Schumpeter

The entrepreneurial state

A new book points out the big role governments play in creating innovative
businesses

Aug 31st 2013 | From the print edition

APPLE is generally regarded as an

embodiment of everything that is best about

innovative businesses. It was started in a

garage. For years it played a cool David to

Microsofts lumbering Goliath. Then it

disrupted itself, and the entire entertainment

industry, by shifting its focus from computers

to mobile devices. But there is something

missing from this story, argues Mariana Mazzucato of Sussex University in England, in her
book, The Entrepreneurial State. Steve Jobs was undoubtedly a genius who understood
both engineering and design. Apple was undoubtedly a nimble innovator. But Apples

success would have been impossible without the active role of the state, the unacknowledged
enabler of todays consumer-electronics revolution.

Consider the technologies that put the smart into Apples smartphones. The armed forces

pioneered the internet, GPS positioning and voice-activated virtual assistants. They also

provided much of the early funding for Silicon Valley. Academic scientists in publicly funded
universities and labs developed the touchscreen and the HTML language. An obscure

government body even lent Apple $500,000 before it went public. Ms Mazzucato considers it
a travesty of justice that a company that owes so much to public investment devotes so much
energy to reducing its tax burden by shifting its money offshore and assigning its intellectual
property to low-tax jurisdictions such as Ireland.

Likewise, the research that produced Googles search algorithm, the fount of its wealth, was

financed by a grant from the National Science Foundation. As for pharmaceutical companies,
they are even bigger beneficiaries of state research than internet and electronics firms.

Americas National Institutes of Health, with an annual budget of more than $30 billion,
finances studies that lead to many of the most revolutionary new drugs.

Economists have long recognised that the state has a role in promoting innovation. It can

correct market failures by investing directly in public goods such as research, or by using the
tax system to nudge businesses towards doing so. But Ms Mazzucato argues that the

entrepreneurial state does far more than just make up for the private sectors shortcomings:
through the big bets it makes on new technologies, such as aircraft or the internet, it creates
and shapes the markets of the future. At its best the state is nothing less than the ultimate

Schumpeterian innovatorgenerating the gales of creative destruction that provide strong

tailwinds for private firms like Apple.

Ms Mazzucato says that the most successful entrepreneurial state can be found in the most
unlikely place: the United States. Americans have traditionally been divided between

Jeffersonians (who think that he governs best who governs least) and Hamiltonians (who

favour active government). The secret of the countrys success lies, she thinks, in talking like
Jeffersonians but acting like Hamiltonians. Whatever their rhetoric, governments have

always invested heavily in promoting the spread of existing technologies such as the railways
(by giving the rail barons free land) and in seeking potentially lucrative scientific
breakthroughs (by financing almost 60% of basic research).

So far, so good. However, Ms Mazzucato omits to acknowledge how often would-be

entrepreneurial states end up pouring money down ratholes. The world is littered with

imitation Silicon Valleys that produce nothing but debt. Yes, private-sector ventures also
frequently fail, but their investors know when to stop: their own money runs out.

Governments can keep on throwing taxpayers money away. It was once fashionable to praise
Japan as an entrepreneurial state being guided to world-domination by the enlightened

thinkers in its mighty industry ministry. Nowadays it is clearer that the ministry has been a
dead hand holding back innovation and entrepreneurship.

Ms Mazzucato laments that private businesses are too short-termist. But governments also

routinely make investments on the basis of short-run political calculations rather than longterm pay-offs. She worries that anti-statist ideology is reducing the states ability to make

important investments for the future. In fact, the explosion of entitlement spending, which is
allocating ever more of the countrys income to the old, is doing more to undermine the

entrepreneurial state than the tea party. She is also too hard on business: putting all those

different state-funded technologies together into user-friendly iPads and iPhones required
rare genius that deserves rare rewards.

The book offers only hints, rather than a complete answer, to the central practical question in
all this: why are some states successful entrepreneurs while others are failures? Successful
states are obsessed by competition; they make scientists compete for research grants, and
businesses compete for start-up fundsand leave the decisions to experts, rather than
politicians or bureaucrats. They also foster networks of innovation that stretch from

universities to profit-maximising companies, keeping their own role to a minimum. The

Jeffersonian-Hamiltonian paradox is important here: the more governments think in terms

of mighty entrepreneurial states the less successful they are likely to be.
How not to spend it
Quibbles aside, Ms Mazzucato is right to argue that the state has played a central role in
producing game-changing breakthroughs, and that its contribution to the success of

technology-based businesses should not be underestimated. She is also right to point out that
the profligate countries that are suffering the most from the current crisis (such as Greece

and Italy) are those that have spent the least on R&D and education. There are many reasons

why policymakers must modernise the state and bring entitlements under control. But one of
the most important is that a well-run state is a vital part of a successful innovation system.
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From the print edition: Business