Can government be innovative?
A review of Mariana Mazzucato’s “The Entrepreneurial State”
Cover of “The Entrepreneurial State: Debunking Public vs. Private Sector Myths” by Mariana Mazzucato
Overview
Since the Reagan-Thatcher era, government has received a poor reception from policy wonks, businesses, and the public. Government is believed to hinder and harm society’s advancement, and it is antithetical to private sector greatness. But what if all these sentiments were misleading and that the private sector, contrary to what we’ve been told, needs government to succeed? In “The Entrepreneurial State: Debunking Public vs. Private Sector Myths,” Mariana Mazzucato proves why government still matters. Mazzucato holds the Chair in the Economics of Innovation and Public Value and is the Director of the Institute for Innovation and Public Purpose at University College London.
The purpose of The Entrepreneurial State is to dismantle the “false image” that the State is merely an administrator and facilitator of the necessary “basics” and that the State has a diminishing purpose in society (p. 3).
The Entrepreneurial State’s central thesis is:
that the fabricated image of a lazy State and a dynamic private sector is one that has allowed some agents in the economy to describe themselves as the ‘wealth creators’, and in doing so, extract an enormous amount of value from the economy—in the name of ‘innovation’ (p. 3).
This bias suggests that the state extracts and distributes wealth and hurts innovation, but this belief “hurts innovation and increases inequality.” (p. 4)
It’s a controversial thesis, no doubt, and Mazzucato explores several topics at length to demonstrate her main argument, including:
The state as a lead risk-taker.
How innovation is understood and the myths around innovation-led growth (there are six of them).
A history of the US’s industrial policy.
Detailed case studies on notable companies, like Apple, and how they’ve benefitted from government.
The green revolution.
The risk and reward relationship and how the private sector often captures the financial gains.
How the state is not merely there to “nudge” or “incentivize,” but to also push.
The book is easy to read for those with a rudimentary understanding of economic theories. Mazzucato presents the arguments and supporting evidence clearly, and, thankfully, there are numerous in-text citations for those willing to read further into any discussed topic. Though the book is short, it’s densely packed with data and evidence from varying sources, so readers should take their time and ponder some of the key ideas expressed rather than powering through; it’s worth noting, however, that the author frequently cites her past publications.
So why read this book? Books as important as “The Entrepreneurial State” do not come around often enough. They are important because they challenge long-established views and force us to swallow tough pills, changing our perspective on important issues that affect society. This book is undoubtedly one that anyone interested in innovation policy should not miss.
Key lessons learned
As with most other books reviewed on this site, there are too many lessons to glean. Below are just four that I found pertinent and will likely remain relevant for the future regarding the success of societies.
Innovation is not a linear process; it involves feedback loops. Mazzucatto shares quantitative evidence from the US, Germany, Japan, and the Soviet Union, demonstrating how more R&D spending does not necessarily mean more innovation. Instead, what matters is how R&D spending is used. In the twentieth century, the most innovative countries grew faster when R&D spending was spread across multiple sectors and when businesses were allowed to commercialize state-developed technologies, combined with stronger “user-producer linkages” and exposure to foreign markets and firms (p. 44). And, of course, none of these developments would have been possible had it not been for state-funded technical training (p. 43). It’s insights like these that make Mazzucato’s book all the more necessary to read. The reality is that innovation is not simple. It’s nuanced since it requires multiple moving pieces and chances for serendipity. To simplify their messages on complex policy matters, bureaucrats, lobbyists, and politicians may insist that all that’s needed is more money for R&D. With more money, everything in our lives will, supposedly, magically improve. The message might convince naïve voters, but it’s an exaggeration that will ultimately fail if put into practice.
Governments make great entrepreneurs (yes, you read that correctly). Governments, not private individuals, are the lead risk-takers for path-breaking innovation because they can more easily provide the financial, personnel, and other resources to conduct fundamental research. It’s their “mission-oriented R&D” that helps accomplish critical goals and programs related to health, space, defence, and agriculture (p. 67). The author provides evidence demonstrating how since roughly the last quarter of the twentieth century, the majority of the most important innovations “have been fully dependent on federal research support, especially, but not only, in their early phases” (p. 70). Private actors usually tag along after the initial work (such as funding for research and infrastructure) is complete and when it’s time to commercialize the ideas and technologies. Despite their risk-taking, governments and taxpayers do not receive their fair share of these ventures’ returns. Instead, it’s the shareholders as “residual claimants” (p. 198), even though they do a great deal of nothing. Shareholders make their exorbitant profits while the rest of society gets little to nothing, resulting in unjust inequity and reduced economic growth.
