The Entrepreneurial State

ANTHEM FRONTIERS OF GLOBAL POLITICAL ECONOMY

The Anthem Frontiers of Global Political Economy series seeks to trigger and attract new thinking in global political economy, with particular reference to the prospects of emerging markets and developing countries. Written by renowned scholars from different parts of the world, books in this series provide historical, analytical and empirical perspectives on national economic strategies and processes, the implications of global and regional economic integration, the changing nature of the development project, and the diverse global-to-local forces that drive change. Scholars featured in the series extend earlier economic insights to provide fresh interpretations that allow new understandings of contemporary economic processes.

Editorial Board

Kevin Gallagher (series editor) – Boston University, USA

Jayati Ghosh (series editor) – Jawaharlal Nehru University, India

Stephanie Blankenburg – School of Oriental and African Studies (SOAS), UK

Ha-Joon Chang – University of Cambridge, UK

Wan-Wen Chu – RCHSS, Academia Sinica, Taiwan

Léonce Ndikumana – University of Massachusetts-Amherst, USA

Alica Puyana Mutis – Facultad Latinoamericana de Ciencias Sociales (FLASCO-México), Mexico

Matías Vernengo – Banco Central de la República Argentina, Argentina

Robert Wade – London School of Economics and Political Science (LSE), UK

Yu Yongding – Chinese Academy of Social Sciences (CASS), China

ANTHEM OTHER CANON ECONOMICS

Anthem Press and The Other Canon Foundation are pleased to present the Anthem Other Canon Economics series. The Other Canon – also described as 'reality economics' – studies the economy as a real object rather than as the behaviour of a model economy based on core axioms, assumptions and techniques. The series includes both classical and contemporary works in this tradition, spanning evolutionary, institutional and Post-Keynesian economics, the history of economic thought and economic policy, economic sociology and technology governance, and works on the theory of uneven development and in the tradition of the German historical school.

Editorial Board

Erik S. Reinert (series editor) – The Other Canon Foundation, Norway and Tallinn University of Technology, Estonia

Rainer Kattel (series editor) – Tallinn University of Technology, Estonia

Jan Kregel (series editor) – University of Missouri, USA and Tallinn University
of Technology, Estonia

Wolfgang Drechsler (series editor) – Tallinn University of Technology, Estonia

Ha-Joon Chang – University of Cambridge, UK

Mario Cimoli – UN-ECLAC, Chile

Jayati Ghosh – Jawaharlal Nehru University, India

Steven Kaplan – Cornell University, USA and University of Versailles, Paris

Bengt-Åke Lundvall – Aalborg University, Denmark

Richard Nelson – Columbia University, USA

Keith Nurse – University of the West Indies

Patrick O'Brien – London School of Economics and Political Science (LSE), UK

Carlota Perez – Judge Institute, University of Cambridge, UK

Alessandro Roncaglia – Sapienza University of Rome, Italy

Jomo Kwame Sundaram – Food and Agriculture Organization of the United Nations

LIST OF TABLES AND FIGURES

Tables

Figures

LIST OF ACRONYMS

ACKNOWLEDGEMENTS

The book could not have been written without the intellectual stimulus and hard work of many colleagues and friends.

First and foremost were inspirational exchanges with two of the world's best economic historians: Carlota Perez and Bill Lazonick. Carlota's work, and our constant discussions, on the role of the State in different phases of technological revolutions, has challenged me to think hard about the changing role of different types of 'capital' – finance and production – over time. And the role of the State in guiding both for productive rather than purely speculative ends. But of course innovation requires some speculation – which Bill has been very careful to distinguish from 'manipulation'. Bill's incisive analysis leaves no words untouched, careful for example to distinguish business from the market, what most of us confuse when we use the term 'private sector'. Bill's work on the changing structure of capitalist production, and its relationship to labour markets and financial dynamics should be required reading for all students interested in the theory of the firm, and all policymakers interested in reforming finance to make capitalist production more inclusive and sustainable.

I also thank Bill for introducing me to two of his most brilliant master's students: Oner Tulum and Matt Hopkins, who provided me with the best possible research assistance one can get. Oner applied his surgical methods of studying company reports to get to the bottom of how much the State provided to Apple, both in terms of the underlying technologies as well as early stage financing; Chapter 5 could not have been written without him. And Matt applied his sharp and passionate understanding of clean technology – something he is both academically an expert on but also politically committed to; Chapters 6 and 7 could not have been written without him.

I'm also grateful to Caetano Penna and Caroline Barrow, who provided laborious editorial assistance. Caetano's background in both heterodox economics (and 'the Other Canon' framework) and in innovation studies – and his ground-breaking PhD on the 'transition' required in automobiles – made him a unique and stimulating sounding board and proofreader. Caroline, who found herself drowning in the editing and formatting the manuscript immediately after joining the Science and Technology Policy Research Unit (SPRU) at Sussex University, never lost her patience, and even provided interesting insights on the role of the public sector in the arts, from her experience as a professional dancer.

