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A review by jwsg
The Entrepreneurial State: Debunking Public vs. Private Sector Myths by Mariana Mazzucato
3.0
In The Entrepreneurial State, Mazzucato sets out to debunk the notion of the state being "bureaucratic, inertial, heavy-handed". That it should basically get out of the way and let the dynamic private sector do its thing to create growth.
She starts by debunking what she terms the myths or false assumptions underpinning much of innovation policy:
Myth #1: Innovation is about R&D. Mazzucato argues that the research does not show that innovation carried out by large or small firms increases their growth performance. As such, identifying the company specific conditions that must be present to allow R&D spending to lead to growth is key. Merely incentivising R&D spending is ineffective.
Myth #2: Small is beautiful. Mazzucato observes that while many high-growth firms are small, many small firms are not high growth. This is problematic since many government policies focus on tax breaks and benefits to SMEs, hoping to making the economy more productive and innovative as a result. She argues that "rather than giving handouts to small companies in the hope that they will grow, it is better to give contracts to young companies that have already demonstrated ambition. It is more effective to commission the technologies that require innovation than to hand out subsidies in the hope that innovation will follow."
Myth #3: Venture capital is risk loving. Rather, Mazzucato notes, venture capital tends to be concentrated in areas of high potential growth, low technological complexity and low capital intensity, since the latter raises costs significantly. Venture capital isn't long term; they want to exit as early as possible to earn returns.
Myth #4: We live in a knowledge economy - look at all the patents! Mazzucato cites researchers' arguments that most patents have little worth, not being cited by other patents, nor do they lead to new innovations. Indeed, they have "caused the rate of innovation to fall...as it blocks the ability of science to move forward in an open exploratory way"
Myth #5: Business investment requires 'less tax and red tape'. Mazzucato argues that it is unclear that tax incentives lead to R&D activity that would otherwise have not occurred without the incentives.
Mazzucato argues that the narrative of the bureaucratic government and the innovative private sector is a misleading one. Many of the technologies and discoveries underpinning the success of major conglomerates - the various technologies in the universe of Apple products (GPS, touch screens, Siri, LCD, to name a few), Google's search algorithm - were supported or developed by the State. Yet, in failing to pay their fair share of taxes (e.g. by incorporating offshore and booking the profits outside the US) and lobbying for lower taxes generally, these companies are undermining the State's ability to continue funding and investing in new technologies. Moreover, the "current US tax system [is obsolete]... designed for an industrial age where the nature of the production model and process required some degree of stickiness or embedded ness to the physical location of business. In today's terms, capital moves much faster, much farther, and is even virtual." Consequently, "while the efforts [to support innovation] are collective, the returns remain private".
So what should the state do? Mazzucato advocates the state being unapologetic about its role as a major player in the innovation eco-system. Apart from subsidies, the state can use its "procurement, commissioning and regulatory functions to shape markets and drive technological advance". DARPA, for instance, has targeted "resources in specific areas and directions; ...opening new windows of opportunities; brokering the interactions between public and private agents involved in technological development, including those between private and public venture capital; and facilitating commercialisation".
Second, to extract its fair share of the rewards from taking on the risk of investing in new technologies with uncertain outcomes, the state should be able to extract a royalty from the application of breakthrough technologies it has supported. Mazzucato advocates for returns from the royalties, earned across sectors and technologies, to be paid into a national innovation fund that can be used to fund future innovations.
This, loans and guarantees handed out by the state to business should come with strings attached! If and when a company makes profits above a certain threshold, after it has received a loan or grant from the state, it should be required to pay back a portion.
Mazzucato stresses that the innovation ecosystem should be one that results in a symbiotic relationship between the private sector and public sector - one that increases "the stake, commitment and return of all players investing in the innovation game" - rather than a parasitic one.
Mazzucato notes that her book had its beginnings as a report she wrote for DEMOS, a UK-based think tank, which had a style similar to the political pamphlets of the 1800s. Presumably, this book is supposed to have more refined and rigorous arguments, backed up by substantive research and case studies. Alas, I fear that it should have remained as a pamphlet; Mazzucato spends most of the 400 plus pages making the same points repeatedly. Apparently the point she is making is so revolutionary, the reader will only be convinced the fifth time she makes her argument. The examples she cites from the pharmaceuticals industry, Apple and Google, DARPA are fascinating but less so when she cites them for the nth time in the book.
