He could see that this would not be possible under capitalism, where all the factories had separate owners, locked in wasteful competition with one another. There, nobody was in a position to think systematically...That was why capitalism was blind, why it groped and blundered. It was like an organism without a brain. But here it was possible to plan for the whole system at once. The economy was a clean sheet of paper on which reason was writing. So why not optimise it? All he would have to do was to persuade the appropriate authorities to listen.

— Leonid Vitalevich, Red Plenty

How can government policy best support the kind of innovation necessary for America to be at its best? That’s a question I’ve always struggled with, and I imagine you have too.  A big part of being at our best involves leadership, and in today’s world that often means climate leadership.

There’s no doubt that today’s status quo is far from the best America has to offer in that regard, and we are plainly not doing enough to address the impending threats of climate change. The way I see it, American politics has largely divided into two camps on this issue.

One says that America is like the Pope: infallible and infinitely virtuous. Their words may admit that climate change is “real,” but the policy goals reject the possibility that we are on the wrong track, deny that our fossil fuel industry and dependency might be a weakness rather than a strength. That’s obviously not good enough.

But in the other camp, I am discouraged by what appears to be a general policy laziness. While they may be genuinely interested in shepherding America toward a more sustainable future, the answer from this side is frequently uncreative: more government spending.

I think there’s a missing piece to our climate policy debates.

Now, look. I do believe that government investment has a significant role to play in maintaining a healthy democratic society, and I would argue that the research backs me up on that. Besides welfare, when it comes to technological innovation, there’s no overstating the power of government-funded research and development which gave us things like the internet, GPS, and LEDs. However, there’s also no overstating the importance of private, iterative innovation which yielded the Wright brothers’ flight at Kitty Hawk and shrunk room-sized computers to fit in our pockets.

Whatever the cause, I’m susceptible to the second camp’s line of thinking, too: that to get our way out of situations like the threat of climate change, the government should dive into this or that enormous project supported by my pet theory. In fact, that’s how this article was born. One apparent problem with a lot of renewable energy or electrification is a need for batteries. Particularly on the utility scale, if we rely on a lot of solar (which is an extremely economical energy source right now) we need lots of energy storage to respond to the grid’s demands when the sun isn’t up. But batteries are expensive, and the materials needed to produce them are finite.

So, for a few years, I’ve had a little pet theory that the United States and the European Union should enter into a power sharing agreement. String a series of power cables through the Atlantic, and the differing sunlight hours ought to help offset some of the need for batteries. After all, we already have fiber optic cables between Virginia and Europe. How hard could it be? Well, as it turns out, very. And pretty inefficient too.

In confronting this, I’ve had to reckon once again with the question that opened this article. How can government policy best support innovation? Is it through big spending projects like my transatlantic extension cord, or something else? More and more I’ve been inclined toward an answer not represented by either the do-nothing or the spend-away policy camps.

One of the most powerful tools in the government’s shed is not cash. It’s regulation. Beneath the free market there is an extraordinary web of rules and regulations which hold the system up and impact its performance. For more on this idea, you can check out one of our early Bird’s Eye podcasts here, but here are the basics.

The market is an unparalleled innovation for the generation of wealth, but the government has a crucial role to play in shaping the incentives of the system to limit behavior that harms the public interest. The original principle behind the idea of capitalism and the free market is the same as that which animates democracy: that people ought to have leverage and freedom of choice. Democracy can meet their demands, and the market can meet their desires. But without regulation—and not to mention taxes—wealth consolidates, and people lose leverage and freedom of choice. Competition dies, and with it, the dream of capitalism.

The key, then, is to regulate intelligently in ways that promote competition and preserve some basic guarantees of quality of service. For example, when President Jimmy Carter—whom I recently learned, thanks to Noah Smith, was a big proponent of deregulation—deregulated airline pricing and route competition, the FAA still retained its power over aviation safety. The result? By loosening regulations but maintaining strict safety requirements, fares took a nosedive, while planes took fewer and fewer of them. Now, this deregulation also dealt some damage to unions, but even smarter regulation could have preserved both safety and worker power. Prices might have decreased less, but competition still could have played a massive part in reforming the industry.

