The Entrepreneurial State: Debunking Public vs. Private Sector Myths

While the dependence of sustained economic growth on entrepreneurship has been acknowledged across the literature in economics, the role of the state in fostering maximal entrepreneurial innovation is less widely agreed upon. Mariana Mazzucato takes a stab at the ongoing debate in her new book, The Entrepreneurial State: Debunking Public vs. Private Sector Myths, in an attempt to put to rest arguments about the heavy-handedness of the state in matters of investment in basic and applied research. Mazzucato is an economist at the University of Sussex with specialties in the fields of industrial economics and economic growth. Mazzucato suggests, in the dichotomy represented by the domestic cat and the ferocious lion on the cover of her book, that the state should not be thought of as a passive kitten in matters of entrepreneurship, but rather a lion that roars and drives private sector innovation through risky public investment.

The Entrepreneurial State is effectively divided into three sections. Mazzucato begins by arguing for why the state needs to be a primary risk-taker in radical innovation. From there, she moves on to a series of case studies dealing with a wide range of industries. Finally, she concludes with a consideration about the rightful recipients of rewards from state-backed entrepreneurship.

The first section begins with Mazzucato discussing the perception that the state is an inefficient risk-taker and investor in new technologies. She argues that this is empirically false and that the state’s role in supporting innovation has led it to become a primary shaper of markets for radical technology. Mazzucato argues that the perception of a sluggish state is an unfair one that has been disseminated by business and media. In the section she also introduces and debunks six popular myths about ineffective state innovation policy. Here she also provides her evidence that government has been the originator of the riskiest and most ground-breaking innovations. Examples given include government funding of programs associated with nanotechnology and early internet technology originating from the Defense Advanced Research Projects Agency (DARPA).

The second section of the book deals primarily with specific case studies of state-led innovation in private technologies. For example, Chapter 5 examines the creation of the technology behind Apple’s iPhone. Mazzucato argues that while individual genius and entrepreneurial spirit are key components of the success of Apple and other high-technology firms, the success of Apple depended upon state investment in internet technology and computing. Mazzucato asserts that Apple benefited from state-led innovation during all stages of its growth – direct investment at the firm’s infancy, utilization of technologies created by publicly funded research institutions, and certain tax and trade policies allowed Apple to sustain its growth even during trying economic periods. Other examples covered in this section include green technology related to wind and solar power.

The third section of The Entrepreneurial State is perhaps the most intriguing, begging the question of why the rewards of socialized investment in risky innovation are frequently not distributed back to the state. The author compares the privatization of rewards and socialization of risk in investments in radical innovation to the financial industry during the financial crisis, where the financial sector has been able to completely privatize rewards while socializing risk. In Chapter 8, Mazzucato again uses the Apple case study to illustrate her claim that the government did not get an adequate share of the rewards from assisting these risky ventures. While Apple received considerable assistance from the state in a myriad of forms as described in Chapter 6, the state did not receive very much of Apple’s pie when the company began to really rake in large revenues. What resulted was a government which bore the majority of the risks and a company which was able to reap the rewards without the associated costs of innovation. Mazzucato believes that this parasitic relationship between government and businesses thriving on public-sector innovations had a hand in the disintegration of regional economies associated with these businesses. In Chapter 9, the author suggests that the recent dysfunction of socialized risk in financial markets is nearly identical in manufacturing, and that further state investment in radical technology is significantly dampened by the inequality between the recipients of the rewards of risky investment. By establishing sufficient institutions, the government might be able to experience more of the rewards of its investments in order to cover losses as well as to continue to fund entrepreneurial activity and shape the market.

The Entrepreneurial State makes a compelling case for the reevaluation of the role of the state in financing high-technology innovation. Instead of simply absorbing the risks taken by the private sector, Mazzucato argues that the state needs to take on the risks in which the private sector is unwilling to invest, and also to enjoy the rewards of successful investment in order to cover losses and to reinvest in future innovations.

While the argument as presented seems rock-solid, there are certainly issues with Mazzucato’s analysis that readers of this journal will be aware. First, it is difficult to imagine that the state should – or could, from a political standpoint – necessarily invest in companies which are not attractive to venture capitalists. Second, while it can be argued after the fact that the state has “picked winners” in industries from the internet to nanotechnology, we do not observe all of the possible counterfactuals. Throughout the book, it seems that the author is simply sampling on the dependent variable. While DARPA is lauded within The Entrepreneurial State for its hand in creating the internet, the agency also spent millions investing in research for telepathic spies and mechanical elephants. With their own money on the line, venture capitalists are nearly certain to be less inclined to invest in fairytales such as these, and rightfully so. Third, it is not at all clear from Mazzucato’s evidence that taxpayers did not receive adequate return from the invested resources that helped contribute to Apple’s success. Her analysis basically credits to government any technological advance that was touched at all by government funding and ignores returns to government such as income taxes paid by Apple employees.

In the end, it is difficult to say whether or not state investment in risky early-stage innovative efforts will or will not always be most efficient. In the 1960s, the internet was as much a fairytale as telepathy, after all, and few in their right mind at the time would have even believed in such magic simply through hearsay, let alone to have invested in it! But the benefits of the internet are evident and it would be just as hard to argue, after the fact, that investment in the infancy of the internet was not an economically efficient action. So while The Entrepreneurial State tells an interesting tale of the history of state-backed entrepreneurial activity, the story could get extra mileage from a discussion of these instances of state failure compared to those of private sector investment. This is not to say that The Entrepreneurial State is not worth your time – quite on the contrary, even those most adamantly opposed to the notion of a high-technology market shaped by the state will stand to learn a good deal about their own beliefs by reading through and critiquing this passionately written book. And those with even the slightest inclination toward the possible efficiency of an entrepreneurial state stand to have their eyes opened wider by the sheer breadth of evidence and persuasiveness of narrative that Mazzucato presents throughout her thesis.