Voodoo Innovationomics

Susan Hockfield and Drew Faust shill for “winning the future.” Shame on them.

First Solar, an American company, makes the best solar cells on the face of the planet. Their devices, while still an eternity away from being cost-competitive with conventional sources of power, are staggeringly far ahead of the rest of the photovoltaic field. The reason for their considerable lead is an innovative new technology for harnessing photons, using cadmium telluride (CdTe) in lieu of traditional crystalline silicon. Theirs is a story of American ingenuity and inventiveness. It is also a story about how we will not “win the future” through innovation.

First Solar, as every company should, sources the manufacturing of its products where the cost of their production is lowest — in this case, Malaysia. Malaysia was not chosen because of its groundbreaking research in renewable energy; the process of making solar cells is very labor-intensive, and Malaysians, in the parlance of economics, value their leisure time much less than Americans or Europeans. If anything, Malaysia’s lack of solar research gave it the edge; Malaysia’s disinterest in solar research is so much the better for safeguarding First Solar’s intellectual property from theft by unscrupulous foreign competitors.

In all likelihood, the innovators and entrepreneurs that created First Solar collect most of the rents that their CdTe cells have created, and their Malaysian laborers receive only a sliver above their marginal costs. This distribution is appropriate — the contribution that First Solar’s scientists made is dearer than that of its assembly line workers. But beyond the receipt of these rents, First Solar’s innovation has not boosted the U.S. economy in any significant way — there are no spillover effects, no knock-on benefits, no magic penumbras of economic growth.

In fact, First Solar is lucky to hold on to the profits its intellectual property creates. The more typical story in research and development is of patent violation and copy-cat engineering. For many inventors, all of the work they do in designing a product makes them merely a greater fool to piggyback off of once their blueprints descend into common knowledge. And for a great deal of research — particularly basic research — there are no patents to defend; anyone can use the information to improve their products, regardless of how much of the research’s cost they shouldered. If the Large Hadron Collider discovers the Higgs boson, it is not as if the residents of Geneva are going to benefit from that discovery any more than those of, say, Waxahachie, Texas.

Thus it was with some dismay that I saw President Susan J. Hockfield and her counterpart at Harvard, Drew G. Faust, jump aboard the “win the future” train with their March 14 Boston Globe Op-Ed, “Riding the Innovation Wave.” In the article, Hockfield and Faust made three claims: one, that America’s past economic successes were largely the result of homegrown innovation; two, that the path to future riches lay in “investment” (read: spending taxpayer money) in research universities; and three, that, ominously, if America failed to act, geopolitical rivals like China would overtake us.

The first point, which underpins the other two, is a gross misreading of history, made even more incredible by Faust’s background as a U.S. historian. The story of American industrialization is populated less by the likes of Thomas Edison and more by the likes Samuel Slater, who stole the factory designs of the British and rebuilt them in America. For a century, we shamelessly lifted from European innovators like Bessemer, Faraday, Hertz, Haber, Blanc, and McAdam and used their ideas to leapfrog over their native lands. Little has changed since then except the roles — today it is China freeloading off of us to their own benefit.

There is nothing terribly wrong with this reality. Certainly it would be better if the Chinese purchased intellectual property instead of stealing it (the better to incentivize innovators to develop new ideas), but it is hard to argue that the world’s solar cell factories, like First Solar’s, should not be sourced in low-cost labor countries like China. If Hockfield and Faust were trying to make the case that innovation is necessary to improve the world economy, and on that altruistic basis justify a major spending increase on research and development, their point would be quite strong. However, this is not the argument that Hockfield and Faust are making — they want us to “win the future,” to enrich our own economy through competition with other nations. Even if “winning” made sense in the context of international trade, we will not win by paying for China’s research and development.

If Hockfield and Faust really are correct in their logic and are nationalist believers in the knowledge economy, they should advocate less for unilateral subsidization of innovation, which produces easily stolen information, and more for education. A blueprint can be stolen or reverse-engineered, but expertise is a stickier thing, not easily mined out of the head of the expert to whom it belongs. At the risk of stretching a metaphor too far: teach a man to fish, and he’ll be fed for life — write a book that teaches anyone to fish, and the author will die penniless.

And when it comes to education, there is little “investment” to be made. The problem with primary education in America is not a lack of spending; we spend far more per pupil than the rest of the developed world. The problems are structural — misaligned incentives, poor diffusion of best practices, and horrible human resource management. Our education sector doesn’t need more taxpayer money; it needs fresh ideas — either developed here or stolen from abroad.

And as for the problems with college education in the United States, Presidents Hockfield and Faust don’t need federal support to clean their own house. They can start by shifting the focus of their institutions from zero-sum prestige competitions over research output to the education of the next generation. If they really want to practice what they preach, they can start by aggressively expanding enrollment, granting tenure to professors who excel at teaching even if their research is mediocre, and re-optimizing undergraduate research opportunities for maximal student learning.

Hockfield and Faust were right to cite the work of Nobelist Robert M. Solow in their defense of innovation as an engine of economic growth. But if they were to actually talk to the good professor, he would no doubt remind them of his better-known work on capital accumulation. The United States is almost certainly saving less than its golden rule savings rate, and this failure is due in no small part to the massive deficit spending of the federal government.

This is not a time for America to throw vast sums of money on a speculative program of voodoo innovationomics. We will build a more prosperous future if we (particularly our government) stick to a simple action plan of working harder and saving more.

Marcus Aurelius about 10 years ago

"In all likelihood, the innovators and entrepreneurs that created First Solar collect most of the rents that their CdTe cells have created, and their Malaysian laborers receive only a sliver above their marginal costs. This distribution is appropriate ..."

If Malaysia provides to First Solar a favorable competitive environment due to its disinterest in solar research, shouldn't the Malaysian government be able to leverage that into better wages for its workers?

TM @ First Solar about 10 years ago

The kind words about First Solar's technology are appreciated, and we have no doubt benefited from having an MIT alum, Bruce Sohn, as our president of operations (Bruce is also Chairman of the President Obama's Manufacturing Council).

However, I need to point out that First Solar's first factory, which we just expanded a year ago, is actualy located in Perrysburg, Ohio, where we also have our primary engineering center (where we continue to innovate). In all, we employ 1,300 associates there, and a total of 1,700 in the US (and growing). We also just announced on St. Patrick's Day that we will build a new manufacturing center in Mesa, Arizona, where we will be hiring another 600 workers (for starters). We do operate a manufacturing center in Malaysia, as well as one in Germany, and we just broke ground on a factory in Vietnam. This porfolio of production helps us cultivate sustainable markets for renewable energy and to make solar electricity affordable, while maintaining close proximity to key markets. In fact, the U.S. is our fastest-growing market, where our current 2.4GW pipeline of North American solar PV projects is expected to create nearly 2,000 construction jobs and drive $6 billion of infrastructure investment.

So in light of these facts, I would take issue with the statment that "...beyond the receipt of these rents, First Solars innovation has not boosted the U.S. economy in any significant way there are no spillover effects, no knock-on benefits, no magic penumbras of economic growth."

For more information, visit http://investor.firstsolar.com/phoenix.zhtml?c201491pirol-newsArticleID1540371

Ted Meyer

First Solar

Anonymous about 10 years ago

It's really confusing that anyone would say that spending on basic science or even cutting edge solar is somehow harming us. What has decimated the U.S. and soon the dollar, is the financial ripoff of the century. Wall street stole untold trillions of dollars, and we are paying it back. Science and good technology hasn't bankrupted us, free market republicans have. Regan and Greenspan's sweet Ayn Rand dream has become America's nightmare.