A Brief Historical Look at Government’s Role in Major Technological & Economic Innovation
I have spent the past few months researching the impact of bubbles on modern economies, specifically the American economy. This is a fascinating topic and I recommend you dive into some of the work by Debora Spar and Carlota Perez, as you will see how the financial, technological, and economic cycles of innovation have continued to lead to progress. Over the past 244 years, America has gone from a fledgling country, to the most dominant super-power history has ever seen, through rapid technological advances that positioned America for the modern age. This writing, however, is not about bubbles and their relation to capital and entrepreneurship, but it is about what was the catalyst for the major economic and technological themes that were the backdrop for those cycles. The genesis for these major advances had a common theme, Government backing — or what we could call Public-Private-Partnership.
A Public–Private Partnership is a cooperative arrangement between two or more public and private sectors, typically of a long-term nature. In other words, it involves an arrangement between a unit of government and a business that brings better services or improves the capacity to operate effectively. Simply defined, PPP fuels private entrepreneurship and innovation with governmental resources to achieve a mutually beneficial goal. Per this definition, PPP has played a pivotal role in past economic and technoloigcal advances and I will highlight PPP’s importance in two major advances in our country’s early history — the telegraph and railroads.
The Telegraph drastically shifted the US economy in the 19th century, laying the groundwork for the US to become the epicenter for the flow of information, and financial markets themselves. The first line laid came from a $30,000 US government grant in March 1843 to Samuel F.B Morse to “test the capacity and usefulness of the system of electromagnetic telegraphs”. Public capital partnering with private market innovation. Between 1844 and 1852, the number of telegraph miles in the United States rose exponentially, from 2,000 to 23,000, and communication itself became much cheaper, from around $25 to about $.03. Over the frenzy, Congress continued to support the expansion of lines, many times with funding and lease-backs to private operators. The impact of the telegraph would go on to create The Western Union, The Chicago Board of Trade, Dun & Brad Street, The Gold Indicator Company, and even Cornell University, while also being the industry where future pioneers got their start, such as Andrew Carnegie, David Sarnoff, and J.P Morgan. The telegraph also had a huge impact on the government. The instantaneous messaging of the telegraph helped make territorial expansion possible by connecting far away places via morse code. This invention helped the early US have a more centralized control over large continents, changing the structure of many governments and changing the relationships between governments. There is an apparent thread here — PPP to spread a technological achievement that creates an industry that transforms our economy.
Railroads developed in the 19th century United States were far more impactful on the economy than the telegraph. Although the telegraph offered a quantum leap in data transmission, for a US economy built on agriculture and natural resources, a quantum leap in the transmission of goods would end up being far more impactful. Beginning in the early 1870s, railroad construction in the United States increased dramatically. Prior to 1871, approximately 45,000 miles of track had been laid. Between 1871 and 1900, another 170,000 miles were added to the nation’s growing railroad system. In 1862, Congress passed the first Pacific Railway Act, which authorized the construction of a transcontinental railroad. By 1900, four additional transcontinental railroads connected the eastern states with the Pacific Coast. Where did the capital and resources come from for such expansion? It was built on land grants, government loans, and government guaranteed bonds. Yes, merchants and businesspeople funneled dollars into this new venture, but government financial backing were the catalyst. In the 1850’s, Congress granted land to Illinois, Alabama, and Mississippi to construct a 705-mile line and taxpayers essentially provided about 25% of the $747 million investment into railroads. For every forty mile section built, companies would receive 30 year U.S. bonds and the government would pay the 6% annual interest. The Pacific Railroad Act of 1864 expanded bond collection for private companies building railroads. The Union Pacific and The Central Pacific were effectively lent more than $53 million by Congress, with no payments required until almost 30 years later. Pioneering entrepreneurs like Stanford, Collis P. Huntington, Mark Hopkins, and Charles Crocker all took advantage of such funding. This public-private-partnership led to an industry that would define the future 20th century. The Western front opened up, speedier travel fostered economic development, inter and intra-state commerce developed, Sears and Montgomery Ward created the first mail-order catalog businesses, the transport of refrigerated foods and packaged food brands changed consumer spending, and Americans moved out across the country. Once again, we see the same thread — PPP to spread a technological achievement that creates an industry that transforms our economy.
There are countless instances of governmental impact in the 19th and 20th centuries on technological and economic advancement. However, not all of the above cases could be fully classified as a PPP. Hence, I spend little time on the New Deal that created a culture of credit, lending, asset management, governance, and investing that still defines America as the financial capital of the world. I don’t cover the Telecommunications Act of 1996 which allowed long distance firms like AT&T and MCI to enter local phone markets, and to make their wires available to ISP’s at relatively low costs. I don’t cover the military’s role in the creation of technological advances, including iconic projects such as The Manhattan Project or the ARPANET. I purposefully don’t even dive into subsidies and tax-benefits, and the roles they have played in the energy industry and real estate/infrastructure development. And on and on I could go.
So where do we go from here? Well, despite spending $2.5 trillion a year on roads, railways, ports, water, and other public infrastructure projects, countries around the world are still falling far short of what we need to invest, according to one estimate. This is why PPP has been proposed to be a core piece to re-building our American infrastructure. The 2019 Global Competitiveness Report from the World Economic Forum (WEF) ranked the United States second overall in economic competitiveness, but thirteenth in quality of infrastructure. The American Society of Civil Engineers gave the United States a D+ in its 2017 Infrastructure Report Card — the same grade it gave in 2013. PPP is not a full proof solution, as the way private companies have generally done business with the government has always been inefficient and led to too much spending. Look at today’s defense procurement with systems integrators, our water and waste services infrastructure, or even look to the past with how telegraph lines and railroads created massive bubbles and vanished taxpayer dollars (For more on this, I recommend you read Trae Stephens insights here). We clearly need a more efficient cost structure and incentive structure for PPPs. But this does not take away the fact that the private sector has always thrived with governmental support and partnership. (If you are interested in studying more on PPPs, I recommend reading the work of Oliver Hart).
In conclusion, as we traverse the early decades of the 21st century, I am confident that we will build a better future hand in hand. Unity is key, and working together is key, even across public and private lines. History tends to repeat itself, and when nations learn from the past, they tend to be on the right side of history. Innovative entrepreneurs, with the creative support of the public sector, will continue to take our economy to new heights, and build a better future.
— Opinions expressed are solely my own and do not express the views or opinions of my employer, 137 Ventures
