State Investment in Human Capital for Innovation

Education as a Major Externality

After physical infrastructure, let us explore State investments in intangible assets: education, fundamental research, public databases, norms and standards. These “invisible” investments generate massive positive externalities and are often the true hidden drivers of innovation.

Public investment in education is probably the one that generates the most positive externalities. Gary Becker, Nobel Prize winner in economics in 1992, theorized the concept of human capital. He demonstrated that education generates social returns superior to private returns.

An engineer trained in a French public university costs the State approximately 100,000 euros. But the value they will create during their career amounts to millions. And above all, this value will benefit many companies, not just their first employer.

Robert Lucas, Nobel Prize winner in economics in 1995, showed in his growth theory that human capital externalities are the main driver of economic growth.

The Importance of General Education

Take the example in France of IUTs (University Institutes of Technology). These public training programs produce developers and technicians. They feed the entire technology ecosystem. Without this public investment, companies would have to train themselves, which they would do less and less well, creating a talent shortage.

Even more subtle is general education. Steve Jobs attributed Apple’s revolutionary design to a calligraphy course he took at university.

Innovation does not come only from technical training. It also comes from the ability to connect different domains—which is enabled by broad, publicly funded education.

Fundamental Research

Fundamental research is the perfect example of investment that only the State can make. Richard Nelson, in his classic article “The Simple Economics of Basic Scientific Research,” showed something important: fundamental research produces knowledge whose social value far exceeds the appropriable private value.

Einstein’s work on relativity had no obvious commercial application. Yet without it, no GPS (which must correct relativistic effects), no modern semiconductors, no nuclear energy.

Nathan Rosenberg and Richard Nelson, in their article “American Universities and Technical Advance,” document how American public universities were the hidden engine of industrial innovation.

The CNRS in France, the NIH in the United States, invest billions in research whose applications are uncertain and distant. Messenger RNA, the basis of COVID vaccines, was studied for 40 years before finding its application. No company would have maintained such an investment for so long.

These investments create a “knowledge stock” from which innovators can draw. It is a global library of ideas, methods, discoveries, accessible to all. Google could not have created the PageRank algorithm without decades of public research in mathematics on graphs and matrices.