The Entrepreneurial State: Debunking Public vs Private Sector Myths
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The Entrepreneurial State: Debunking Public vs Private Sector Myths
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Product Details
| ISBN-13: | 9780593656938 |
|---|---|
| Publisher: | Penguin Publishing Group |
| Publication date: | 02/06/2024 |
| Pages: | 288 |
| Sales rank: | 1,082,366 |
| Product dimensions: | 8.30(w) x 5.40(h) x 0.20(d) |
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The Entrepreneurial State
Debunking Public vs. Private Sector Myths
By Mariana Mazzucato
Wimbledon Publishing Company
Copyright © 2015 Mariana MazzucatoAll rights reserved.
ISBN: 978-1-78308-520-0
CHAPTER 1
FROM CRISIS IDEOLOGY TO THE DIVISION OF INNOVATIVE LABOUR
Governments have always been lousy at picking winners, and they are likely to become more so, as legions of entrepreneurs and tinkerers swap designs online, turn them into products at home and market them globally from a garage. As the revolution rages, governments should stick to the basics: better schools for a skilled workforce, clear rules and a level playing field for enterprises of all kinds. Leave the rest to the revolutionaries.
Economist (2012)
Across the globe we are hearing that the State has to be cut back in order to foster a post-crisis recovery. The assumption is that, with the State in the back seat, 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 that it is accepted by many as a 'common-sense' truth, and has even made many believe that the 2007 financial crisis, which soon precipitated into a full-blown economic crisis, was caused by public sector debt, rather than the truth (private sector 'pyramid scheme' debt).
And the language used has been forceful. In March 2011, UK prime minister David Cameron promised to take on the 'enemies of enterprise' working in government, which he defined as the 'bureaucrats in government departments' (Wheeler 2011). The rhetoric fits in with the UK government's broader theme of the Big Society, where responsibility for the delivery of public services is shifted away from the State to individuals operating either on their own or coming together through the third sector — with the justification that such 'freedom' from the State's influence will reinvigorate such services. The terms used, such as 'free' schools (the equivalent of charter schools in the US), imply that by freeing schools from the heavy hand of the State, they will be both more interesting to students and run more efficiently.
The increasing percentage of public services, across the globe, that are being 'outsourced' to the private sector is often justified using precisely this 'efficiency' argument. Yet a proper look at the real cost savings that such outsourcing provides — especially taking into account the lack of 'quality control' and absurd costs that ensue — is almost never carried out. The recent scandal where the security for London's 2012 Olympics was outsourced to a company called G4S, which then failed due to utter incompetence to deliver, meant that the British Army was called in to provide security during the Olympics. While the managers of the company were 'reprimanded', the company today is still making profits. And outsourcing remains on the rise. Examples where outsourcing is resisted, such as the British Broadcasting Corporation's (BBC) choice to build in-house the Internet platform for its broadcasting, the iPlayer, has meant that it has been able to keep the BBC a dynamic innovative organization that continues to attract top talent, retaining its high market share in both radio and TV — what public broadcasters in other countries can only dream of.
The view of the State as an enemy of enterprise is a point of view found constantly in the respected business press, such as the Economist, which often refers to government as a 'Hobbesian Leviathan' that should take the back seat (Economist 2011a). Its prescription for economic growth includes focusing on creating freer markets and the right conditions for new ideas to prosper, rather than taking a more activist approach (Economist 2012). And in a recent special issue on the green revolution, the magazine explicitly made the case, as quoted in the beginning of this chapter, that while the government should 'stick to the basics', such as funding education and research, the rest should be left to the 'revolutionaries', i.e. businesses. Yet, as will be argued in Chapters 4–8, this revolutionary spirit is often hard to find in the private sector, with the State having to take on the greatest areas of risk and uncertainty.
