A rough metric for how much I enjoy a book is a) the frequency with which I bring it up in conversations and b) suggest it be read (note that these are not independent events). I suggested Mariana Mazzucato’s “The Entrepreneurial State...” to at least three people this past week and brought it up in several conversations in which it was not even relevant. In “The Entrepreneurial State...”, Mazzucato presents a fascinating position regarding the role of government in funding technological innovation. If you want a simple way to defend the argument that government should invest lots of money in research, then this is a great read (which is actually free! at here). If you are not of this persuasion, you should definitely read this book as you may be surprised by what it has to offer (since it is free here you will only sink opportunity costs!).
Mazzucato’s basic argument is that technological innovations require a party that is willing to make extraordinary investments in research for which the returns are uncertain (i.e. the probability of return is not quantifiable). This party must be the state. That is, the state must be entrepreneurial: “one able to take risks and create a highly networked system of actors that harness the best of the private sector for the national good over a medium- to long-term time horizon” (p. 21) (now the title of the book should make more sense). Therefore, economic growth is tightly coupled with investments in research and coordinating efforts by the state.
How does she get to this position? First, Mazzucato critiques the prevailing view (i.e. the market failure perspective), which holds that the role of the state is to correct market “imperfections”. That is, situations where firms do not invest because the returns may be difficult to appropriate (e.g. a public good available to other competing firms [e.g. a lighthouse]) or because the risks are too substantial for any single firm to bear. In reviewing many technological innovations (including the Internet and all of Apple’s iOS devices), Mazzucato shows that the state has been far more likely to bear the risks of developing technology than the companies that have developed commercial value from such technology. Using Apple as an example (Chapter 5), she shows that, rather than investing in research and developing the technologies underlying the iOS devices (i.e. iPod, iPhone, iPad), Apple purchased existing patents from the state, thereby integrating complex technologies into user-friendly devices. Many of these technologies were driven by research funded through defense department contracts (e.g. DARPA) and coordination of firms and universities through consortia (e.g. SEMATECH). It is in this sense that the state is entrepreneurial: investing in high risk research and service a coordinating role. As a result, Mazzucato argues that the state doesn’t “fix” markets it creates them. In other words, investment in technological innovation by the state creates particular conditions for competitive markets to emerge. This is because state investment has been the primary engine behind “general purpose technologies,” which are innovations that cause economy-wide growth in a variety of economic sectors.
A key feature of Mazzucato argument is the state must be entrepreneurial because of the inability (or unwillingness) of private firms to convert uncertainty (i.e. an unquantifiable outcome) into risk (i.e. a probability of success or failure). For example, if you were playing craps, you would know the risk of a 7 or 11 on a come-out roll. But, if you have never played craps and knew nothing about the die, you could not attribute a probability to what will happen, so you are uncertain of the outcome. As such, you would be better off asking someone or watching several trials to develop information that will be beneficial. Mazzucato argues that this is the position of private firms: they are uncertain about the returns on new technology, so it is better to invest in developing technologies for which there are quantifiable returns. In my analogy, watching others play craps or asking them about the game would be like waiting for the state to conduct basic and applied research to reveal the commercial viability of a technology (i.e. risk). It is In this way the state is a necessary part of the system of technological innovations.
So why did I bring the book up in so many conversations? (if the above discussion didn’t do it for you hopefully this will) Mazzucato argues there has been a problematic trend toward a “socialization of risk, but a privatization of rewards” (p. 27) in developing countries (most particularly the US and Great Britain). Although the largest investment costs of technology are made by the taxpayer, through state funding agencies and contracts, the rewards of commercialized technology are reaped by private firms. Mazzucato appropriately emphasizes that the majority of taxpayers simply are unaware of how their taxes foster innovation and economic growth. As she illustrates, the usual argument (that share-holders in private firms bear all the risk) is only half the story and ignores the fact that successful technologies almost always involve some subsidy by taxpayers. She argues that, since an entrepreneurial state is required for economic growth and maintaining leadership in innovation, redistribution of returns must be made such that funds continue to flow back into the state. However, this is difficult to accomplish since private firms have an incentive to maintain minimal investments in basic research and development and direct capital to technologies that are already developed (which she refers to as the “risk-reward nexus” and a peer-reviewed discussion of the argument is available here).
The reason I liked this book is because it presents an argument in which people who usually disagree on an ideological level about the role of government should probably agree. This is not a debate about whether the state should “meddle in the market”. It is an illustration of how the state is the only organizational form that can bear the uncertainty of creating technological innovations. As such, we should maintain a keen eye when it comes to discussions about reducing the investments of the state in research.