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Why Mariana Mazzucato is wrong about the ‘entrepreneurial state’

Credit: Justin Sullivan/Getty Images

Credit: Justin Sullivan/Getty Images

June 22, 2018   4 mins

The world is facing a number of very grave threats – climate change, air and ocean pollution, organised crime, cyber-threats, antibiotic resistance, pandemics, cancer, dementia, road deaths, persistent poverty and so on – all of which demand some form of intervention and leadership by the state. What is at issue is the way in which the state should intervene.

The seductive new ideology of the ‘entrepreneurial state’ is the wrong way to go. Most of the challenges listed above will only be solved by means of hefty doses of new technology and business models. Anything that reduces the global economy’s ability to innovate, however well-intentioned, will have serious consequences.

The first two decades after the collapse of the Soviet Union were difficult for socialism. The centre left was forced to concede the primacy of markets, the hard left was forced into exile. All of that changed with the financial crisis. Suddenly capitalism looked vulnerable again, but if it was to take advantage of the situation, the Left needed new ideas. Lo and behold, along came two: Thomas Piketty’s inequality and Mariana Mazzucato’s entrepreneurial state.

The intellectual flaws in Mazzucato’s work lie not in what she has proven, but in what she has omitted.

Piketty and Mazzucato both based their prescriptions on painstaking research. Piketty’s volume Capital in the 20th Century – bought by so many, read by so few – is a tour de force of statistics, carefully arranged to show wealth increasingly concentrated in the richest few percent of society. Mazzucato, for her part, tracked the origins of the technologies behind some of the era’s most iconic products, in particular the iPhone, showing the extent to which they originated with state funding and programmes.

The reason Piketty and Mazzucato became instant champions of the Left lay in the solutions they were proposing: Piketty became a vocal advocate for punitive levels of redistributive taxation; Mazzucato’s entrepreneurial state more subtly suggests that the state should maintain (at least part) ownership of the technologies whose development it has helped to fund – in effect a combination of state planning and a tax on innovation.

The intellectual flaws in Mazzucato’s work lie not in what she has proven, but in what she has omitted. Yes, state funding helped create a number of valuable technologies – but at what cost? Would additional state investment result in more innovation, or more waste? What innovations might have resulted had money not been siphoned off by the state in the first place? Why only technology? By Mazzucato’s logic every logistics company which uses publicly-funded roads should be government-owned.

Mazzucato also fails to describe the bureaucracy needed to administer the new state-owned intellectual riches. An entrepreneurial state would need to manage thousand upon thousands of venture investments each year, and track myriads of innovations as they aggregate into products – often combining multiple platform technologies like flat screens, quantum computing, graphene, nanotechnology or genetics. Most universities now have commercialisation offices; generally they are regarded as incompetent by the industries with whom they interact and by the scientists whose intellectual property they attempt to market, rarely are they staffed by top-drawer venture capitalists.

Perhaps the most critical omission in Mazzucato’s work is the impact the entrepreneurial state would be likely to have on the willingness of private investors to put capital at risk. Even if it is only needed later in the innovation process – to integrate different technologies into products and services, market them, and build the fabric of businesses – they provide real risk capital, often on a scale which dwarfs that invested in early technology research.

Mazzucato claims to have bust the myth that state actors cannot be innovative. However, that is not in fact a myth but a straw man. What is not a myth is the fact that state actors are very bad at delivering innovative new products and services. It’s one thing funding the development of internet protocols, quite another thing to create Facebook, Google, Amazon or YouTube. Minitel anyone?

Mazzucato is right to highlight how state-funded research has helped create huge corporations which have concentrated wealth disproportionately in the hands of their founders and shareholders, while paying little or no tax. Risk has been socialised and profits privatised on an epic scale.

However, if tax avoidance is the problem, then perhaps the solution is, you know, to get serious about clamping down on it – not using it as an excuse to build a vast new technology bureaucracy.

Despite these flaws – or perhaps because of them – the entrepreneurial state found a receptive audience among those who dislike American technology companies on principal, and want to get their hands on a greater tax take. Carlos Moedas, European Commissioner for Research, Science and Innovation hired Mazzucato as a consultant to advise on the next €100 billion, seven-year EU programme for research and innovation, due to launch in 2021.

If tax avoidance is the problem, then perhaps the solution is, you know, to get serious about clamping down on it – not using it as an excuse to build a vast new technology bureaucracy.

It’s not that the EU doesn’t need new ideas on research and innovation. Last year’s interim assessment of Horizon 2020, the €80 billion programme which draws to a close in 2021, blandly stated that “the benefits of Horizon 2020 are… hard to monetise” – it certainly was unable to enumerate any in terms of new products, services, companies or jobs.

This is entirely consistent with its predecessor programmes. Essentially, by 2021 the EU will have spent nearly €200 billion (in real terms) on research and innovation over 37 years, with little to show for it but some macroeconomic modelling claiming it was a good idea.

Mazzucato is right to state that “innovation has both a rate and a direction”. She is right to point out that policy-makers need to “act in bold ways to shape new futures, solving public problems and create new markets”. They must, however, do it in such a way that it enables, rather than stifles, the very innovation it is intended to produce. They must foster competition between private players, not suppress it, bureaucratise it or crowd it out.

What is needed is a joined-up set of policies across research and development, infrastructure, taxation, trade, government procurement and regional development to target public priorities. Policies which, taken together, encourage capital formation, entrepreneurship, and the creation of intellectual property.

What is not needed is an entrepreneurial state – or in the case of the EU, superstate – to centrally plan and nationalise the development of technology.

Michael Liebreich is the Chairman of Liebreich Associates, Founder and Senior Contributor of Bloomberg NEF, ex-TFL Board Member and Chairman of Zeelo.


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