The Entrepreneurial State- Mariana Mazzucato

Every day, newspapers bombard us with the idea that public debt is excessively high and should be decreased. The argument for reducing this debt is based on the belief that it will negatively impact future taxpayers who will have to pay interest on it. Over the last 25 years, there has been a consistent narrative promoting the idea that shrinking government and expanding the private sector are crucial for fostering economic growth. The prevailing view is that business plays the primary role in driving growth, with the government's function limited to addressing market failures and providing essential services such as education, healthcare, and infrastructure. However, the notion that a large government hinders dynamic, capitalist-led growth is flawed. The suggestion that Europe lacks companies like Google due to the size of the state is misleading. To encourage innovation and entrepreneurship comparable to the US, the proposed solution is to reduce government intervention and expand the market. The oversimplified contrast between a dynamic private sector and a bureaucratic public sector is deeply rooted in our minds, yet it is a simplistic and deceptive portrayal. Such exaggerated representations have historically been employed to manipulate perceptions, as evidenced by Mexico being unfairly depicted as lazy to justify territorial theft. Likewise, characterizing the public sector as slow and inefficient serves ideological purposes and restricts our comprehension of its role in the capitalist system. It is time to question and dispel these misleading stereotypes.

It is probable that many of you own an iPhone. Should you decide to take apart the iPhone, you would discover that nearly every part of it was financially backed by the government. The government not only provided support to the educational institutions that trained the workers involved in the iPhone's creation but also directly funded critical elements such as the internet, GPS, touchscreen display, and communication technologies. Additionally, through public investment programs like the Small Business Innovation scheme in the US, the government offered early-stage funding to innovative companies like Compaq, Intel, and Apple, rather than solely relying on private venture capital. Contrary to popular belief, private investment is often less inclined to take risks, typically entering the market two decades after the government has supported the most uncertain and challenging aspects of technological progress. While some may argue that the government's role is mainly in fundamental research and initial innovation, with the private sector leading commercialization and growth, it is evident that both sectors are crucial for a prosperous economy.

Let's consider pharmaceutical companies like Pfizer, for example. If we were to analyze all the medications developed in the past decade and classify them based on their level of innovation - distinguishing between truly new-ways-of-thinking, groundbreaking drugs (new molecular entities) and those that are simply variations of existing drugs (me-too drugs) - and further categorize the new molecular entities based on their significance, such as priority rating. Research conducted by Marsha Angels revealed that 75 percent of the most innovative drugs, those that represent radical and creative advancements in medicine, were actually supported by government funding in national laboratories, while private pharmaceutical companies tended to focus more on producing me-too drugs. The reason behind this preference is the lower risk and higher profitability associated with me-too drugs. This is not to criticize private pharmaceutical companies or praise the National Institutes of Health laboratories; rather, it aims to challenge the common perception of the pharmaceutical industry as a highly innovative and research-driven sector. This perception has been utilized by pharmaceutical companies to justify their high prices by citing extensive research and development costs and the risky nature of the industry. It is crucial to take a step back and examine all stakeholders in the pharmaceutical industry.

Let's examine pharmaceutical companies such as Pfizer. If we consider all the medications developed in the past decade and categorize them into truly innovative drugs which are new molecular entities versus me-too drugs (different color, dosage), and then further distinguish the new molecular entities based on their significance (priority-rated or not), we find that Marsha Angels discovered that 75 percent of the groundbreaking, new-ways-of thinking drugs were actually funded by the state through national laboratories, while private pharmaceutical companies focused more on me-too drugs. The reason behind this lies in the significant lower risk and easy to profit of producing such me-too drugs. This does not imply that private pharma is negative or that NIH laboratories are superior. The main point is to challenge the common perception of the pharmaceutical industry as a highly innovative sector driven by research and development. This perception has been used by companies to justify high prices based on substantial R&D expenses and industry risks. Therefore, it is crucial to take a step back and analyze all stakeholders in the pharmaceutical industry.

Let's examine the different types of state funding accessible to both big and small businesses and discuss who is taking on the most significant risks. It is important to highlight that innovation is not only risky but also highly uncertain. Noted intellectual Frank Knight differentiates between risk, which involves calculating probabilities such as winning or losing a lottery, and uncertainty, which encompasses unforeseeable events like divorce or war outcomes. Innovation inherently entails navigating uncertainty, where individuals face substantial losses as around 90% of research and development projects end in failure. Contrary to popular belief, the US, rather than Europe, has actively engaged in funding innovation, demonstrating a visible hand rather than solely relying on the market's invisible hand. Economists have frequently ignored this aspect by concentrating narrowly on market failures and advocating for state intervention, especially in instances involving public goods like fundamental research. This viewpoint fails to recognize the broader role of the state in research beyond addressing specific market deficiencies.

