciding vote by groups of key senators and congressmen—and I’m just using an American example, but this could apply to any country—are not backed by powerful lobby groups in their home states? We don’t know. But we tend to assume that the government picking is an impartial process.

If we’re picking the technology today that’s going to win, do we pick the sectors tomorrow and the companies in a year from now? What is the precedent for a country picking which companies, sectors and technologies should be the chosen ones? That’s a lot like Soviet-style planning. The government’s track record in picking technologies isn’t very good. That’s why capitalism works best when the government creates an environment for the best to rise to the top but doesn’t get involved in picking who is the best. Naturally, the best will rise, so you don’t have to pick it in the first place. We’ve seen this play out time and time again. In the early 2000s, the big topic was gasoline-fired combustion engines polluting the environment. Many European countries decided that diesel would have lower noxious emissions in the absence of electric taking off. There was a big push to go diesel, but later on they found that diesel had many other side effects, and it wasn’t a good decision. By picking a technology rather than allowing all of the competing technologies to fight it out and go for peer reviews, studies, etc., they selected something that wasn’t ready or fully proven.

What is the role of government? Around the world, we’re talking about government intervention, but is government intervention, control and decision-making about things like what technology is going to dominate in the next 5-10 years? Or is government intervention saying, “We’re going to protect all the players who are fighting it out to discover who will be the dominant player?” Whose right is it to pick the winner beyond the market, and what are the long-term implications for this?

Right now, I have clients in very senior positions—CEOs, COOs, CSOs, etc.—who are sometimes making strategy decisions on the assumption that the government should intervene, and is that the right decision to make? We have a lot of clients who occupy senior government positions and have slowly accepted this view that the government should intervene. My question to them is that they’re very smart people, and they know what they’re doing, but think about the long-term implications of what you’re doing and how it will position your country relative to countries with a different model of capitalism. When you get voted out of office in two or four years, or when you retire, everything you do is going to play out over the next 5-15 years, so where is it going to leave your children and grandchildren? Is that where you want things to be?

This is an excerpt from Monday Morning 8 a.m. newsletter, issue #17. Many of you have found Monday Morning 8 a.m. so useful that you’ve asked us to release a book version of these newsletters. We’ve obliged and released a Kindle version, which you can find on Amazon under “Strategy Insights.” It contains the insights from previous Monday Morning 8 a.m. issues, edited into a bite-sized format that’s very easy to use. And you can learn about other FIRMSconsulting books here. 

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