Circling back to energy—the principal issue at the heart of this otherwise expansive, though I promise not distracted, commentary. We have an absolutely dismal regulatory scheme that is not only opposed to competition and innovation but resolutely tilted in the favor of the world-burning oil and gas industry.

Matt Yglesias, who co-founded Vox and runs the ‘Slow Boring’ blog, did a good job breaking some of this down in a recent post. He mostly discusses geothermal energy, the process of using heat from deep in the ground to generate electricity, but he also explains how iteration and practice have generated incredible technological breakthroughs in fossil fuel extraction. Put aside the potentials of geothermal for a moment—regarding which there seems to be division within the scientific community, as there often is when we cannot know what technology the future holds. Matt poses the obvious question. Why can’t we get this same kind of progress with geothermal that we’ve had with oil and gas?

The answer? On federal land, where geothermal would be well-suited for experimentation, “oil and gas companies can avail themselves of their categorical exemption from [environmental] review to drill holes.” In other words, our environmental regulations both enable free-wheeling enterprise that destroys the environment and inhibit the development of technology which might save the environment. According to Austin Vernon, a similar problem can be found in other areas of renewable technology: regulations unnecessarily stifling innovation and iterative progress.

We’ve got things totally backwards. If we could flip this script, who knows what progress we might unleash?

Just the other day, Congress passed the bipartisan infrastructure framework, or the Infrastructure Investment and Jobs Act. Those in the concerned-about-climate-change camp have largely lambasted its limited spending on green projects. On the other hand, I haven’t seen a single comment from one of these legislators or commentators lamenting that the bill doesn’t include an overhaul to these environmental regulations which are so counter-productive.

It’s true that the IIJA doesn’t contain nearly enough investment in green solutions to put a dent in carbon emissions. But even the Build Back Better Act, which could contain over $500 billion in climate-related spending—including tax credits  designed to stimulate innovation in the private sector—doesn’t get anywhere close to the regulatory overhaul needed to shape private actors’ incentives for the better. More spending will be fantastic and much-needed, but the bill lacks the imagination to confront and reshape regulatory environments, something that could so efficiently and effectively help it achieve its goals.

Subsidies, spending, and government R&D investment can go a long way. But we also need to just open the door. So much could be achieved with so little cost to taxpayers simply by granting the opportunity to movers and shakers to try, try again.

Our propensity to focus on enormous infrastructure and spending projects suggests that we have simultaneously expanded our imaginations and constricted them to a point that we cannot even see the very simple solutions beneath our noses. We tend to think about reshaping the world in grand strokes, and yet we can’t seem to contemplate how enormous an impact we could have by shifting the details.

It’s very tempting to think like Leonid Vitalevich and wish we were in his position, to imagine that we have the grand solution and to yearn for a blank-sheet economy on which our reason could write. But Leonid overlooks something crucial. He overestimates his own intelligence—and as far as we find ourselves in similar shoes, we do the same. The world is complex, and the market has incredible power to synthesize the imaginations of millions of people.

There is not a silver bullet solution, and we should all be wary of anyone who tries to sell us the snake oil of simple fixes to enormous problems. Instead, in focusing on that key question—how government policy can best support innovation—we should consider how to leverage complexity rather than ignore it.

There’s no doubt that investment and spending have a big part to play. But the missing link in our policy debates seems to me, at least partly, a lack of consideration of smarter regulation. The government has the power and responsibility, as with airline safety and the FAA, to provide competitive opportunity and tell the market, “This is the opportunity. These are the demands. Meet them.” To chart our precise path to the future, the market, that “organism without a brain” yields far more promise than anyone with one.