on 18 August 2013
This well researched book proves that most important innovations are based on financing from government. Apple's iPods, iPhones and iPads are presented as one of the examples. The author describes in detail how the government has financed all essential technological innovations used. The author recognizes the genius of Steve Jobs by visualizing an attractive product that people would buy, selecting technologies, and putting them together in a compact beautiful package.
At first sight this appears the way it should be. The government finances technological breakthroughs that are picked up by business. The problem she sees is financing by the government. Governments are pressured to reduce costs and furthermore are accused to be highly inefficient in everything they do. She describes how for example the governments the US, Germany and Denmark invest heavily and effectively in research and development. They act as entrepreneurs taking the highest risks.
She shows that businesses, in the medical electronic and other fields have radically reduced their funding of the more longer term research and development on which breakthroughs depend. Business and venture capitalists are short term orientated. When "innovative" companies are hugely profitable they buy back shares and/or raise dividends but do not invest it in the longer-term future. She presents a lot of statistics to prove this point.
She considers that it is very important for the people at large to recognize the essential role government plays as the fundamental force in innovation. This role goes beyond developing new knowledge. The state in many cases also has to finance the development of a new technology to the point where it is applied and achieve critical mass. The governments is involved in the supply side but in important cases also on the demand side. The government chooses, has to choose, the winners.
The United States is by far the most effective and largest investor in innovation. Many people believe that the free market and entrepreneurs are the driving force in innovation. She refers to this as a "myth" presenting many examples.
Companies in general but especially highly profitable global companies go out of their way to reduce their taxes. Statistics show that these global companies are highly successful on this point. The tax income in addition to being reduced is also not going to the countries that have financed the new technologies that played an important role in generating the profits. She believes it is naive to believe that national governments can enforce tax regulations on global companies and therefore proposes other solutions.
One suggestion is to attach a royalty obligation to a technological innovation. The first buyer, as the public at large financed the innovation, should after a few years of exclusive rights, license other companies to use the innovation. She also refers to government financed development banks that provide financing for the early sages of development. A good example is such a bank in Germany the KfW (www.KFW.de).
She considers the present system as "dysfunctional", where governments take the highest risks and businesses take all the profits being an example where risks are socialized and the profits privatized.
I have worked extensively in this field, both in business and for government. I found this book stimulating to read and recommend it to others. I am however not sure, to what extent, the suggestions can be implemented. I do not doubt the importance and essential role the government plays in financing R&D. That kind of financing and managing, early stage innovation even including the creation of demand can also be seen as a logical task of government. I do agree that it is important that people at large should become more aware of the entrepreneurial role of government in innovation, and the necessity to organize and finance it.
Reading The Economist is one of life's pleasures. Well-written, knowledgeable, and with a certain dash of the unconventional to spice it up, as in the paper's views on the so-called War on Drugs. But there's no denying that some of their pronouncements have an ex cathedra feel about them, as if the editorial team has been imbued with a certain infallibility.
So it is with their framing of the role of the state in business, that is, that its role is to keep out, to not "pick winners".
But as Mariana Mazzucato shows in The Entrepreneurial State, it has been, and should ever be, the role of the state to kick start the kind of research that private business is unwilling to finance. Without the state there would be no Internet, no GPS, no touch-screen technology to power Apple's iPod, iPad or iPhone. The irony, as she points out, is that Apple, beneficiary of a whole raft of state-sponsored technologies which she meticulously lists, is often used as the poster child of market fundamentalists. Mazzucato does not deny the role the firm has played in putting all of the technologies together in an aesthetically and ergonomically pleasing package, and praises Steve Jobs for his role in that respect. She also praises Jobs for his long-termist view, remembering that he always avoided the fashionable but short-termist stock-repurchase and profit-disbursement schemes advocated by exemplary citizens such as Carl Icahn. But the fact is that Apple is a prime example of where socialised risk has been parlayed into privatised return, albeit probably less egregious than banks in that respect.
