34 Forcing technological change with subsidies

Posted on December 1, 2011 by


I’ve commented on the economic rationality of “holding back” investment when confronted with rapidly changing technology – like light bulbs. I’d now like to look at the issue of “forcing” technological change through subsidies, and its unforeseen consequences.

Nuclear technology for electricity production emerged as part of designing submarines for strategic nuclear warfare: It was the child of the Cold War (I still remember the excitement of Nautilus’ first trip to the North Pole). Once developed and tested (and paid for by the military) the technologies so developed were then put to use in civilian power production.

The political decision to develop nuclear technology for warfare had three consequences for the civilian applications:

  • Military necessities dictated the use compact technologies. This design bore specific risks for their subsequent use in civilian life: all redundancy had to be foregone to reduce dead weight and volume, so safe containment became a weak point. Secondly, “fail-safe” technologies, which would have required more volume, were ignored (“fail-safe” nuclear technologies were available then, but were inherently poorly suited to military purposes).
  • National security overrode any environmental concerns about nuclear waste disposal. Given the urgency, the problem was simply not addressed. Had the issue been raised then, the population involved might have grudgingly accepted siting of waste as patriotic duty. This was no longer the case when patriotism yielded to commercial considerations.
  • Political, rather than economic, considerations drove and paid for the expansion of nuclear power. Civilian applications were collateral, and the subsequent transfer amounted to hefty subsidies – the US military essentially paid for the development costs of much of the hardware. Not to be outdone, other governments followed suit. Furthermore, what may have been collateral benefit for a super-power became a necessary component of military deployment for lesser ones. The economic intermeshing of civilian and military nuclear programs is best seen in the case of France.

One should be also aware of the “fashion” as well as the “political” aspect. To have nuclear energy was to be “modern” (The Atomium, built for Expo ‘58 still graces the Parc d’Osseghem in Brussels, but looks quite incongruous now). “Atoms for peace” – the American initiative in 1953 to make nuclear energy widely available to all states ready to accept international safeguards on civilian use of nuclear energy – led to a “fashion” of building such power plants, irrespective of economics.

Once transferred to the civilian sector, nuclear power became a “path-dependent outcome” – it was cheaper (and politically easier) to continue than switch. This phenomenon was exacerbated by the lumpy character of the technology: plants are big, last a long time and “stand-alones” are not viable[1]. Consequently economic and political interests remained intertwined – until the technology hit the safety and ecology wall. Counterfactuals are difficult to evaluate, but one may justly regret the hasty political decisions cum subsidies that led to the irreversible choice of creating a civilian nuclear energy sector.

One lesson to be drawn is that decisions to develop long-lasting technologies tend to have irreversible consequences. We should be cautions, for our technology choices often essentially foreclose options: we are locking today’s values[2] as well as technologies far into the future.

We all make mistakes, and markets have their share of mistakes. I would not automatically trust the market, or believe naïvely that “the market is always right”. Nothing compares, however, with autocratic, albeit well-intentioned, sovereign decisions. The world is replete with politicians’ failed follies. And they invariably are big.

Subsidies play a central role here. Like surgery, they are invasive, and severely affect the market. It might be done successfully[3]; it needs to be done at times. When they create “path-dependent outcomes”, the effects of subsidies, however, go well beyond mere budgetary implications. The long-term distortions that follow may far outweigh the direct benefits and costs.

[1]           The “lumpiness” of the technology is extreme. Not only is an each power plant big; the enrichment/retreatment facilities require a whole park of power plants to run efficiently (unless they operate “dual-use” with military programs). The regulatory framework is only effective is its activities are spread across a number of plants. The same applies to waste disposal.

[2]           An interesting example is “big dams”. When the Hoover Dam was built, social values heavily favoured it. People valued jobs over scenery. With raising incomes values have changed, and many have come to regret the dam’s construction. Note the implicit circularity of the argument. The dam generated income, which led to recreational demands for unspoiled lascapes…

[3]           A contemporary instance was the transfer of jet technology from airborne tankers to the civilian sector. The Boeing 707 and the KX-135 Strato-tanker are obvious siblings.