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The Entrepreneurial State:

Debunking public vs. private sector myths — By Mariana Mazzucato

Reviewed by David Schreiber

            Champions of the free market call for the government to play a minimal role in the economy. They see government as useful in setting the conditions and providing incentives for private enterprise, and they might allow that government has a limited role when the market fails to provide solutions, such as fixing roads and effecting pollution clean-ups. But essentially the public sector is regarded as fearful, sluggish, and bureaucratic, the enemy, a dead hand on the economy. Dynamism is the result solely of private sector activity. This is the view of most businessmen, politicians, media pundits, and, because of their combined influence, large swathes of the general public.

In The Entrepreneurial State: Debunking Public vs. Private Sector Myths, Mariana Mazzucato provides a correction to this view, pointing out the central role that the government plays in innovation. Drawing mostly on the US experience (the US being considered the epicentre of innovation), she demonstrates that the private sector has been the pussycat in innovation while the State has been the lion. The State, not the private sector, has led the way in virtually all the fundamental breakthroughs, including such areas as nanotechnology, pharmaceuticals, computers, the Internet, and GPS. The State has been the entrepreneurial actor in the economy, taking on the riskiest projects, accepting the certainty of a high failure rate, constantly forging into the unknown, while the private sector has hung back. It is important to realize, she says, that the State does much more than merely undertake and fund basic research, where high costs and long time horizons hold off the private sector; it also provides the initial impulse, the creative vision that gives direction to research. And, far from simply handing over the results of its basic research to the private sector, it often has to provide assistance along the entire process of commercialization, including the task of creating and stimulating markets through government procurements. Only after the heavy lifting has been done by government do private venture capital and the entrepreneurial individual take an interest.

A professor in the Economics of Innovation at the University of Sussex, Mazzucato provides ample support for her view with data, charts, case studies, citations, arguments, and counter-arguments. She takes Apple as the prime example of the relationship between public and private sectors in the area of innovation, devoting an entire chapter to the company. When Apple was still a computer company, it was struggling and faced a very uncertain future. Then it produced a wave of new products: the iOS family (iPod, iPad, and iPhone) which created sudden success of astronomical dimensions. But, Mazzucato insists, Apple had nothing to do with developing the twelve key technologies underlying its earth-shaking new products. For decades, it was the US government that worked on the core technologies exploited by Apple, such as the multi-touch screens, the advances in batteries, microprocessors and micro hard-drives, the voice-recognition technologies behind SIRI (Apple's virtual personal assistant), GPS, and the creation of the Internet. Apple has been undeniably brilliant, but not in technological innovation; its genius lies in recognizing opportunities in emerging technologies, in the integration of existing technologies, in product design, and in marketing. When R&D investments are compared between Apple and similar companies such as Microsoft, Samsung, Sony, Google, and HTC, Apple's commitments are revealed to be decidedly modest. Apple has ridden a wave created by the innovative public sector, enabling it to achieve annual sales of over $100 billion, an annual profit of $30 billion, and a market capitalization of $663 billion. This pattern of reliance on and exploitation of public sector discoveries is repeated across all the high-tech fields, with the pharmaceutical industry being another fine example.

The rewards these companies reap are far out of proportion to their own input and the risks they take. The innovation system has become what the financial system was revealed to be in the 2008 crisis—the socialization of risk and privatization of reward. It is not a rational system. Mazzucato calls the public-private relationship parasitic rather than symbiotic. Most importantly, the system is not sustainable in an era of enormous national debts. The State, argues Mazzucato, should get some return from its enormous investments in order to cover the costs of the many failures inevitably bound up with the earliest and riskiest phases of R&D, as well as to fund future innovations. Mechanisms might include royalties, patents held by the government, the State holding equity in companies, or State development banks, which have proven their worth in Germany, China, Norway, and Brazil.

It is no defence of the current system to suggest that the State gets its rewards in the form of taxes and improved employment rates. With globalization and changes in corporate culture, it is now corporate practice to avoid taxes through complex schemes involving shell companies set up in dozens of jurisdictions around the world, at the same time that tax cuts are demanded as an encouragement to business. Manufacturing jobs are largely shipped offshore, where wages are at rock bottom. In the case of Apple, most of its American workforce is left in low-wage retail stores.

The Entrepreneurial State is not anti-business, and it does not argue for government to be the big player throughout the economy. Its purpose is simply to create a clearer picture of how innovation really works with a view to educating policymakers and the public. Once the State becomes clearer and more confident about its role in innovation, a more rational and sustainable system can be constructed, based on a realistic assessment of risks and rewards for the various actors in the process.

UFCW