The entrepreneurial state: foundations for progressive economics.
| Author | Mazzucato, Mariana |
| Position | Features - Company overview |
Across the globe we are hearing that the state has to be cut back in order to foster a post-crisis recovery, unleashing the power of entrepreneurship and innovation in the private sector. This feeds a perceived contrast that is repeatedly drawn by the media, business and libertarian politicians of a dynamic, innovative, competitive private sector versus a sluggish, bureaucratic, inertial, 'meddling' public sector. So much so that it is virtually accepted by the public as a 'common sense' truth.
For example, in his budget speech of June 2010, a month after taking office, the Chancellor, George Osborne, stated that the public sector was 'crowding out' the private sector, providing an additional justification, beyond the need to reduce the deficit, for a relative contraction of the state (Osborne, 2011). Both in the documentation that supported that emergency budget, and subsequently, the Coalition Government has repeatedly called for a more 'balanced' economy, with private activity taking up a greater share of the total so that the economy can be more 'competitive and innovative'.
The Prime Minister, David Cameron, adopted a more polemical tone in a speech given to the Cardiff Conservative Spring Forum in March 2011 when he promised to take on the 'enemies of enterprise' working in government, which he defined as the 'bureaucrats in government departments' (Wheeler, 2011). This is a rhetoric that fits with the government's broader theme of the 'Big Society', where responsibility for the delivery of public services is shifted away from the state to individuals operating either on their own or by coming together through the third sector. The Big Society is in fact based on the idea that the state should recede not only to reduce the deficit but because the state impedes innovation and dynamism. By allowing local communities to have more control of their resources and decisions, free from the heavy hand of big government, initiatives under the Big Society programme - including 'free schools' which are run by local parents and self-help groups - will lead to higher quality, more dynamism and more choice. Without this assumption, the Big Society is only about cuts, something the government has insisted it is not.
And it is not a view that is unique to the UK government. The Economist, which often refers to government as a Hobbesian Leviathan (The Economist, 2011a), recently argued that government should take the back seat and focus on creating freer markets and creating the right conditions for new ideas to prosper, rather than taking a more activist approach (The Economist, 2010). The established business lobby groups have long argued for freedom from the long arm of the state, which they see as stifling their ability to succeed through the imposition of employee rights, tax and regulation. The right-wing Adam Smith Institute argues that the number of regulators in the UK should be reduced to enable the British economy to 'experience a burst of innovation and growth' (Ambler and Boyfield, 2010). In the USA, supporters of the Tea Party movement are united by a desire to limit state budgets and promote free markets.
While business as a whole may not see the virtues of anything that does not have a clear and positive impact on its bottom line, and nor arguably should it, there is a danger when a general desire to reduce the size of the state translates into weak and non-ambitious economic policy. When that happens, we are all losers: policy is not as effective as it could be and the potential to create greater prosperity is not fulfilled. There is now a real danger of that happening in the field of innovation policy, greatly limiting its impact on economic growth.
A secret history
The view of the current government - shared by its predecessor - is that the role of the state in spurring innovation is simply to provide the 'conditions for innovation to flourish' (BIS and HM Treasury, 2011). The UK government states that if it invests in skills and a strong science base, ensures a strong legal framework within an amenable macroeconomy, and supports entrepreneurial clusters, then the market will do the rest through the incentive of the profit motive.
In The Entrepreneurial State I present evidence that challenges this minimalist view of the state in the field of economic policy, and argue that a far more proactive role is required (Mazzucato, 2011). The case can be made that the role of the government, in the most successful economies, has gone way beyond creating the right infrastructure and setting the rules. It has been a leading agent in achieving the type of innovative breakthroughs that allow companies, and economies, to grow, not just by creating the 'conditions' that enable innovation. Rather the state can proactively create strategy around a new high growth area before the potential is understood by the business community (from the internet to nanotechnology), funding the most uncertain phase of the research that the private sector is too risk-averse to engage with, seeking and commissioning further developments, and often even overseeing the commercialisation process. In this sense it has played an important entrepreneurial role.
Of course there are plenty of examples of private sector entrepreneurial activity, from the role of young new companies in providing the dynamism behind new sectors (for example Google), to the important source of funding from private sources like venture capital. But this is the only story that is usually told. Silicon Valley and the emergence of the biotech industry are usually attributed to the geniuses behind the small high tech firms like Facebook or the plethora of small biotech companies in Boston or Cambridge in the UK. Europe's 'lag' behind the USA is often attributed to its weak venture capital sector. Examples from these high tech sectors in the USA are often used to argue why we need less state and more market: to allow Europe to produce its own Googles.
But how many people know that the algorithm that led to Google's success was funded by a public sector National Science Foundation grant? Or that molecular antibodies, which provided the foundation for biotechnology before venture capital moved into the sector, were discovered in public Medical Research Council (MRC) labs in the UK? Or that many of the most innovative young companies in the USA, including Apple, were funded not by private venture capital but by public funds, including the Small Business Innovation Research (SBIR) programme?
Lessons from these experiences are important. They force the debate to go beyond the role of the state in stimulating demand, or the role of the state in 'picking winners' in industrial policy, where taxpayers' money is potentially misdirected to badly managed firms in the name of progress, distorting incentives as it goes along. Instead it is a case for a targeted, proactive, entrepreneurial state, able to take risks, creating a highly networked system of actors harnessing the best of the private sector for the national good over a medium-to long-term horizon. It is the state as catalyst, and lead investor, sparking the initial reaction in a network that will then cause knowledge to spread. It is the state as creator of the knowledge economy.
It cannot be called 'new' industrial policy because it is in fact what has happened, though in a 'hidden way' to prevent a backlash, over the last three decades in the development of the computer industry, the internet, the pharma-biotech industry, and many more including today's nanotech industry (Block and Keller, 2011a). None of these technological revolutions would have occurred without the leading role of the state. It is about...
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