There are many myths surrounding the current doctrine of innovation. The most valuable contribution of Mazzucato’s book is the myth-busting at the end of the second chapter. She dispels six myths surrounding innovation: Innovation is about R&D; small business is beautiful; venture capital is risk-loving; we live in a knowledge economy; Europe’s problem is all about commercialization; business investment requires less tax and red tape. (I cannot imagine how many classical liberals Mazzucato offended with that last one). Mazzucato busts these myths using clear facts, figures, data, and case studies rather than relying on ideological doctrine. For example, she shows how popular policy solutions like tax cuts, credits/deductions, and enterprise zones are unclear and ineffective; how the self-congratulatory rhetoric from finance professionals is nonsense; why big companies are more productive and innovative than small ones; and why patent numbers are misleading, to name just a few. Laypeople must understand these findings because, for several decades, these policy approaches have gone unquestioned. States cannot address these issues and become more dynamic if society is incapable and unwilling to evaluate these long-standing myths.
Corporate success is not always suitable for everyone. It’s a common belief that so long as businesses can earn money and provide wonderful goods and services, communities will inevitably flourish, too. However, that is not always the case. In chapter 8, Mazzucato argues that “promoting innovation is not the same as promoting ‘equitable’ growth” (p. 192). The US’s substantial investments in science and technology made it an innovative winner compared to the rest of the world. Still, as Mazzucato explains, the innovations “paradoxically failed to secure high levels of employment, to increase tax revenues and to promote export of goods and services” (p. 191). Repeatedly bending over backwards to help large companies may not always help regions within the host country flourish economically. Decision-makers must ask whether these new jobs, goods, and services allow workers to have decent wages, a work-life balance, and a reasonable chance at upward mobility. Societies can quickly become unstable if these essential needs are not met. Though awe-inspiring for what it has accomplished, the ruthless pursuit of profit and market share seems to have neglected the heart and soul of communities across developed nations.
Here are several other valuable topics “The Entrepreneurial State” explores:
Several in-depth case studies of mission-oriented innovation, such as The Defense Advanced Research Projects Agency (DARPA), The Small Business Innovation Research (SBIR) Programme, Orphan Drugs, and the National Nanotechnology Initiative (chapter 4).
How the state is blamed for failed investments but rarely, if ever, praised for successful ones, like Apple, which received a significant amount of direct and indirect government support (p. 94, and all of chapter 5). The State’s hand was not invisible, and Mazzucato articulates why.
An in-depth exploration of innovation policies and why ‘pushing’ is more important than ‘nudging’ to spur the Green Revolution (chapter 6). This chapter also contains key details on the innovation process and where and how sustained government financing is essential from start to finish.
How big companies in the US legally avoid taxes by funnelling money, profits, and IP rights to subsidiaries in low/no tax jurisdictions (p. 187-189).
The reasons why “the tax system was not conceived to support innovation systems” (p. 202), and the role lobbyists play in this issue.
How Big Pharma reduces its taxes because of weak legislation (p. 203).
Mazzucato’s detailed solutions for better risk-reward policies: national innovation funds (p. 203), income-contingent loans and equity (p. 204), and development banks (p. 205); anyone interested in policy tools should consider these options.
Why innovation policy is more complicated than just picking ‘winners’ (p. 209).
Overall impression and who should read this book
So, is government evil? Indeed, there are regimes with atrocious human rights abuse records and excessive economic, bureaucratic, and educational control. But from what we’ve seen in “The Entrepreneurial State,” government can set the rules and incentivize private actors to accomplish great things. The state can lead economic growth and innovation with the right outlook and funding.
You should read this book if you are looking for clear-cut examples of how government, particularly the US government, has created, shaped, and maintained science and technological innovation policy since the latter of the twentieth century. There is a plethora of economic and public policy literature cited in this book, and the case studies, data, and examples of government departments and programs are instrumental if you’re looking for proof of government’s importance in such a controversial subject area, one in which the private sector often receives all the praise. It would be unsurprising if this book forces free-market fundamentalists to reconsider their most cherished ideas. Readers can expect “The Entrepreneurial State” to influence future generations of legislators and policymakers tasked with making their country more economically competitive and a leader in science and technology.