Three stars for the thesis, two stars for the actual writing.
She starts by debunking what she terms the myths or false assumptions underpinning much of innovation policy:
Myth #1: Innovation is about R&D. Mazzucato argues that the research does not show that innovation carried out by large or small firms increases their growth performance. As such, identifying the company specific conditions that must be present to allow R&D spending to lead to growth is key. Merely incentivising R&D spending is ineffective.
Myth #2: Small is beautiful. Mazzucato observes that while many high-growth firms are small, many small firms are not high growth. This is problematic since many government policies focus on tax breaks and benefits to SMEs, hoping to making the economy more productive and innovative as a result. She argues that "rather than giving handouts to small companies in the hope that they will grow, it is better to give contracts to young companies that have already demonstrated ambition. It is more effective to commission the technologies that require innovation than to hand out subsidies in the hope that innovation will follow."
Myth #3: Venture capital is risk loving. Rather, Mazzucato notes, venture capital tends to be concentrated in areas of high potential growth, low technological complexity and low capital intensity, since the latter raises costs significantly. Venture capital isn't long term; they want to exit as early as possible to earn returns.
Myth #4: We live in a knowledge economy - look at all the patents! Mazzucato cites researchers' arguments that most patents have little worth, not being cited by other patents, nor do they lead to new innovations. Indeed, they have "caused the rate of innovation to fall...as it blocks the ability of science to move forward in an open exploratory way"
Myth #5: Business investment requires 'less tax and red tape'. Mazzucato argues that it is unclear that tax incentives lead to R&D activity that would otherwise have not occurred without the incentives.
Mazzucato argues that the narrative of the bureaucratic government and the innovative private sector is a misleading one. Many of the technologies and discoveries underpinning the success of major conglomerates - the various technologies in the universe of Apple products (GPS, touch screens, Siri, LCD, to name a few), Google's search algorithm - were supported or developed by the State. Yet, in failing to pay their fair share of taxes (e.g. by incorporating offshore and booking the profits outside the US) and lobbying for lower taxes generally, these companies are undermining the State's ability to continue funding and investing in new technologies. Moreover, the "current US tax system [is obsolete]... designed for an industrial age where the nature of the production model and process required some degree of stickiness or embedded ness to the physical location of business. In today's terms, capital moves much faster, much farther, and is even virtual." Consequently, "while the efforts [to support innovation] are collective, the returns remain private".
So what should the state do? Mazzucato advocates the state being unapologetic about its role as a major player in the innovation eco-system. Apart from subsidies, the state can use its "procurement, commissioning and regulatory functions to shape markets and drive technological advance". DARPA, for instance, has targeted "resources in specific areas and directions; ...opening new windows of opportunities; brokering the interactions between public and private agents involved in technological development, including those between private and public venture capital; and facilitating commercialisation".
Second, to extract its fair share of the rewards from taking on the risk of investing in new technologies with uncertain outcomes, the state should be able to extract a royalty from the application of breakthrough technologies it has supported. Mazzucato advocates for returns from the royalties, earned across sectors and technologies, to be paid into a national innovation fund that can be used to fund future innovations.
This, loans and guarantees handed out by the state to business should come with strings attached! If and when a company makes profits above a certain threshold, after it has received a loan or grant from the state, it should be required to pay back a portion.
Mazzucato stresses that the innovation ecosystem should be one that results in a symbiotic relationship between the private sector and public sector - one that increases "the stake, commitment and return of all players investing in the innovation game" - rather than a parasitic one.
Mazzucato notes that her book had its beginnings as a report she wrote for DEMOS, a UK-based think tank, which had a style similar to the political pamphlets of the 1800s. Presumably, this book is supposed to have more refined and rigorous arguments, backed up by substantive research and case studies. Alas, I fear that it should have remained as a pamphlet; Mazzucato spends most of the 400 plus pages making the same points repeatedly. Apparently the point she is making is so revolutionary, the reader will only be convinced the fifth time she makes her argument. The examples she cites from the pharmaceuticals industry, Apple and Google, DARPA are fascinating but less so when she cites them for the nth time in the book.
Three stars for the thesis, two stars for the actual writing.