The conventional wisdom is that only the private sector can marshal the entrepreneurial energy to create innovation and growth, while government can do little more than shift around the wealth that the private sector creates.
But is that really true? A new book by Mariana Mazzucato, an economist and professor of science and technology policy at the University of Sussex, says it is 100% wrong. She posits that The Entrepreneurial State, as the title of her new book calls it, provides most of the risk-taking energy and investment behind innovation.
I know many readers will rise in disbelief, perhaps even in anger at this statement, but Mazzucato is right. Most of the bedrock technological innovations of the last 70 years can be traced directly to U.S. and European government programs.
Furthermore, Mazzucato is correct to indict tax-avoiding and tax-opposing beneficiaries of these government programs for denying the government the funds it needs to pursue its vital entrepreneurial role.
To round off her paradigm-busting message, Mazzucato argues for establishing ways the government can reap rewards for creating innovations and taking risks. She writes that if the public sector – i.e., the taxpayer – were paid a fair return on the government’s farsighted investments, it would be “immediately logical for there to be a more collective distribution of the rewards.” This would help solve the U.S.’s economic inequality problem.
Anyone who has worked for a U.S. government research laboratory, as I have, knows that our government is deeply involved, not only in research and development of innovative technologies, but also in their commercialization. The National Institutes of Health, the National Science Foundation, the National Aeronautics and Space Administration, the Department of Energy, the Small Business Innovation Research and Advanced Technology programs and the complex of government agencies comprising the Department of Defense – especially the Defense Advanced Research Projects Agency, which developed the Internet – have funded and created most of the fundamental innovations that have brought modern industrial society to where it is today.
Government has dynamically and aggressively pushed innovative technologies. On the other hand, as Mazzucato points out, “There are plenty of ‘bureaucratic’ and inertial businesses“ in the private sector. “There is nothing in the DNA of the public sector that makes it less innovative than the private sector,” according to Mazzucato.
Mazzucato writes that compared to the federal government, the venture capital industry is risk-averse. Venture capitalists rely on the government to take big risks and make big expenditures, on which they can then ride. Government, she writes, takes on the Knightian uncertainty (risks that are so unknown that they cannot be quantified) of developing innovative groundbreaking technologies. Once those risks become risks that can be calculated, venture capitalists and private sector entrepreneurs step in.
The case of Apple
Most people think of Apple as the quintessential entrepreneurial company and its co-founder Steve Jobs as the quintessential entrepreneur. Mazzucato does not deny the company or Jobs due recognition for those roles. But she points out that “all of the technologies that make Jobs’ iPhone so ‘smart’ were government funded.” Specifically:
There are 12 major technologies integrated within the iPod, iPhone and iPad that stand out as features that are either ‘enablers,’ or that differentiate these products from their rivals in the market. These include semiconductor devices such as (1) microprocessors or central processing units (CPU); (2) dynamic random-access memory (DRAM); as well as (3) micro hard drive storage or hard drive disks (HDD); (4) liquid-crystal displays (LCDs); (5) lithium-polymer (Li-pol) and lithium-ion (Li-ion) batteries; (6) digital signal processing (DSP), based on the advancement in fast Fourier transform (FFT) algorithms; (7) the Internet; (8) the Hypertext Transfer Protocol (HTTP) and Hypertext Markup Language (HTML); (9) and cellular technology and networks – all of which can be considered as the core enabler technologies for products such as the iPod, iPhone and iPad. On the other hand, (10) global positioning systems (GPS), (11) click-wheel navigation and multi-touch screens, (12) and artificial intelligence with a voice-user interface program (a.k.a. Apple’s SIRI) are innovative features that have drastically impacted consumer expectations and user experiences, further enhancing the popularity and success of these products.
Mazzucato recounts the history of each of these technologies, pointing out the central and crucial role of government in performing and funding research and development and in creating corporate networks and consortia that applied and commercialized the technologies.
Her conclusion is that “such radical investments – which embedded extreme uncertainty – did not come about due to the presence of venture capitalists, nor of ‘garage tinkerers’. It was the visible hand of the State which made these innovations happen.”
Google, too, had its origins in a government-funded program. Larry Page and Sergey Brin, the founders of Google, were supported by the National Science Foundation-led Digital Library Initiative in their development of the PageRank method, which became one of the main components of Google’s search engine.
The prevailing mythology about government and the private sector
A common view these days, especially among free-market enthusiasts, is that government should only establish the rules – ideally just the rules of contract – and step back to let the private sector work its “invisible hand” miracles. Not even Adam Smith would have bought this philosophy whole. Progressives today argue that the government needs to apply Keynesian stimuli at times, but only to help revive the private sector’s “animal spirits” so it can do its entrepreneurial work. At most, Americans believe, government can only nudge the private sector in one direction or another.
