newspeak

Thanks for the review, and the comments. Some clarifications.

First, my point is not that the state is always entrepreneurial. But that it CAN be, and that the constant depiction of it as a heavy-handed impediment to innovation and entrepreneurship is based on ideology not empirical evidence. There are of course plenty of states that waste money—and that are anything but entrepreneurial. My recent piece in the FT (21/8/13) made exactly that point the problems in Greece & Italy are that their high debt/GDP is a result of spending in the wrong places—areas that increase debt without growth. And as entitlements are important for redistributing wealth, if investments are not made in wealth creation, then there is nothing to redistribute and the system becomes unsustainable. Spain’s recent 40% drop in research spending since 2009 will not help it become a ‘surplus’ country like Germany.

Second, what we learn from looking at the public spending that helped create Silicon Valley is that the form of state institutions/agencies matter. Top down decisions from ‘ministries of innovation’ are less successful than when those investment decisions happen bottom up, via dynamic, de-centralized, and well-funded state agencies, coordinated by higher-level ministries but not overly directed by them (see work of Block & Keller). And to attract the kind of ‘expertise’ that DARPA and ARPA-E are able to attract, it is important to create dynamic ‘missions’ (going to the moon in the past, tackling climate change today), and to give the relevant agencies serious budgets. Indeed, the ability of DARPA to hire top minds, and to nurture an atmosphere where risk-taking is welcomed rather than feared was related to its ability to know when to halt investments that were going no where. Ironically, it is the type of states that have timid missions, and small budgets, that are not able to attract this kind of expertise in government, and that are thus more likely to make both wasteful investments, and failing ones that go on too long.

Third, precisely because innovation is so uncertain (most will fail), it is fundamental to consider the risk-reward relationship in innovation. This is not about asking the public sector to act like the private sector, and to seek profits. Indeed, the state should be driven by big missions, and invest precisely in the areas that the private sector fears. This means thinking big and going beyond investing only in the ‘basics’, spending also, for example, on seed finance which private venture capital (VC) has proved too risk-averse to fund. Revolutionaries like Steve Jobs have surfed waves of state investments which today are under threat. VC often enters the game after the capital intensive and high-risk investments have been absorbed by the state. We saw this in biotech and are seeing this again today in clean-tech. Of course these private sector actors are important. And, are especially important when co-investing alongside the state in the big opportunities of the future, as was the case with the crucial investments made in Xerox Parc and Bell Labs—rather than the focus today by companies like Cisco on share-buybacks (be careful Apple). The problem is that ideology is preventing us from understanding the role that the state is playing in this co-investment process. Once we understand that it is much more than providing the ‘basics’ and is actually making things happen that otherwise would not, the question arises, ‘Where will the public funding come from in the future to fund such activity?’ If risks (in innovation) are being socialize, so should the rewards. Not to fill up the pockets of ‘government bureaucrats’ but to replenish the innovation funds that are so important in funding areas like Google’s algorithm (National Science Foundation), Compaq and Intel’s early stage funds (SBIR), the research behind the Internet (DARPA, CERN), and the funding that today goes to the discovery of the most radical new medicines (NIH spending $32bn/year), and the most revolutionary high clean-tech investments (ARPA-E). It does not matter whether in some of these cases the government is ‘only funding’ the research (e.g. NSF grant) or actually doing it (e.g. in NIH labs, or CERN). The issue is that the funds are coming from the taxpayer. Given that many of the companies that benefit from such funding pay back very little tax, and many of the jobs generated go global, thinking less naively about the risk-return nexus will make the innovation cycle more sustainable (regenerated in the future, rather than start/stop), but also more inclusive. Is it right that Silicon Valley public schools have not benefitted from the ‘wealth creation’ process in Silicon Valley that the public sector was fundamental to making happen? I don’t think so.
Mariana Mazzucato, author of The Entrepreneurial State: debunking public vs. private sector myths (Anthem 2013)