Wednesday, July 24, 2013

The Entrepreneurial State: Debunking Public vs. Private Myths by Mariana Mazzucato

From start to finish of this superb book, I want Mariana Mazzucato to be right. In The Entrepreneurial State, Mazzucato suggests that the state has had a much more powerful role in stimulating innovation that the dominant narrative admits. The state pushes the key breakthroughs; private firms enter the game quite late (though they often capture an inordinate amount of the social gains from innovation).

Mazzucato’s book is timely (indeed, it has had a considerable impact in Brussels), as countries shift away from austerity policies and look towards Keynesian-style spending to get their economies moving. Keynes famously suggested burying a treasure in an abandoned mine as a make-work project (his point, of course, was not to endorse pointless exercise; rather, he meant to show that pure make-work could act as a stimulus). Mazzucato argues countries can improve on Keynes by spending on state entrepreneurship. In a best-case outcome, state-sponsored innovation will shock the economy back to expansion and will lead to frontier-shifting welfare gains.

And maybe it would - if the political class could be convinced by Mazzucato’s account of the hidden state-centric nature of innovation. Her recent historic examples involve pharmaceuticals and information technologies. The private drug development narrative is deliberately cultivated by Big Pharma: bold firms undertake massive R&D in their laboratories, to be rewarded (in the event of success) by patent monopolies. Big Pharma asks to be ‘left alone’ by the State: no tort liability and quick market approvals are the best policies. In fact, Mazzucato observes, it is the state that undertakes the greatest risks in developing new approaches and active agents, through public funding (such as NIH grants in the United States) of medical research. Left to their own devices, Big Pharma would undertake little research; indeed, the current trend among large pharmaceutical firms is to reduce R&D expenditure and to look to smaller, research-oriented firms to do later-stage development work, then in-licensing or acquiring fairly proven projects. But without the substrate of state-funded science, even this system would grind to a half.

Mazzucato’s capstone chapter The State Behind the iPhone is devoted to Apple. She, as others do, marvels at Apple’s success: the company that repeatedly created product categories that never existed and changed the way we live our lives. But more was at work than the magic (and design sensibility) of Steve Jobs. Mazzucato documents how Apple is the beneficiary of a stream of technologies developed with government funding. These include the internet itself (what would an iPhone or an iPad be without it?), as well as the core electronics, hard drives, touch sensitivities, batteries, GPS and artificial intelligence (SIRI, are you listening?)

Indeed, Apple is (comparatively speaking) a company with rather modest R&D spending, though this may simply be an artifact of its outsized success. Mazzucato depicts Jobs as a junk collector, picking up odd technological bits (originally developed through various DOD and other federal programs) and cobbling them together into killer consumer products. While not minimizing Jobs’ creativity, Mazzucato convincingly makes the case that we would not have had these products were it not for extensive government involvement in innovation. Indeed, she calls on the government to “stay foolish” in priming technological development in new fields, such as green- and nanotechnologies.

Mazzucato’s Apple study predates the company’s current embarrassments involving tax strategies - but she makes the point that Apple may ‘owe’ the state more than do other companies, due to the state-sponsored origins of Apple’s technologies and its enormous profits built on them.

Mazzucato seeks to correct our understanding of the source of innovation. We shouldn't read her as denying the valuable contribution of private firms in technological development; her point is that the state has had an underappreciated role as well. She doesn't hesitate to make state-based innovation a prescription, however; she calls for a continuing state commitment to the “green industrial revolution.”

Mazzucato doesn’t promise a successful outcome to state entrepreneurship: there may be many Solyndras out there, technological or organizational dead-ends. But the state should, she argues, cause to happen what “otherwise would not have” (again quoting Keynes). There are identifiable unaddressed needs (orphan diseases, sustainable energy) where reliance on the private sector is a recipe for inaction.

Mazzucato employs a sliding notion of risk in her work. She observes (correctly) that venture capital firms are much more risk-adverse than their reputation suggests - and that their short- and medium-term horizons are not suited for transformative innovation that plays out (with stops, starts and many blind alleys) over decades. She uses the language of risk and reward to suggest a proper state role - but missed innovation opportunities are not instances of market failure. Perhaps the better argument for state entrepreneurship is that the state should do it because it can.

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