Writes Mazzucato: “The assumption is that, with the State in the backseat, we unleash the power of entrepreneurship and innovation in the private sector. The media, business and libertarian politicians draw from this convenient contrast, and feed into the dichotomy of a dynamic, innovative and competitive ‘revolutionary’ private sector versus a sluggish, bureaucratic, inertial, ‘meddling’ public sector. The message is repeated so much so that it is accepted by the many as a ‘common sense’ truth.”
Instead, Mazzucato believes that in many cases, it was “the State that appeared to have the most aggressive ‘animal spirits’.”
“In biotechnology, nanotechnology and the Internet,” she writes, “venture capital arrived 15–20 years after the most important investments were made by public sector funds.”
The mythology about government sluggishness is self-defeating and “has created a self-fulfilling prophecy, where the smartest young graduates think that it will be more exciting and fun to work at Goldman Sachs or Google rather than a State investment bank or a ministry for innovation,” according to Mazzucato. “The only way to rebalance this problem is to upgrade, not downgrade, the status of government – and the words and the images used to describe it.”
Entrepreneurs like Steve Jobs treat innovative tools and technologies developed by government the same way they treat mineral deposits – as resources to be exploited and taken for granted. We do not credit Mother Nature for her role in creating an iPhone, even though it would not be possible without the silicon, metal and other natural resources that go into it. Similarly, we do not credit the government for its role in creating or funding development of the underlying technologies, without which the device would not be possible. For natural resources and government resources, it is important to recognize the need to replenish or sustain the resource.
Why are failures of private ventures lauded as inevitable consequences of aggressive risk-taking, while failures of risky government ventures – such as the Supersonic Transport (SST) – are held up as examples of how the government shouldn’t be allowed to pick winners and losers? (Mazzucato writes that Solyndra’s failure was more a consequence of the faint-heartedness of venture capital than a government error, though unfortunately her argument for that position lacks clarity.) The government R&D establishment, according to Mazzucato, has the longest vision and largest appetite for risk of any venture capitalist. Of course, it will experience failure.
Government’s next big challenge
Mazzucato believes we must restore confidence in government as the engine of innovation and risk-taking to solve the biggest challenge we face now: the development of clean energy. Government has been heavily involved in this for decades – especially since the last bout of fossil-fuel angst in the 1970s and early 80s. But due to climate change, the level of urgency is raised. Some governments have been very active in pushing green energy – notably China, Germany and Denmark. Yet in the U.S., according to Mazzucato, “China’s public support for clean technology industry development is framed as ‘cheating,’ rather than effective.” Mazzucato would prefer that instead of accusing China of unfair subsidies, the U.S. increase support for private sector green energy to match China’s.
Is past prologue?
Mazzucato’s book raises the question of whether past is prologue. It cannot be denied that government expenditures on innovative technologies, especially by the U.S. military establishment, have been a key engine of advanced technological development. (Mazzucato argues that Europe’s lower level of technological innovation is due to the fact that it spends less than half as much on R&D as a percentage of GDP as the U.S. This is in part because U.S. defense spending is greater than or equal to the rest of the world’s combined.)
Does that mean that government leadership in innovation will continue to be as important as it has been since World War II? Will government be able to pick enough winners among green energy technologies to compensate for the losers?
Mazzucato argues that “leaving direction setting to ‘the market’ only ensures that the energy transition will be put off until fossil prices reach economy-wrecking highs.” She could also have referred to ocean levels or temperatures reaching economy-wrecking highs — both forecasts are speculative but plausible. As it has before, government needs to lead. In fact, other governments are doing so already. The U.S. is feeling the pinch: It may be growing less competitive in green energy technologies.
But is U.S. government investment the only way that long-term risks can be taken and the necessary breakthroughs in clean energy and other important technologies can be made?
Mazzucato argues convincingly that it is. If we believe her, we must implement a paradigm shift. Government must regain respect and support – at least for its scientific and technological R&D establishment. In his review of Mazzucato’s book, Martin Wolf, the chief economics commentator of the Financial Times, concludes, “The failure to recognise the role of the government in driving innovation may well be the greatest threat to rising prosperity.”
Michael Edesess is an accomplished mathematician and economist with experience in the investment, energy, environment and sustainable development fields. He is a senior research fellow with the Centre for Systems Informatics Engineering at City University of Hong Kong and a project consultant at the Fung Global Institute, as well as a partner and chief investment officer of Denver-based Fair Advisors. In 2007, he authored a book about the investment services industry titled The Big Investment Lie, published by Berrett-Koehler.
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