Conventional economics offers abstract models; conventional wisdom insists the answer lies with private entrepreneurship. In this brilliant book, Mariana Mazzucato, a Sussex university professor of economics who specialises in science and technology, argues that the former is useless and the latter incomplete. Yes, innovation depends on bold entrepreneurship. But the entity that takes the boldest risks and achieves the biggest breakthroughs is not the private sector; it is the much-maligned state.
Mazzucato notes that “75 per cent of the new molecular entities [approved by the Food and Drug Administration between 1993 and 2004] trace their research ... to publicly funded National Institutes of Health (NIH) labs in the US”. The UK’s Medical Research Council discovered monoclonal antibodies, which are the foundation of biotechnology. Such discoveries are then handed cheaply to private companies that reap huge profits.
A perhaps even more potent example is the information and communications revolution. The US National Science Foundation funded the algorithm that drove Google’s search engine. Early funding for Apple came from the US government’s Small Business Investment Company. Moreover, “All the technologies which make the iPhone ‘smart’ are also state-funded ... the internet, wireless networks, the global positioning system, microelectronics, touchscreen displays and the latest voice-activated SIRI personal assistant.” Apple put this together, brilliantly. But it was gathering the fruit of seven decades of state-supported innovation.
Why is the state’s role so important? The answer lies in the huge uncertainties, time spans and costs associated with fundamental, science-based innovation. Private companies cannot and will not bear these costs, partly because they cannot be sure to reap the fruits and partly because these fruits lie so far in the future.
Indeed, the more competitive and finance-driven the economy, the less the private sector will be willing to bear such risks. Buying back shares is apparently a far more attractive way of using surplus cash than spending on fundamental innovation. The days of AT&T’s path-breaking Bell Labs are long gone. In any case, the private sector could not have created the internet or GPS. Only the US military had the resources to do so.
Arguably, the most important engines of innovation in the past five decades have been the US Defense Advanced Research Projects Agency and the NIH. Today, if the world is to make fundamental breakthroughs in energy technologies, states will play a big role. Indeed, the US government even helped drive the development of the hydraulic fracturing of shale rock.
Mazzucato insists this involves more than state support of research and development, vital though that is (in the US, the government funds a quarter of R&D and nearly 60 per cent of basic research). But the state is also an active entrepreneur, taking risks and, of course, accepting the inevitable failures. America has been a developmental state since the days of Alexander Hamilton. Indeed, the nation’s recent role as the premier promoter of fundamental innovations owes as much to its state as to the get-up-and-go of its entrepreneurs.
Germany’s failure to remain at the forefront of today’s new technologies, in contrast to before the second world war, may be down to the limited role now accorded its state.
Mazzucato loves puncturing myths about risk-loving venture capital and risk-avoiding bureaucrats. Does it matter that the role of the state has been written out of the story? She argues that it does.
First, policy makers increasingly believe the myth that the state is only an obstacle, thereby depriving innovation of support and humanity of its best prospects for prosperity. Indeed, the scorn heaped on government also deprives it of the will and capacity to take entrepreneurial risks.
Second, government has also increasingly accepted that it funds the risks, while the private sector reaps the rewards. What is emerging, then, is not a truly symbiotic ecosystem of innovation, but a parasitic one, in which the most lossmaking elements are socialised, while the profitmaking ones are largely privatised. Do ordinary taxpayers understand that their taxes fund the fundamental innovations that drive their economy?
This book has a controversial thesis. But it is basically right. The failure to recognise the role of the government in driving innovation may well be the greatest threat to rising prosperity.
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It’s a Myth That Entrepreneurs Drive New Technology
For real innovation, thank the state.
Some of our hero worship of tech entrepreneurs like Facebook CEO Mark Zuckerberg would be better directed at the government.