When not lobbying the State for specific types of support, established business lobby groups — in areas as diverse as weapons, medicine and oil — have long argued for freedom from the long arm of the State, which they see as stifling their ability to succeed through the imposition of employee rights, tax and regulation. The conservative Adam Smith Institute argues that the number of regulators in the UK should be reduced to enable the British economy to 'experience a burst of innovation and growth' (Ambler and Boyfield 2010, 4). In the United States, supporters of the Tea Party movement are united by a desire to limit State budgets and promote free markets. Big pharmaceutical companies, which, as we will see in Chapter 3, are some of the biggest beneficiaries of publicly funded research, constantly argue for less regulation and 'meddling' in what they claim is a very innovative industry.
AND IN THE EUROZONE
And, in the Eurozone, it is today argued that all the ills of the 'peripheral' European Union (EU) countries like Portugal, Italy and Greece come from having a 'profligate' public sector, ignoring the evidence that such countries are characterized more by a stagnant public sector which has not made the kind of strategic investments that the more successful 'core' countries, such as Germany, have been making for decades (Mazzucato 2012b).
The power of the ideology is so strong that history is easily fabricated. A remarkable aspect of the financial crisis that began in 2007 was that even though it was blatantly caused by excessive private debt (mainly in the US real estate market), many people were later led to believe that the chief culprit was public debt. It is true that public sector debt rose drastically both due to the government-funded bank bailouts and reduced tax receipts that accompanied the ensuing recession in many countries (Alessandri and Haldane 2009). But it can hardly be argued that the financial crisis, or the resulting economic crisis, was caused by public debt. The key issue was not the amount of public sector spending but the type of spending. Indeed, one of the reasons that Italy's growth rate has been so low for the last 15 years is not that it has been spending too much but that it has not been spending enough in areas like education, human capital and R&D. So even with a relatively modest pre-crisis deficit (around 4 per cent), its debt/GDP ratio kept rising because the rate of growth of the denominator in this ratio remained close to zero.
While there are of course low-growth countries with large public debts, the question of which causes which is highly debatable. Indeed, the recent controversy over the work of Reinhart and Rogoff (2010) shows just how heated the debate is. What was most shocking, however, from that recent debate was not only the finding that their statistical work (published in what is deemed the top economics journal) was done incorrectly (and recklessly), but how quickly people had believed the core result: that debt above 60 per cent of GDP will necessarily bring down growth. The corollary became the new dogma: austerity will necessarily (and sufficiently) bring back growth. And yet there are many countries with higher debt that have grown in a stable fashion (such as Canada, New Zealand and Australia — all ignored by their results). Even more obvious is the point that what matters is surely not the aggregate size of the public sector, but what it is spending on. Spending on useless paperwork, or kickbacks, is surely not the same thing as spending on making a healthcare system more functional and efficient, or spending on top-quality education or ground-breaking research that can fuel human capital formation and future technologies. Indeed, the variables that economists have found to be important for growth — such as education and research and development — are expensive. The fact that the weakest countries in Europe, with high debt/GDP ratios, have been spending very little in these areas (thus causing the denominator in this ratio to suffer) should not come as a surprise. Yet the austerity recipes that are currently being forced on them will only make this problem worse.
In a 2010 paper published in the American Economic Review, economists Carmen Reinhart and Kenneth Rogoff argued that higher levels of gross external debt to GDP were significantly associated with lower levels of annual GDP growth rates. While the paper was highly influential, substantiating austerity policies, in 2013 other economists reviewed their work and demonstrated that the paper's methodology was flawed and that the data employed in the Reinhart–Rogoff study would not support the conclusions.
And this is where there is a self-fulfilling prophecy: the more we talk down the State's role in the economy, the less able we are to up its game and make it a relevant player, and so the less able it is to attract top talent. Is it a coincidence that the US Department of Energy, which is the lead spender on R&D in the US government and one of the lead spenders (per capita) on energy research in the Organisation for Economic Co-operation and Development (OECD), has been able to attract a Nobel Prize–winning physicist to run it? Or that those countries with much less ambitious plans for government organizations are more susceptible to crony-type promotions and little expertise within ministries? Of course the problem is not simply of 'expertise', but the ability to attract it is an indicator of the importance it is given within public agencies in a given country.
