- - Monday, November 7, 2011

THE COMEBACK: HOW INNOVATION WILL RESTORE THE AMERICAN DREAM
By Gary Shapiro
Beaufort Books, $24.95, 204 pages

Author Gary Shapiro begins this well-written, thoughtful panegyric to American inventiveness with a gothic horror tale that shocks even someone familiar with how policy gets made in Washington.

The story begins in the late-1970s when Mr. Shapiro, still a Georgetown law student, was hired as a clerk by a K Street power lawyer named Ed Day, a former U.S. postmaster general. Day’s firm was representing Sony in its defense of its new consumer video recording device known as the Betamax. Arrayed against Sony was the full might of the Hollywood motion picture industry in the form of the most powerful Washington lobbyist of that time, Jack Valenti, who headed the Motion Picture Association of America operation from offices just across the park from the White House where once he had served Lyndon Johnson.

The case was one of those game-changers that too often go on here in Washington without all that much public attention in the general or business press. The issues involved far more than just resistance to a new form of technology, which is what video recorders were. Remember, at this time even video rental stores were still few and far between. A crucial issue raised by the MPAA was that copyright laws gave them the exclusive right to make copies of their products and that the VCR, by allowing consumers to record television broadcasts for free - especially motion pictures - violated copyright protections.

But the copyright argument was just the legal peg on which Hollywood hung its case. The real issue was loss of control. If individual consumers could record a program and play it later, how could a broadcaster assure an advertiser that its commercial messages were being viewed and not bypassed? Mr. Shapiro also gives the example of that hardy holiday perennial showing of “The Wizard of Oz,” which once it was taped one year, made its broadcast again a year later problematic for advertisers and producers. Hollywood, in short, faced the loss of control over its product content as well as its distribution of that product.

What is so chilling about Mr. Shapiro’s story is not the tortuous path of the litigation through the federal courts, or that Valenti and his team were easily able to inveigle members of Congress to introduce legislation to protect Hollywood’s monopoly, but that the final victory for the VCR as a consumer device hinged on a single vote in the 5-to-4 U.S. Supreme Court final decision on the case. When one thinks of how our world has changed because of that innovation and that it depended on so slim a chance, one has to wonder what it all is coming to.

And that, of course, is Mr. Shapiro’s point. Even in the best of times, it is hard for innovations to gain public and commercial acceptance. But now with the national government’s habit of viewing change only from the standpoint of social policy, it is little wonder that, as he reports, China recently filed nearly 600,000 patents for new products and technologies, a 41 percent gain, while the United States recorded a nearly 12 percent decline in patent applications during the same period.

Not that Mr. Shapiro is someone yearning for a “no-government” utopian environment for business. As chief executive of the Consumer Electronics Association, the trade association for 2,000 consumer electronics companies, he knows how to work the Washington system as well as anyone. Rather, his point is that government should not be in the business of picking winners and losers in a world where technological advances offer the promise of enormous economic benefits even as they threaten older products and ways of doing things.

One does not have to look beyond the scandal over the Obama administration’s $535 million in loan guarantees for now-bankrupt solar panel maker Solyndra to realize the marketplace and not well-intentioned government bureaucrats will determine which alternative energy sources will prevail in the real world.

Mr. Shapiro also makes a telling point by acknowledging that what he calls the “creative destruction” produced by innovation means some old technologies - and that means jobs - become economic casualties the way buggy-whip makers vanished in the wake of the automobile a century ago. While government can help ease those displaced workers into the new technological marketplace, it has no business either propping up old technologies or choosing which new ones will succeed.

As he points out, “Innovation does not require massive government spending on entrepreneurs. Innovation does not actually even require a healthy economy. In fact, recession economies often force innovation in companies and by underemployed people or people out of work.”

It’s a point recently underscored by Alexander Field, a California university economist, in a study published in the American Economic Review: “The most technologically progressive of any comparable period in U.S. economic history has been 1929 to 1941.” That’s right, the Great Depression.

The Field study shows that infrastructure programs - the kind Mr. Shapiro advocates - helped entrepreneurs get on with the business of innovation in engineering, aviation, communications, motor transport, chemistry, pharmaceuticals, fuel efficiency and environmental improvements. More important, this innovation was mostly accomplished by privately funded research and development that had nothing to do with the rush to military build-up that occurred during World War II.

In short, the post-war economic boom that followed had already been set in place five years earlier, sped by innovations that sprang from the Depression-era need to work more efficiently, more profitably and more productively than people had imagined in the “Roaring Twenties.”

This is a thought-provoking book by someone on the front lines of both the technological revolution going on around us and the struggle in Washington over the revolution’s outcome.

James Srodes is a long-time financial journalist and former Washington bureau chief for Forbes and Financial World magazines.