Schumpeter

The entrepreneurial state

A new book points out the big role governments play in creating innovative businesses

APPLE is generally regarded as an embodiment of everything that is best about innovative businesses. It was started in a garage. For years it played a cool David to Microsofts lumbering Goliath. Then it disrupted itself, and the entire entertainment industry, by shifting its focus from computers to mobile devices. But there is something missing from this story, argues Mariana Mazzucato of Sussex University in England, in her book, The Entrepreneurial State. Steve Jobs was undoubtedly a genius who underst ood both engineering and design. Apple was undoubtedly a nimble innovator. But Apples success would have been impossible without the active role of the state, the unacknowledged enabler of todays consumer -electronics revolution. Consider the technologies that put the smart into Apples smartphones. The armed forces pioneered the internet, GPS positioning and voice-activated virtual assistants. They also provided much of the early funding for Silicon Valley. Academic scientists in publicly funded universities and labs developed the touchscreen and the HTML language. An obscure government body even lent Apple $500,000 before it went public. Ms Mazzucato considers it a travesty of justice that a company that owes so much to public investment devotes so much energy to reducing its tax burden by shifting its money offshore and assigning its intellectual property to low-tax jurisdictions such as Ireland. Likewise, the research that produced Googles search algorithm, the fount of its wealth, was financed by a g rant from the National Science Foundation. As for pharmaceutical companies, they are even bigger beneficiaries of state research than internet and electronics firms. Americas National Institutes of Health, with an annual budget of more than $30 billion, finances studies that lead to many of the most revolutionary new drugs. Economists have long recognised that the state has a role in promoting innovation. It can correct market failures by investing directly in public goods such as research, or by using the tax system to nudge businesses towards doing so. But Ms Mazzucato argues that the entrepreneurial state does far more than just make up for the private sectors shortcomings: through the big bets it makes on new technologies, such as aircraft or the inter net, it

creates and shapes the markets of the future. At its best the state is nothing less than the ultimate Schumpeterian innovatorgenerating the gales of creative destruction that provide strong tailwinds for private firms like Apple. Ms Mazzucato says that the most successful entrepreneurial state can be found in the most unlikely place: the United States. Americans have traditionally been divided between Jeffersonians (who think that he governs best who governs least) and Hamiltonians (who favour acti ve government). The secret of the countrys success lies, she thinks, in talking like Jeffersonians but acting like Hamiltonians. Whatever their rhetoric, governments have always invested heavily in promoting the spread of existing technologies such as the railways (by giving the rail barons free land) and in seeking potentially lucrative scientific breakthroughs (by financing almost 60% of basic research). So far, so good. However, Ms Mazzucato omits to acknowledge how often would-be entrepreneurial states end up pouring money down ratholes. The world is littered with imitation Silicon Valleys that produce nothing but debt. Yes, private-sector ventures also frequently fail, but their investors know when to stop: their own money runs out. Governments can keep on throwing taxpayers money away. It was once fashionable to praise Japan as an entrepreneurial state being guided to world-domination by the enlightened thinkers in its mighty industry ministry. Nowadays it is clearer that the ministry has been a dead hand holding back innovation and entrepreneurship. Ms Mazzucato laments that private businesses are too short-termist. But governments also routinely make investments on the basis of short-run political calculations rather than long-term pay-offs. She worries that antistatist ideology is reducing the states ability to make important investments for the future. In fact, the explosion of entitlement spending, which is allocating ever more of the countrys income to the old, is doing more to undermine the entrepreneurial state than the tea party. She is also too hard on business: putting all those different state-funded technologies together into user-friendly iPads and iPhones required rare genius that deserves rare rewards. The book offers only hints, rather than a complete answer, to the central practical question in all this: why are some states successful entrepreneurs while others are failures? Successful states are obsessed by competition; they make scientists compete for research grants, and businesses compete for start-up fundsand leave the decisions to experts, rather than politicians or bureaucrats. They also foster networks of innovation that stretch from universities to profit-maximising companies, keeping their own role to a minimum. The JeffersonianHamiltonian paradox is important here: the more governments think in terms of mighty entrepreneurial states the less successful they are likely to be. How not to spend it Quibbles aside, Ms Mazzucato is right to argue that the state has played a central role in producing gamechanging breakthroughs, and that its contribution to the success of technology-based businesses should not be underestimated. She is also right to point out that the profligate countries that are suffering the most from the current crisis (such as Greece and Italy) are those that have spent the least on R&D and education. There are many reasons why policymakers must modernise the state and bring entitlements under control. But one of the most important is that a well-run state is a vital part of a successful innovation system.