Another viewpoint to consider is the identification of system failures. It is not solely about increasing knowledge but also about ensuring its dissemination. This necessitates the establishment of appropriate framework conditions by the government and the facilitation of information exchange between academic institutions and businesses. The government can play a crucial role in this regard. The core argument is that the government's function as a market creator and influencer is frequently underestimated, rather than just a market fixer. Additionally, the government serves as a primary risk-taker, particularly in the early phases of nascent sectors such as biotechnology or nanotechnology, where risks are heightened. State investments have demonstrated that early government involvement has paved the way for successful ventures, preceding the entry of private venture capital firms, leading to substantial returns. It is essential to understand the reasons behind its significant success, given the cumulative aspect of innovation. Imagine it as a curve and assess where you stand on this cumulative curve. In theory, you could cover the entire area under the curve, not just your incremental input. Various sectors entail different levels of risk, including technological and market risks. For example, in sectors like clean technology, it is observed that venture capitalists are backing less risky, incremental ventures, while riskier projects are mainly supported by state initiatives, particularly in countries like China, Germany, Finland, Korea, and to some extent, the US. Stressing the importance of state investment rather than mere spending is crucial, especially when analyzing its position in the risk landscape. This debate holds significance, especially for supporters of a more active state role like Keynesians, such as the well-known economist Paul Krugman, who advocates for increased state involvement during economic downturns.

An additional constraint is that depending solely on government expenditure is inadequate for boosting the economy in times of recession, marked by insufficient private investments. This is the central argument of Keynesian economists, who support government intervention to counter the cyclical fluctuations in private investments, particularly during economic downturns. While the Keynesian viewpoint is widely accepted, it overlooks the fact that even during economic upswings, like the dot-com era of the 1990s, government initiatives played a significant role. State-funded initiatives played a crucial role in pioneering groundbreaking technologies like the internet and providing assistance to risky ventures during their initial stages.

The crucial point here is not to pit the government against businesses, but to acknowledge the varied risk environment and stakeholders involved. The state has frequently been undervalued as a catalyst and architect of the knowledge economy, rather than merely a facilitator. Interestingly, Keynesians used the concept of "animal spirits" to justify the need for increased government spending due to the unpredictable nature of private investment decisions. However, a private correspondence from Keynes to Roosevelt in 1938 presented a different viewpoint, likening businesses not to wild animals like wolves or tigers, but to domesticated animals that require encouragement to act. This analogy contrasts the common belief of businesses being driven by untamed instincts, emphasizing the significance of nurturing and guiding their conduct. Ultimately, our choice of language can influence our comprehension and may have obscured the genuine potential and historical contributions of the state.

Most of you are likely aware that the field of finance has been facing a significant crisis. Despite this, certain aspects of finance still hold some truth. For instance, the risk-return relationship is a key concept. People tend to invest more in stocks than in bonds due to the willingness to take on greater risk. Bonds offer a guaranteed return, while stocks do not. Historically, stocks, with their higher risk, have shown higher returns over the long term. If this risk-return relationship holds true, why is it that the government, a prominent risk taker and investor is not reaping the rewards? This issue circles back to the tax system. Can the tax system adequately capture the rewards of risk-taking for the state? I would argue that it cannot. Relying solely on the tax system to generate returns for investments in areas like education and healthcare, which are known to boost growth, may not be sufficient. It is reasonable to expect that these investments will yield returns through increased incomes, leading to higher tax revenues for the state, which can then be reinvested.

When it comes to state investments with risks, relying only on taxation is not enough. It is worth considering what would have happened if the state had gained just one percent from its investment in the internet through DARPA, a key public funding entity that played a crucial role in the internet revolution. This could have led to a significantly larger amount of funds available today for investing in green technology. Instead, we see state funds almost depleted, resulting in minimal investments in radical green technology. This aspect is often disregarded, especially in Anglo-Saxon countries. On the contrary, nations like Finland in Scandinavia have a deeper understanding of the state's role, going beyond market regulation, school funding, and infrastructure development. They have explored this concept more extensively. Consider Nokia, for example, which encountered substantial challenges not stemming from external factors, but as a result of its strategic business plan and risk perception within the mobile phone technology industry. Instead of seeking private venture capital, Nokia initially obtained funding from a public entity in Finland known as Sitra. Sitra maintained equity in Nokia, allowing it to profit from Nokia's success and reinvest the returns.

In a similar vein, Google's algorithm was developed with the assistance of a public grant from the National Science Foundation (NSF). However, it raises concerns when successful companies like Google fail to give back to the public funding sources that initially supported them. One proposal is to explore the implementation of income contingent loans, where a portion of profits would be repaid to the state if a company prospers. Brazil's public investment bank offers a successful model by not only providing loans but also acquiring equity in strategic sectors such as biotech and renewables, generating significant returns that are partly redistributed for societal benefit and partly reinvested. This investment approach, which revolves around a cycle of returns and reinvestment, is essential for nurturing sustainable innovation and economic growth, particularly in times of limited government resources that necessitate more innovative methods to recapture returns on state investments.