Friday, August 10, 2012

Eyes on the Prize

A look to the final frontier and then back to energy

Inline image 1
Picture from The Guardian

While evidence in favor of global warming piles up by the day, there seems little political motivation to try to address the issue. Both cap and trade and a carbon tax would be politically impossible in such a low growth environment, and subsidies for more clean energy research would be shouted down with cries of "Solyndra!" Moreover, these policies are likely to have little substantive effect either. Without an international governing body, trade would nullify cap and trade or carbon taxes, and research subsidies tend to increase the price of research without raising the quantity. With this in mind, Evan proposes an alternative funding mechanism: research prizes. Instead of having the government subsidize firms or directly do basic research, the Federal government could sponsor research competitions, allowing innovators from all over the world to pool their collective wisdom to solve the energy crisis. To get a better idea of this would mean, we should look at a current example in which prizes played a large role: NASA's development of private, low earth orbit vehicles.

First, some history. What is often left out of the public memory of the push into space is what happened after we made it to the moon. Optimism about U.S. space policy led people to make "conservative" predictions of Mars landings by 1988, with a Mars base by the end of the century. Pan-Am even started taking reservations for flights to the moon, as it was forecasted that trips to the moon would be a quickly realized affair. So what happened? As the geopolitical impetus for the space program started to fade, so did the funding. Instead of going back to the Moon and beyond, we settled with the Space Shuttle program, which functioned as a space taxi that would ferry astronauts from Earth to Low Earth Orbit (LEO) and the International Space Station.

In theory, the Space Shuttle was supposed to be a temporary affair, replaced by a vehicle capable of going to the moon and beyond. However, cost overruns and budget problems eventually ended the program, resulting in a problem: after the retirement of the Space Shuttle in 2011, there was no way for U.S. astronauts to get back to space. Instead, we had to buy seats on Russian Soyuz shuttles at a price of $51 million, round-trip. 

Enter Commercial Orbital Transportation Services (COTS), a program designed to spur private sector solutions to the space transport program. It was implemented through special arrangements known as Space Act Agreements (SAA) coordinating development between NASA and private sector firms. Firms submitted proposals, NASA gave initial approval, and as the firms met certain milestones NASA gave them more funding. The funding was capped though, so no matter how much the companies spent, NASA would not pay them extra. This forced the competing firms to cut costs and streamline projects. NASA promised to purchase resupply and crew transport services from the final successful companies.

The program has been a resounding success. About 26 companies submitted proposals for the first stage, CCdev-1. Another 11 propsals were submitted for the second stage, CCdev-2. Space-X, the private space company that docked with the ISS just a few months ago, was actually denied funding for CCdev-1, but was later granted funded for CCdev-2. This showcases the resiliency of the SAA funding structure. Even though SpaceX was passed over, it still pulled through and is now the front runner in the COTS race. There is even discussion on how SpaceX's Dragon and Dragon Heavy rockets may make a trip to Mars by 2017, nearly 15 years before the same projection for the NASA planned Space Launch Vehicle at less than one hundredth of the cost. Of course some of it is hype and overoptimism, but it nonetheless stands testament to how far SpaceX and commercial space ventures have come since the era of Apollo.

The development of commercial crew highlights a few lessons about prizes and innovation. First, prizes often save money. There are stories of Elon Musk, the founder of SpaceX, being so unsatisfied with the market price for a certain injector that goes into the Dragon rocket that he decides to build it in-house at less than half the price. This is a particular issues as politicians like to see results for their billions of dollars spent. Lower costs equal happier politicians, which is a plus for a research program.

Well, except if the politicians are hungry for the pork offered by the traditional Space program. In the commercial transition, Senator Hutchinson of Texas has been a notable offender, fighting hard for the traditional government programs such as the Space Launch System as their budgets are cut in favor of commercial crew. This is the second lesson on why prizes are useful; they guard against rent-seeking, as if a firm meets the requirements, they are eligible for funds. No backdoor deals are needed.

A third lesson is that when you give the private sector the chance to directly work with the technology in the hope of generating disruptive innovations, they are in a better position to develop the technology into further disruptive innovations. In the vocabulary of growth economics, prizes promote "learning-by-doing", and have domino effects in promoting further development down the line. The fact that many firms are all trying their own ideas means that the market learns at a much faster rate once the knowledge gained from the innovations diffuses outwards. You have decentralized tinkering, instead of a top-down solution, vastly increasing the probability that someone thinks of the golden idea.

So does this mean this kind of fixed-cost research prize system is always superior to government sponsored direct subsidies and research funds? If anything, just the opposite. SpaceX, United Launch Alliance, Sierra Nevada, and all the other commercial space companies would not have gotten off the ground without the initial investment from NASA. Imagine Kennedy delcaring "We choose to pay the private sector to bring us to the moon in this decade and do the other things, not because they are easy, but because they are hard" There would have been no gravitas, no national pride, and importantly, no technology. At that point, the technology had not been developed. Somebody needed to go do the basic science to get us up there. 

To give an example of the wide range of science involved, think about the "simple" task of linking two orbiting objects together. It requires a firm understanding of the science of orbital rendezvous to build the correct equipment and to pilot correctly. Buzz Aldrin actually wrote a dissertation on this issue, and although it seemed useless at the time it was critical in the development of the space program. Buzz also spent time solving other physics problems such as the differential effects of gravity on large objects in space and the implications for navigation. If that science seems like something the private sector would be willing to fund, recall that the initial analyses of rocketry were conducted by a German Nazi* that was working on military rockets. None of this was easy; this was part of the reason why there were so many failures. Without the military impetus and government support, there would have been no space program. If the SpaceX Falcon rockets are able to fly so far now, it is because they launch off of the shoulders of giants. This is true figuratively as well as literally. The Falcon rockets launch from Cape Canaveral, the former launch site of the rocket that took us to the moon: the Saturn V.

In short, government directed research and prizes are complements. First, government R+D and subsidies are best for discovering fundamental disruptive technologies and sciences, whereas prizes are an effective way to further organize and commercialize that existing knowledge. Without DARPA, there would have been no Internet. But without subsequent innovations from companies such as Google or Facebook, the Internet would not be as vibrant as it is today. Second, it is important the government is to be a consumer, or an anchor tenant, of the innovation. For commercial space, NASA has committed to buy launches from whichever company that ends up developing the rocket. For energy, this would mean a guarantee from the government to purchase the electricity or fuel cells produced by a revolutionary firm. Third, private sector innovations from prizes can be used by the government. Government investments that fed into the private sector may feed back to the government again. NASA may end up using the improved rockets from COTS instead of the current United Launch Alliance Atlas V rocket for future Mars missions. The military may extensively deploy improved private sector solar panels to increase readiness in times of energy price volatility. So by all means, use prizes to spur innovation. But don't neglect the foundational role of the government in other dimensions.

*The rocket scientist in question was Wernher von Braun, and Tom Leher once wrote the following poem making fun of his political history:

Once the rockets are up,
Who cares where they come down?
'That's not my department',
Says Wernher von Braun.

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