Photo by Justin Sullivan/Getty Images
Images of tech entrepreneurs such as Mark Zuckerberg and Steve Jobs are continually thrown at us by politicians, economists, and the media. The message is that innovation is best left in the hands of these individuals and the wider private sector, and that the state—bureaucratic and sluggish—should keep out. A telling 2012 article in the Economistclaimed that, to be innovative, governments must "stick to the basics" such as spending on infrastructure, education, and skills, leaving the rest to the revolutionary garage tinkerers.
Yet it is ideology, not evidence, that fuels this image. A quick look at the pioneering technologies of the past century points to the state, not the private sector, as the most decisive player in the game.
Whether an innovation will be a success is uncertain, and it can take longer than traditional banks or venture capitalists are willing to wait. In countries such as the United States, China, Singapore, and Denmark, the state has provided the kind of patient and long-term finance new technologies need to get off the ground. Investments of this kind have often been driven by big missions, from putting a human on the moon to solving climate change. This has required not only funding basic research—the typical "public good" that most economists admit needs state help—but applied research and seed funding too.
Apple is a perfect example. In its early stages, the company received government cash support via a $500,000 small-business investment company grant. And every technology that makes the iPhone a smartphone owes its vision and funding to the state: the Internet, GPS, touch-screen displays, and even the voice-activated smartphone assistant Siri all received state cash. The U.S. Defense Advanced Research Projects Agencybankrolled the Internet, and the CIA and the military funded GPS. So, although the United States is sold to us as the model example of progress through private enterprise, innovation there has benefited from a very interventionist state.
The examples don't just come from the military arena, either. The U.S. National Institutes of Health spends about $30 billion every year on pharmaceutical and biotechnology research and is responsible for 75 percent of the most innovative new drugs annually. Even the algorithm behind Google benefited from U.S. National Science Foundationfunding.
Across the world we see state investment banks financing innovation. Green energy is a great example. From Germany's KfW state bank to the Chinese and Brazilian development banks, state-run finance is playing an increasing role in the development of the next big thing: green tech.
In this era of obsession with reducing public debt—and the size of the state more generally—it is vital to dispel the myth that the public sector will be less innovative than the private sector. Otherwise, the state's ability to continue to play its enterprising role will be weakened. Stories about how progress is led by entrepreneurs and venture capitalists have aided lobbyists for the U.S. venture capital industry in negotiating lower capital gains and corporate income taxes—hurting the ability of the state to refill its innovation fund.
The fact that companies like Apple and Google pay hardly any tax—relative to their massive profits—is all the more problematic, given the significant contributions they have had from the government. Thus, the "real" economy (made up of goods and services) has experienced a shift similar to that of the "financial" economy: The risk has been increasingly moved to the public sector while the private sector keeps the rewards. Indeed, one of the most perverse trends in recent years is that while the state has increased its funding of R&D and innovation, the private sector is apparently de-committing itself. In the name of "open innovation," big pharma is closing down its R&D labs, relying more on small biotech companies and public funds to do the hard stuff. Is this a symbiotic public-private partnership or a parasitic one?
It is time for the state to get something back for its investments. How? First, this requires an admission that the state does more than just fix market failures—the usual way economists justify state spending. The state has shaped and created markets and, in doing so, taken on great risks. Second, we must ask where the reward is for such risk-taking and admit that it is no longer coming from the tax systems. Third, we must think creatively about how that reward can come back.
There are many ways for this to happen. The repayment of some loans for students depends on income, so why not do this for companies? When Google's future owners received a grant from the NSF, the contract should have said: If and when the beneficiaries of the grant make $X billion, a contribution will be made back to the NSF.
Other ways include giving the state bank or agency that invested a stake in the company. A good example is Finland, where the government-backed innovation fund SITRA retained equity when it invested in Nokia. There is also the possibility of keeping a share of the intellectual property rights, which are almost totally given away in the current system.
Recognizing the state as a lead risk-taker, and enabling it to reap a reward, will not only make the innovation system stronger, it will also spread the profits of growth more fairly. This will ensure that education, health, and transportation can benefit from state investments in innovation, instead of just the small number of people who see themselves as wealth creators, while relying increasingly on the courageous, entrepreneurial state.