MarianaMazzucato Sep 2nd, 12:57 Thanks for the review, and the comments. Some clarifications.
First, my point is not that the state is always entrepreneurial. But that it CAN be, and that the constant depiction of it as a heavy-handed impediment to innovation and entrepreneurship is based on ideology not empirical evidence. There are of course plenty of states that waste moneyand that are anything but entrepreneurial. My recent piece in the FT (21/8/13) made exactly that point the problems in Greece & Italy are that their high debt/GDP is a result of spending in the wrong placesareas that increase debt without growth. And as

entitlements are important for redistributing wealth, if investments are not made in wealth creation, then there is nothing to redistribute and the system becomes unsustainable. Spains recent 40% drop in research spending since 2009 will not help it become a surplus country like Germany. Second, what we learn from looking at the public spending that helped create Silicon Valley is that the form of state institutions/agencies matter. Top down decisions from ministries of innovation are less successful than when those investment decisions happen bottom up, via dynamic, de-centralized, and well-funded state agencies, coordinated by higher-level ministries but not overly directed by them (see work of Block & Keller). And to attract the kind of expertise that DARPA and ARPA-E are able to attract, it is important to create dynamic missions (going to the moon in the past, tackling climate change today), and to give th e relevant agencies serious budgets. Indeed, the ability of DARPA to hire top minds, and to nurture an atmosphere where risk-taking is welcomed rather than feared was related to its ability to know when to halt investments that were going no where. Ironically, it is the type of states that have timid missions, and small budgets, that are not able to attract this kind of expertise in government, and that are thus more likely to make both wasteful investments, and failing ones that go on too long. Third, precisely because innovation is so uncertain (most will fail), it is fundamental to consider the risk-reward relationship in innovation. This is not about asking the public sector to act like the private sector, and to seek profits. Indeed, the state should be driven by big missions, and invest precisely in the areas that the private sector fears. This means thinking big and going beyond investing only in the basics, spending also, for example, on seed finance which private venture capital (VC) has proved too risk-averse to fund. Revolutionaries like Steve Jobs have surfed waves of state investments which today are under threat. VC often enters the game after the capital intensive and high-risk investments have been absorbed by the state. We saw this in biotech and are seeing this again today in clean-tech. Of course these private sector actors are important. And, are especially important when co-investing alongside the state in the big opportunities of the future, as was the case with the crucial investments made in Xerox Parc and Bell Labsrather than the focus today by companies like Cisco on share-buybacks (be careful Apple). The problem is that ideology is preventing us from understanding the role that the state is playing in this co-investment process. Once we understand that it is much more than providing the basics and is actually making things happen that otherwise would not, the question arises, Where will the public funding come from in the future to fund such activity? If risks (in innovation) are being socialize, so should the rewards. Not to fill up the pockets of government bureaucrats but to replenish the innovation funds that are so important in funding areas like Googles algorithm (National Science Foundation), Compaq and Intels early sta ge funds (SBIR), the research behind the Internet (DARPA, CERN), and the funding that today goes to the discovery of the most radical new medicines (NIH spending $32bn/year), and the most revolutionary high clean-tech investments (ARPA-E). It does not matter whether in some of these cases the government is only funding the research (e.g. NSF grant) or actually doing it (e.g. in NIH labs, or CERN). The issue is that the funds are coming from the taxpayer. Given that many of the companies that benefit from such funding pay back very little tax, and many of the jobs generated go global, thinking less naively about the risk-return nexus will make the innovation cycle more sustainable (regenerated in the future, rather than start/stop), but also more inclusive. Is it right that Silicon Valley public schools have not benefitted from the wealth creation process in Silicon Valley that the public sector was fundamental to making happen? I don't think so. Mariana Mazzucato, author of The Entrepreneurial State: debunking public vs. private sector myths (Anthem 2013)