STATE PICKING WINNERS VS. LOSERS PICKING THE STATE
We are constantly told that the State should have a limited role in the economy due to its inability to 'pick winners', whether the 'winners' are new technologies, economic sectors or specific firms. But what is ignored is that, in many of the cases that the State 'failed', it was trying to do something much more difficult than what many private businesses do: either trying to extend the period of glory of a mature industry (the Concorde experiment or the American Supersonic Transport project), or actively trying to launch a new technology sector (the Internet, or the information technology [IT] revolution).
Operating in such difficult territory makes the probability of failure much higher. Yet by constantly bashing the State's ability to be an effective and innovative agent in society, not only have we too easily blamed the State for some of its failures, we have also not developed the accurate metrics needed to judge its investments fairly. Public venture capital, for example, is very different from private venture capital. It is willing to invest in areas with much higher risk, while providing greater patience and lower expectations of future returns. By definition this is a more difficult situation. Yet the returns to public versus private venture capital are compared without taking this difference into account.
Ironically, the inability of the State to argue its own position, to explain its role in the winners that have been picked (from the Internet to companies like Apple), has made it easier to criticize it for its occasional failures (e.g. the Supersonic Transport projects). Or even worse, it has responded to criticism by becoming vulnerable and timid, easily 'captured' by lobbies seeking public resources for private gain, or by pundits that parrot the 'myths' about the origins of economic dynamism.
In the late 1970s, capital gains taxes fell significantly following lobbying efforts on behalf of the US venture capital industry (Lazonick 2009, 73). The lobbyists argued before the government that venture capitalists had funded both the Internet and the early semiconductor industry, and that without venture capitalists innovation would not happen. Thus the same actors who rode the wave of expensive State investments in what would later become the dot.com revolution successfully lobbied government to reduce their taxes. In that way the government's own pockets, so critical for funding innovation, were being emptied by those who had depended on it for their success.
Furthermore, by not being confident of its own role, government has been easily captured by the myths describing where innovation and entrepreneurship come from. Big Pharma tries to convince government that it is subject to too much regulation and red tape, while it is simultaneously dependent on government-funded R&D. Small-business associations have convinced governments in many countries that they are underfunded as a category. Yet in many countries, they receive more support than the police force(!), without providing the jobs or innovation that help justify such support (Hughes 2008; Storey 2006). Had the State better understood how its own investments have led to the emergence of the most successful new companies, like Google, Apple and Compaq, it would perhaps mount a stronger defence against such arguments.
But the State has not had a good marketing/communications department. Imagine how much easier President Barack Obama's fight for US national healthcare policy would have been if the US population knew the important role that the US government had in funding the most radical new drugs in the industry (discussed in Chapter 3). This is not 'propaganda' — it's raising awareness about the history of technology. In health, the State has not 'meddled' but created and innovated. Yet the story told, and unfortunately believed, is one of an innovative Big Pharma and a meddling government. Getting the (complex) history right is important for many reasons. Indeed, the high prices charged for drugs, whether they are subsidized by the State or not, are justified by the industry with their alleged 'high R&D costs'. Uncovering the truth not only helps government policies to be better designed but also can help the 'market' system work better.
The emphasis on the State as an entrepreneurial agent is not of course meant to deny the existence of private sector entrepreneurial activity, from the role of young new companies in providing the dynamism behind new sectors (e.g. Google) to the important source of funding from private sources like venture capital. The key problem is that this is usually the only story that is told. Silicon Valley and the emergence of the biotech industry are attributed to the geniuses behind the small high-tech firms like Facebook, or the plethora of small biotech companies in Boston (US) or Cambridge (UK). Europe's 'lag' behind the US is often attributed to its weak venture capital sector. Examples from these high-tech sectors in the US are often used to argue why we need less State and more market: tipping the balance in favour of the market would allow Europe to produce its own 'Googles'. But how many people know that the algorithm that led to Google's success was funded by a public sector National Science Foundation grant (Battelle 2005)? Or that molecular antibodies, which provided the foundation for biotechnology before venture capital moved into the sector, were discovered in public Medical Research Council (MRC) labs in the UK? How many people realize that many of the most innovative young companies in the US were funded not by private venture capital but by public venture capital, such as that provided by the Small Business Innovation Research (SBIR) programme?
