'The Entrepreneurial State': Apple Didn't
Build Your iPhone; Your Taxes Did
By Mariana Mazzucato
Government
support for research and development is responsible for much of the innovation
that drives GDP, argues Mariana Mazzucato. Photo courtesy of Stephen
Yang/Bloomberg via Getty Images.
As
the deadline for raising the government debt limit fast approaches, and
wrangling on the issue in Congress intensifies, Mariana
Mazzucato reminds us
of the difference between public and private debt. Professor of economics at the
University of Sussex, Mazzucato is the author of "The
Entrepreneurial State: Debunking Private vs. Public Sector
Myths." Her
provocative "they-didn't-build-that" thesis, that the government funds most of
the initial research and development on which the private sector capitalizes,
has generated a lot of buzz in the financial
press, including Martin Wolf's review in the Financial Times calling it
"basically right." So we asked her to explain her thinking to our Business Desk
audience.
Is
government debt slowing economic growth, if not impeding it? The world-wide
economic crisis that began in 2007 has kept that question alive, despite the
fact that it was private debt that caused the crisis in the
first place. But attempts to curb the crisis have also led to an explosion
of public sector expenditures like bank bailouts
and unemployment insurance that have ballooned debt levels. At the same time,
lower tax receipts due to falling incomes have prompted even more borrowing.
Yet
amnesia and dogma have conflated the public debt that helped cure the crisis
with the private debt that caused it. The Reinhart-Rogoff
saga seems to have
ended with evidence winning out over ideological fiction. That's because the
government debt threshold these noted economists supposedly discovered --
surpass a 90 percent ratio of debt-to-GDP and you're screwed -- seems to have
been based on statistical error. But despite the correction, countries across
the globe are still being asked to slash spending in hopes of kick starting
economic growth.
My
own work shows the utter foolishness of such a strategy. What matters is not the
absolute size of debt, but what that debt consists of. Throughout history,
strategic government expenditures have played a key role in spurring economic
growth. Indeed, by forcing the world's weakest economies to cut public spending
-- in key areas like education, research and health -- their potential for
long-run growth is weakening. Spain, for instance, has cut its research spending
by 40 percent since 2009. Will this help it create the kind of goods and
services the world might want to buy -- and be as competitive as its Nordic
neighbors? It seems wildly unlikely.
The
key question is simple: what causes GDP growth? And the answer from economists
is that, at the very least, spending on education, human capital, and research
are tightly related to it. Indeed, Robert Solow, who won the Nobel Prize in
Economics in 1987, found that close to 90 percent of growth is not explained by the usual suspects,
capital and labor. They account for only 10 percent. So Solow called the
unaccounted-for 90 percent the "residual." And what drove the residual? It had to be technology. And how is
technology fostered? More often than not, down through history, by government investment, from the roads of ancient
Rome to the Internet of modern America.
However,
things are not quite so easy. Which areas should the government fund?
Traditional economic theory argues that government funding should be limited to
areas where the free market is not working properly because of so-called "market
failures," some of which might be due to the existence of "public goods" like
basic research, which are hard to make proprietary and profitable since they're
quickly available to everyone. As a result, the private sector
under-invests.
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So
if government nudges the private sector to invest by doing
the basic research itself, goes the argument, business will promptly respond by
innovating. Thus policy makers have obsessed over different types of tax
incentives (from R&D tax credits to recent tax cuts related to patents) in
order to increase the amount which the business sector spends on R&D.
I
have been pushing a very different view, as embodied in my recent book "The
Entrepreneurial State: Debunking Private vs. Public Sector
Myths." I argue that
businesses are typically timid-- waiting to invest
until they can clearly see new technological and market opportunities. And
evidence shows that such opportunities come when large sums of public money are
spent directly on high risk (and high cost) technological missions. This raises debt of
course, but also GDP, keeping the ratio of debt-to-GDP in check.
