The revival of interest in national industrial policy and place-based development in the United States, after three decades in which libertarians and economic liberals together made the term taboo, is overdue and welcome. But a new American industrial policy is unlikely to succeed, unless it is accompanied by a policy promoting the diffusion of new technology.

This point is put forward by members of the “Schumpeterian” school of economic thought, associated with the Austrian-American economist Joseph Schumpeter of Harvard. Schumpeter is responsible for the phrase “creative destruction,” which did not mean mere economic churn, but the long-term “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” Schumpeter also stressed that technological progress does not occur continuously, but in spurts, each based on what subsequent scholars called a “general purpose technology” (GPT) such as the steam engine, the internal combustion engine, and the transistor, and each leading to the rise of a new “techno-economic paradigm” to replace the old one.

Carlota Perez, a contemporary economic historian in the Schumpeterian tradition, has emphasized that the emergence of a new techno-economic paradigm takes place in stages. First comes the stage of invention, when a new GPT is created, followed by the stage of innovation, when new uses are found for the new technology, and finally by the stage of diffusion, when all industries and sectors in an economy are finally modernized by the application of the new technology.

At each stage a different division of labor is appropriate. In the early phases of the industrial revolution, individuals such as James Watt and Alexander Graham Bell were important in the invention phase. By the time of Thomas Edison, in the second industrial era, large laboratories inside corporations or funded by them were necessary for breakthroughs. Increasingly, basic research in science and technology in areas from rocket technology to biotechnology is so expensive that only the deep pockets of governments of large nations like those of the United States and China can fund them. 

In the innovation phase, the initiative shifts to entrepreneurs backed by venture capital. In the information age, individuals such as Steve Jobs and Bill Gates commercialized and found new uses for computer technology originally developed in the invention phase for military purposes with Pentagon funding by research universities and large corporate labs such as Xerox’s XPARC and ATT’s Bell Labs.

But government plays a role once more in the diffusion of new technology—the next phase of development of what Schumpeterian economists call a “technoeconomic paradigm.” The early adoption and modification of innovative technologies often occurs in industries that are naturally concentrated with large firms possessing deep pockets, such as manufacturing and telecommunications. It is a much greater challenge to apply new technology to boost productivity growth in “laggard” sectors. These sectors are often labor-intensive and dominated by many small firms subjected to fierce competition. Their low profit margins do not permit them to engage in the kind of private, internal “product and process” R&D that large corporations can afford.

The historic solution to the challenge of diffusing new technology to modernize laggard economic sectors has been partnership among government, universities, and firms in a particular industry. The modernization of U.S. agriculture after the Civil War and Reconstruction provides an example. The Morris Land Grant College Act of 1862, along with subsequent legislation, provided federal funding in the form of the proceeds from sales from federal land grants for state agricultural and mechanical (A&M) colleges. Rather than engaging in basic scientific research, state A&Ms often focused on solving the practical problems of farmers and other local businesses. 

The county extension agent came later. A Texan corn farmer named W.C. Stallings became the first county extension agent, when he was hired by Smith County in Texas to teach other farmers how to combat destructive boll weevil infestations. The 1914 Smith-Lever Act added county extension services to the responsibilities of land-grant colleges and universities. Often rooted in the communities they serve and trusted by their neighbors, county extension agents have been able to transfer new ideas and techniques from academic laboratories to farmers around the country, helping to make U.S. agriculture among the most productive in the world. Technology diffusion in agriculture has also been accelerated by the Farm Credit System, created by Congress in 1916 to increase financing opportunities for American farmers and ranchers.

In the mid-twentieth century, the United States missed an opportunity to create a version of this successful approach to technology diffusion in the industrial economy. During the Second World War, Harley Kilgore wanted wartime funding for science and technology to continue after the war under the auspices of what he called a “National Science Foundation.” Kilgore wanted the mission of the NSF to include help for small businesses in less developed regions of the country like his own West Virginia.

In its final form, however, the NSF was shaped by the quite different vision of Vannevar Bush, a patrician scientist who headed the Office of Scientific Research and Development (OSRD) during the war. Kilgore’s vision was sidelined and U.S. science policy since the 1940s has been focused on federal funding for basic science at major research universities, of which MIT and Stanford were the most important in the development of information technology. The National Institutes of Health also emphasize basic research, not applied technology.

From a Schumpeterian perspective, there is no need to choose between the Bush model and the Kilgore model. Basic research that can lead to breakthroughs in science and technology is good – and so are programs that can diffuse the new knowledge to boost productivity throughout the economy.

A model of an agency that promotes technology diffusion is Germany’s Kreditanstalt fur Wiederaufbau (KfW), the world’s largest national development bank. Ironically, the KfW, established as part of the Marshall Plan for Germany in 1948, was modeled on, and named after, the U.S. Reconstruction Finance Corporation (RFC). The RFC rescued businesses during the Depression and later helped fund and organize U.S. war production, only to be abolished by anti-government Republicans in Congress in 1953. 

Following the three-part Schumpeterian schema, the KfW explains:

The development stage of a technology involves researching the technology with its fundamental properties and developing possible applications. … In the following market introduction stage, technologies are developed to a point where they have proven their general functioning but are not yet being broadly deployed. … Finally, the diffusion stage of the innovation process refers to the application of new technologies across the breadth of the economy and society that ultimately enable the necessary climate and environmental benefits.

Among its other activities, KfW makes financing for small and medium enterprises (SMEs) for technological upgrading possible, directly or through loans to regional banks in Germany.

In the last generation, policymakers of both parties have sought to improve the technology-diffusion capacity of the federal government. One program is the Manufacturing Extension Partnership (MEP) program, administered by the Commerce Department’s National Institute of Standards and Technology (NIST). There are 51 MEP Centers located in all 50 states and Puerto Rico, along with more than 400 MEP service locations, which can help small manufacturers in particular.

In addition, there is the Manufacturing USA Network, which includes regional institutes such as NIIMBL (the National Institute for Innovation in Manufacturing Biopharmaceuticals), located in Newark, Delaware, and CyManII (the Cybersecurity Manufacturing Innovation Institute) in San Antonio, Texas. 

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Predictably, these federal initiatives to help small firms adopt innovative technology have been opposed by ideological libertarians and the anti-government wing of the Republican Party. Indeed, in its 2017 budget proposal, the Trump administration, dominated at the time by old-school economic liberals, sought to defund the Manufacturing Extension Partnership altogether. In contrast, the Biden administration has bolstered the national MEP network.

Promoting effective technology diffusion programs to help small firms adopt innovative technology, improving productivity in their sector and the U.S. economy as a whole, should be a bipartisan objective. Without technology diffusion as a key element of a national industrial policy, research universities, government agencies, and corporations may allow the United States to lead the world in breakthroughs in basic science and technology, but the benefits in wealth and power will be gained by other countries, including military rivals. 

This article is part of the “American System” series edited by David A. Cowan and supported by the Common Good Economics Grant Program. The contents of this publication are solely the responsibility of the authors.