To compound the insult, Apple is one of the firms - she also cites Google, Amazon and Oracle - actively engaged in "tax-shuffling" activities which guarantee that some of the positive externalities of state-sponsored development are not realised, although she is perhaps somewhat overharsh in her assessment of other such externalities such as the number of people Apple claim to be employed as a result of their success. But as a result of some of this tax chicanery, she says as an example, the UK "tax gap" - the difference between actual tax collected and potential - is £120bn, at a time when the national deficit is £126bn.
One of the problems with business, as she says, is its relatively short, and ever-shortening time horizons. In what she labels the Old Economy Business Model (OEBM), which was responsible for creating the golden age of the mass-production, Fordist technological revolution, capital, labour and the state shared the benefits, with job stability and real-income growth deemed important. These were the days of establishments like Bell Labs, Xerox PARC and the Alcoa Research Lab. These have now largely disappeared as a part of the New Economy Business Model (NEBM), in which constant job-hopping and insecurity are the norm, especially in the ICT arena.
One of the problems with the attack on the state is that it becomes self-fulfilling, with state institutions hesitant in sponsoring research in the fear of failure and further attack. But if not the state, then whom? The usual suspects in this respect, Venture Capitalists and "entrepreneurs", she characterises (and here I paraphrases only slightly) as a bunch of pussies, nowadays particularly overly tied to the NEBM and highly risk-averse; and large, price-dependent corporations have massive sunk costs which make them path dependent, averse to anything which may disrupt their cosy business models. (In analysis I conducted a couple of years ago I attempted to establish a statistical correlation between large corporates, particularly in concentrated markets, and R&D expenditure . Whilst not particularly happy with some of the data available, I nevertheless expected to be able to demonstrate some correlation. After all, part of the pay-off for being allowed to operate as a large firm in a concentrated sector, able to set one's own prices and earn supernormal profits, is investment in ongoing R&D. But the correlation I found was very weak.)
There is, then, a danger that the state will withdraw so much from research that much of the ability to develop breakthrough innovations is lost, with private firms reduced to making largely incremental changes to their product offerings. (In the west, at least. China, as Mazzucato points out, is not so shy when it comes to state-sponsored development.) What is needed, she says, is an application of the principles of Keynes and Schumpeter, with a recognition of the key role of the state in creative destruction. Together with that the state needs to work out how it may socialise the benefits of the outputs of this process, as well as being able to tell a better story about its achievements. We hear plenty about the failures, but who, she asks, has ever performed a thorough analysis of, say, the costs and benefits of Concorde, or rather the Concorde programme? Sometimes learning from "failure" is as important as learning from success.
In presenting her case, Mazzucato has kept it concise and readable. Her examples are robust and sufficiently high profile that most people will be aware of them (which goes a long way to proving her point!). She is sometimes scathing of private business but never wholly dismissive: as with the case of Steve Jobs, private business has a key role to play as an entrepreneur in the Schumpeterian sense, of someone who adopts an invention and converts it into a saleable innovation. And as a coda to my opening about The Economist, when the paper reviewed the book (August 31st 2013), appropriately enough in its Schumpeter spot, it opined, ex cathedra, that "Quibbles aside, Ms Mazzucato is right to argue that the state has played a central role in producing game-changing breakthroughs". So that settles that, then.
With regard to production of the book itself, the editing could have been a little better, although it's not by any means dire. In the Foreword, by Carlota Perez, "led" is spelt "lead", and then again in the early stages of Mazzucato's text, suggesting it is the editor, not the authors, at fault. The Foreword itself becomes the "forward" later on. As common as the error is, it should be noted that "quote" is not a noun, "quotation" is. Similarly, at one point "both" is followed by three things where "both" suggests two. Where we are told about "the Japanese electronics giant Sony" I think "Sony" would have done. But my greatest irritation is this now increasingly common inability to add "apostrophe s" to create singular possessives when the root noun itself ends with an "s". Instead we are given Jobs' instead of Jobs's, and on one occasion Job's. Unfortunately your (and my) spellchecker is wrong, here, and is even now indicating that Jobs's is incorrect and offers the other two as alternatives.