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Government’s Venture Capital

by Elaine Schwartz    •    Jan 9, 2012    •    647 Views

The Erie Railway went bankrupt multiple times. Primarily government funded, it originally connected 2 small NY communities and cost 4 times more than initial projections when it was completed in 1851. 

Citing the financial woes of the Erie Railway, a calamitous 1913 decision to build a steel plate manufacturing plant, and the Solyndra bankruptcy, financial historian John Steele Gordon says government repeatedly is a “bad venture capitalist.”

By contrast, a recent paper from the Hamilton Project tells us that sometimes, when the private sector has no incentive to innovate, the government has to step in.  Focusing on energy, they suggest that government should fund basic research, development and demonstration.

The Economic Lesson

Deciding whether a government investment is successful takes us to private and social benefit. Sometimes a business can be a financial failure but have so much of a social benefit that it might be called worthwhile. One example is the Midwestern U.S. canals that declared bankruptcy during the 19th century. As links in a broader transportation infrastructure, some believe that they should be judged on the basis of the role they played. As a result, the financial cost of these canals is offset by their intangible social benefits.

An Economic Question: Explain why you support more or less government venture capital activity.

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