Finally, I am grateful for funding which allowed me to take some time off to write the manuscript. A grant from the Ford Foundation's Reforming Global Finance initiative, led by Leonardo Burlamaqui, was not only helpful but useful due to Leonardo's own work on understanding ways in which 'knowledge governance' can 'shape' markets. It was indeed Leonardo's work with Ford that inspired the first meetings and work that led to another research project, funded by the Institute for New Economic Thinking (INET), in which Randy Wray and I are today banging heads: a project on how to bring together the thinking of Joseph Schumpeter on innovation and Hyman Minsky on finance, to understand the degree to which finance can be turned into a vehicle for creative destruction rather than its current obsession with Ponzi-like destructive creation.

Amongst other friends and colleagues who have provided inspiration through interaction and feedback, I want to mention Fred Block, Michael Jacobs, Paul Nightingale and Andy Stirling, the latter two from SPRU, my new academic home. SPRU, founded by Chris Freeman, is one of the most dynamic environments in which I have worked – a place where innovation is understood to be at the core of capitalist competition, and where rather than mythologizing the process, it is studied 'critically' – in both its rate and its direction.

Lastly, over the last two years I have had the fortune to work closely with different policymakers around the world, who rightly yearn to hear 'different' voices in economics. In the UK I have found particular inspiration working with Secretary of State David Willetts, Shadow Business Secretary Chuka Umunna, Shadow Science Minister Chi Onwurah (now in the Cabinet Office) and Andrew Adonis. In the European Commission, working with Peter Droell (head of the Innovation Unit of the DG RTD) on how to think about public sector innovation (both 'within' and 'through') has provided me with motivation to not only talk about the potential 'entrepreneurial' role of government but to think concretely about how to build 'entrepreneurial' organizations within the public sector.

Of course none of the people listed here bear any responsibility for my own errors, exaggerations, provocations and sometimes too passionate opinions expressed in this book.

FOREWORD

By Carlota Perez

Debunking myths is never easy. Swimming against the tide requires determination, a serious commitment to the truth and massive evidence. That is what Mariana Mazzucato displays in this book, which successfully challenges the widespread idea that the State cannot pick winners, that it is clumsy, bureaucratic and incapable of entrepreneurial risk taking.

Her analysis is not just Keynesian; it is also Schumpeterian. The role of the State is not limited to interventions into the macroeconomy as a 'market fixer' or as for the passive financer of public R&D. The State is also seen as entrepreneur, risk taker and market creator. Mazzucato's argument goes well beyond the role played by government in the countries that recently forged ahead (Japan in the 1980s or South Korea in the 1990s) to focus on the role played by the public sector agencies of the United States – the wealthiest country in the world and an active promoter of 'free markets' – in making risky investments behind the Internet and in funding most of the crucial elements behind the 'stars' of the information revolution, companies such as Google and Apple. Indeed, an illuminating chapter on Apple computers shows how each of the technologies that make the iPhone so 'smart' can be traced back to State investments, from the Internet itself, to the touch-screen display, to the new voice-activated SIRI personal assistant. Mazzucato also analyses the crucial role of the German, Danish and other governments (including China, of course) in recent attempts to develop and diffuse clean energy technologies.

Her key point is that the most radical new technologies in different sectors – from the Internet to pharmaceuticals – trace their funding to a courageous, risk-taking State. Her account of the US government's investment in the Internet provides evidence for the complex set of actions that make such wide-ranging innovations happen. She highlights the importance of mission-oriented funding and procurement; of the bringing together of multiple agencies; and also of the creation of incentives for multiple sectors and the multiple financing tools deployed to make it happen.

Successful efforts do not stop at basic and applied research but carry out the work of achieving commercialization. Companies like Apple, Compaq, Intel and many others received early stage financing through government funding programmes like the SBIR (Small Business Innovation Research). For example, the infrastructure of the ICT revolution, laying the basis for the Internet, was lavishly funded by the State from its beginning stages until it was installed and fully functional and could be turned over for commercial use. As Mazzucato argues, no private investors or market forces could have done that job on their own.

Her more recent examples concerning investments in 'green' technologies show the significance of long-term, committed 'patient' finance. In the advanced world this funding has been provided by State agencies such as the US ARPA-E (the energy version of DARPA, the Defense Advanced Research Projects Agency, which developed the Internet) or by State investment banks such as KfW in Germany. In the emerging world, funds have come from BNDES, the national development bank of Brazil, or the Chinese Development Bank. In all cases and in all contexts – as Mazzucato convincingly shows – major innovations require time and patience. Private finance has become too short-termist and is increasingly dependent on government labs that engage in high-risk portions of the innovation chain before committing its own funds.

This is another myth that this book debunks: the much celebrated role of venture capital (VC). Mazzucato demonstrates how VC has depended on government for the more expensive and uncertain research, before entering and cashing in when the uncertainty of investing in new innovations have been significantly reduced. She even reveals that the much-vaunted failure of the Obama administration's support for Solyndra was equally, if not more, a result of venture capitalists withdrawing funding at a critical moment in the company's development.

In the course of the analysis, Mazzucato manages to establish a strong connection with the literature of 'industry dynamics'. This is a major contribution. Most of the arguments in favour of State intervention for growth and development forget to mention innovation, taking it as a natural companion of growth, a sort of manna from heaven. What Mazzucato does is to link the government directly to technology, innovation and entrepreneurship, while examining the key issues in the economics of innovation such as R&D and growth, the role of patents, and the role of SMEs and large firms acting as innovators and other related aspects.