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 in fixing a few things that the market fails
to provide, such as roads and pollution cleanups. 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 epicentre of
innovation, she demonstrates that the pussy cat in innovation has been the
private sector while the state has been the lion. The state, not the private
sector, has led the way in virtually all the fundamental breakthroughs, whether
in nanotechnology, pharmaceuticals, computers, the Internet, GPS, etc. 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 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 does private venture capital and the
entrepreneuial 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, 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, the creation
of the Internet, etc. 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 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 employment. 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 “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.
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