The Entrepreneurial State #1

I read The Entrepreneurial State by Mariana Mazzucato, an economics professor in the UK. Its thesis is that the entrepreneurial actions of government have been enormous and much underappreciated, and those of the private sector exaggerated. She claims to debunk the pervasive myth that the government is sluggish and inept, and at odds with a dynamic private sector.

She claims to debunk the alternative view of the private sector. “The fast-moving, risk-loving, and private sector, by contrast, is what really drives the innovation that creates economic growth. According to this view, the secret behind an engine of innovation like Silicon Valley lies in its entrepreneurs and venture capitalists. The State can intervene in the economy – but only to fix ‘market failures’ or level the playing field. It can regulate the private sector in order to account for the external costs companies may impose on the public (such as pollution), and it can invest in public goods such as basic scientific research or the development of drugs with little market potential. To some on the political right even fixing market failures would be a sin, because such attempts would lead to a worse outcome in the form of ‘government failures’“ (2-3).

“This conventional view of a boring, lethargic State versus a dynamic private sector is as wrong as it is widespread. This book concentrates on telling a very different story: in counties that owe their growth to innovation … the State has historically [been] a key actor in it, and often a more daring one, willing to take the risks that businesses won’t.” Government investments, not merely spending, have proved transformative, creating entirely new markets and sectors, including the Internet, nanotechnology, biotechnology and clean energy (4). “Instead, the truth is that government investment often has the effect of ‘crowding in’, meaning that it stimulates private investment that would not otherwise happen” (9). Of course, the opposite view is that government spending ‘crowds out’ private investment that would otherwise happen.

She advocates a more mutual public-private ecosystem that requires new methods, metrics, and indicators to evaluate public investments and their results (9).

The book is filled with narratives about how government-led innovations and investment have been so beneficial. The USA’s DARPA (Defense Advanced Research Projects Agency) is a prominent agency of innovation. Fair enough, but some of the key people at DARPA had their seminal ideas while at MIT, a private university, before they were hired by DARPA (Brief History of the Internet).  As one can glean from the reviews on Amazon that give the book a low rating, she greatly exaggerates the role of the State in success stories, such as Apple’s, and greatly shrinks that of the private sector. I agree with her critics and will say more why in subsequent posts.