Lessons from these experiences are important. They force the debate to go beyond the role of the State in stimulating demand, or the worry of 'picking winners'. What we have instead is a case for a targeted, proactive, entrepreneurial State, one able to take risks and create a highly networked system of actors that harness the best of the private sector for the national good over a medium- to long-term time horizon. It is the State acting as lead investor and catalyst which sparks the network to act and spread knowledge. The State can and does act as creator, not just facilitator, of the knowledge economy.
Arguing for an entrepreneurial State is not 'new' industrial policy because it is in fact what has happened. As Block and Keller (2011, 95) have explained so well, the industrial directives of the State are 'hidden' primarily to prevent a backlash from the conservative right. Evidence abounds of the State's pivotal role in the history of the computer industry, the Internet, the pharmaceutical-biotech industry, nanotech and the emerging green tech sector. In all these cases, the State dared to think — against all odds — about the 'impossible': creating a new technological opportunity; making the initial large necessary investments; enabling a decentralized network of actors to carry out the risky research; and then allowing the development and commercialization process to occur in a dynamic way.
(Continues...)
Excerpted from The Entrepreneurial State by Mariana Mazzucato. Copyright © 2015 Mariana Mazzucato. Excerpted by permission of Wimbledon Publishing Company.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Table of Contents
List of Tables and Figures; List of Acronyms; Acknowledgements; Introduction: Thinking Big Again; Chapter 1: From Crisis Ideology to the Division of Innovative Labour; Chapter 2: Technology, Innovation and Growth; Chapter 3: Risk-Taking State: From 'De-risking' to 'Bring It On!'; Chapter 4: The US Entrepreneurial State; Chapter 5: The State behind the iPhone; Chapter 6: Pushing vs. Nudging the Green Industrial Revolution; Chapter 7: Wind and Solar Power: Government Success Stories and Technology in Crisis; Chapter 8: Risks and Rewards: From Rotten Apples to Symbiotic Ecosystems; Chapter 9: Socialization of Risk and Privatization of Rewards: Can the Entrepreneurial State Eat Its Cake Too?; Chapter 10: Conclusion; Appendix; Bibliography; IndexWhat People are Saying About This
'This is a book whose time has come. Mariana Mazzucato documents how the state played a crucial role behind some of the landmark innovations of our time. For many, the "entrepreneurial state" is a contradiction in terms. For Mazzucato, it is both a reality and a requirement for future prosperity.'—Dani Rodrik, Rafiq Hariri Professor of International Political Economy, John F. Kennedy School of Government, Harvard University
'The principal entrepreneurial drive that has given us many of today's most important technologies has come from the state. Most thinking and arguing regarding how to energize our sluggish economies is blind to this fact. Mariana Mazzucato's book aims to get us to understand better the sources of entrepreneurship, and to reflect more positively on the role aggressive technology policies can play in getting our economies moving again.'—Richard Nelson, George Blumenthal Professor of International and Public Affairs, Columbia University
'"The Entrepreneurial State" delivers a well-researched and elegantly (even entertainingly) written knock-out to the belief across most of the political spectrum and the economics profession that (with some qualifications) "the market knows best". As many governments wonder how to boost the productivity and innovativeness of their industrial sectors, this book provides guidelines — based on successful and unsuccessful cases — on how to do industrial policy well. Above all, it shows why the common presumption that the state "crowds out" the private sector — as though the private sector is a lion caged by a smothering state — is contradicted by what governments of economies from the United States to Brazil and China actually do to "crowd in" innovations in the private sector.'—Robert Wade, Professor of Political Economy and Development, London School of Economics