Public Subsidy, Private Profit

When Steve Jobs unveiled the iPhone in January 2007, the crowd responded as if Apple had conjured something from nothing. What neither Jobs nor the press mentioned was that every technology in that device had been developed with government money. The internet it connected to had been built by the Defense Advanced Research Projects Agency. The GPS it used had been developed and maintained by the US Air Force, which had turned off the deliberate signal degradation for civilian users only seven years earlier. Its touchscreen came from research supported by the National Science Foundation, which Apple had acquired by buying a small company called FingerWorks in 2005. Siri, added to the iPhone 4S in 2011, had started as a DARPA-funded project at SRI International. The government took the risk; the investors who held Apple stock reaped the benefits.

This pattern is not unique to Apple. The internet began as ARPANET, a network funded by the Department of Defense from 1969 to connect university research computers. The initial packet-switching protocols, the domain name system, and the basic architecture of what became the web were all developed in publicly funded laboratories and universities. The commercial internet of the 1990s built on this foundation without paying for it. The browser itself emerged from the National Center for Supercomputing Applications, funded by the National Science Foundation. Mosaic was not a startup product: It was a research project paid for by American taxpayers.

The drug industry runs the same arrangement at enormous scale. The National Institutes of Health spends roughly $47 billion annually on biomedical research. Much of this money funds the basic science that pharmaceutical companies would not fund themselves because the returns are too distant and uncertain. When that basic science produces a promising compound, private companies license it, conduct clinical trials, and patent the result. The public paid for the underlying knowledge. The private company captures the patent and sets the price. Unlike every other wealthy country. the United States has no legal mechanism to negotiate that price. As a result, insulin costs American patients ten times what Canadians pay.

The economist Mariana Mazzucato has called this arrangement the privatization of gains and the socialization of losses. Her argument is not that private companies add no value: they obviously do, in manufacturing, distribution, and application. Her argument is that the standard story of heroic private entrepreneurs taking risks that timid governments would never accept inverts the actual history. Governments took the foundational risks by funding research that might produce nothing, maintaining infrastructure that would not attract private capital, and training the scientists and engineers that firms would later hire. Technology transfer moves the results into private hands, almost always at prices that dramatically undervalue the public’s investment.

The tech companies that have benefited most from publicly funded research are also among the most sophisticated users of international tax structures designed to minimize what they pay back into the public systems that enabled them. Apple’s arrangements in Ireland, described in a 2016 European Commission ruling, allowed the company to pay an effective tax rate of 0.005% on European profits. Over and over, public investment creates the technology, private firms capture the profits, and international tax structures ensure that only a tiny fraction of those profits flow back into the public budget. The cycle is effectively a permanent subsidy.

The arrangement looks different in Europe, partly because European governments built in mechanisms that Americans left out. Germany’s Fraunhofer-Gesellschaft, a network of applied research institutes funded jointly by the federal government, state governments, and industry, licenses its discoveries under terms that return revenue to the institutes themselves rather than transferring intellectual property to private buyers at knockdown prices. The European Medicines Agency negotiates drug prices on behalf of member states, which is why the same cancer drugs that cost American patients six figures a year cost Germans and French patients a fraction of that. When Moderna tried to sell COVID-19 vaccines to the European Union, EU negotiators paid roughly half the per-dose price that American buyers paid, for the same product developed with the same publicly funded science. The European model still lets private firms profit substantially from public investment. What it does not do is treat the transfer as a gift.

China has taken a third path that makes the American arrangement look like an oversight rather than a design. Programs like Made in China 2025, announced in 2015, identify strategic industries like semiconductors, electric vehicles, robotics, and artificial intelligence, and pour in state capital with the explicit goal of domestic ownership of the results, not just the benefits. Companies like CATL, which now supplies roughly a third of the world’s electric vehicle batteries, grew to global scale with protected home markets and state-backed financing before competing internationally. The distinction between public and private in this system is deliberately blurry: the government can require access to technology developed with state support, block the international transfer of profits, and redirect corporate strategy in ways that American or European regulators legally cannot. This does solve the problem Mazzucato describes, since the state that takes the foundational risk never fully loses its claim on the result. It creates a different problem, though: accountability runs upward to the Communist Party rather than outward to citizens, and the line between a national champion and an instrument of state policy disappears entirely.

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Acemoglu2023

Daron Acemoglu and Simon Johnson: Power and Progress: Our Thousand-Year Struggle Over Technology and Prosperity. PublicAffairs, 2023, 978-1541702530.

Chang2012

Ha-Joon Chang: 23 Things They Don’t Tell You About Capitalism. Bloomsbury, 2012, 978-1608193387.

Mazzucato2013

Mariana Mazzucato: The Entrepreneurial State: Debunking Public vs. Private Sector Myths. PublicAffairs, 2015, 978-1610396134.