These
missions are expensive precisely because the government does much more than just
solve market failures. It intervenes in both basic and applied research and even
provides early stage seed finance to private companies. Indeed, Small Business
Innovation Research (SBIR) grants have funded a higher percentage of early stage
seed finance than private capital. This is because private finance is too
risk-averse -- afraid -- to engage with industries characterized by high
technological and market risk. The fear explains why we have seen venture
capital entering, in industry after industry, only decades after the initial
high risk has been absorbed by government.
Mission-oriented
public investment put men on the moon, and later, lead to the invention and
commercialization of the Internet, which in turn has stimulated growth in many
sectors of the economy. Indeed, as I describe in the longest chapter of my book,
the U.S. government has been a leading player in funding not only the Internet
but all the other technologies -- GPS, touchscreen display, and the new Siri
voice-activated personal assistant -- that make the iPhone, for example, a
miracle of American technology.
Crucially,
mission-oriented policies are needed today to tackle climate change and other
large societal, technological challenges. But the fear that such investments
will cause debt to rise too high and stymie growth -- ignoring the
potential positive effects on growth that these
investments can make in the long run -- is paralyzing governments throughout the
world.
Furthermore,
there is the general belief that the direction of investments should be
determined by the market, not government, because government consists of a bunch
of bureaucrats who lack expertise. But the technological leadership in countries
like Singapore, Korea, China, Israel, Brazil, Finland, Denmark and Germany is a
result of the well-funded network of state agencies in those countries that are
able to attract expertise and drive change, working of course, alongside the
private sector, but often leading it.
The
U.S. Department of Energy (DoE) was recently run by a Nobel Prize winning
physicist. And the atmosphere at the Advanced Research Project
Agency-Energy, which is trying to do for renewable energy what
the Defense
Advanced Research Agency did for the Internet, is just as
dynamic and creative as Google. And historically, it is investments driven by
such agencies (including the National Science Foundation, National Nanotech
Initiative, National Institutes of Health) that galvanize private sector
investment.
Indeed,
when Pfizer recently closed down a large R&D lab in Sandwich, Kent, and
transferred it to Boston, Massachusetts, it was not due to the lower taxes or
laxer regulation for which industry is constantly lobbying. They moved because
of the large amounts of money that the National Institutes of Health (NIH) has
been spending on research and the mission of improved health care in the United
States: $792 billion from 1936-2011 (in 2011 dollars), with $30.9 billion in
2012 alone.
These
lessons are important for policy makers interested in fostering
entrepreneurship. While Steve Jobs was a genius in his ability to exploit
existing government-funded technologies in new ways, he would have had little to
work with absent massive public spending. And given the public spending cuts that are happening in most countries
the world over, the question then becomes: will there be a future wave to surf in places like Silicon
Valley, or is the technology tide destined to turn?
Furthermore,
casting the public sector as the villain and business as savior has relieved the
private sector from any obligation to increase its own commitment to the
innovation process. There simply are not enough large businesses today playing
the role that Xerox PARC (the Palo Alto Research Center) and AT&T (Bell
Labs) played in the past.
Today's
big companies, like Cisco and Pfizer, spend almost as much on share-repurchase
schemes (which enrich those who own stock) as they spend on research.
Interestingly, the big "repurchasers" (the biggest being in oil and pharma)
often justify such buybacks with the claim that there are no other
"opportunities" for their investments. But really? No opportunities in health
for pharma these days? Nothing for oil companies to invest in? What about safe
and clean renewable energy?
When
building innovation "eco-systems," then, it is important to make sure the role
of business is symbiotic, not parasitic. That means, if we want to rebalance the
economy, we need to rebalance the story we tell about who the innovators really
are. Interestingly, it was the venture capital lobby in the mid-1970s that
pushed for the capital gains tax to fall by 100 percent (from 40 percent in 1976
to 20 percent in the mid '80s). It has been falling ever since, based on the
narrative that only thus will the entrepreneurial "risk-takers' do their thing
and enrich us all.
But
that narrative is false. The entrepreneurial state has funded the radical innovation
behind much if not most of modern economic growth. Denying government today the
resources to do its thing endangers us
all.
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