Demos Daily: The Entrepreneurial State

When this crisis is over, we will find our economy transformed. There will be a huge task ahead to recharge it, and potentially the pressure to create hundreds of thousands of new jobs. There will likely be a dilemma for the Government in the way they choose to face this challenge: will they leave it to the markets with minimal intervention? Or will the public sector lead the way in rebuilding the economy through investment and development, playing more of an entrepreneurial role? Back in 2011, Mariana Mazzucato challenged the ‘minimalist’ view of the state, arguing in The Entrepreneurial State that a far more proactive role is required in the field of economic policy.

Read The Entrepreneurial State here, and the introduction and summary below.

Introduction and summary

Across the globe we are hearing that the state has to be cut back in order to foster a post-crisis recovery, unleashing the power of entrepreneurship and innovation in the private sector. This feeds a perceived contrast that is repeatedly drawn by the media, business and libertarian politicians of a dynamic, innovative, competitive private sector versus a sluggish, bureaucratic, inertial, ‘meddling’ public sector. So much so that it is virtually accepted by the public as a ‘common sense’ truth.

For example, in his budget speech of June 2010, a month after taking office, the Chancellor, George Osborne, stated that the public sector was ‘crowding out’ the private sector, providing an additional justification beyond the need to reduce the deficit, for a relative contraction of the state. Both in the documentation that supported that emergency budget, and subsequently, the Coalition Government has repeatedly called for a more ‘balanced’ economy, with private activity taking up a greater share of the total than has previously been the case. The Prime Minister, David Cameron, adopted a more polemic tone in a speech given to the Cardiff Spring Forum in March 2011 when he promised to take on the ‘enemies of enterprise’ working in government, which he defined as the ‘bureaucrats in government departments’. (2) This is a rhetoric that fits with the Government’s broader theme of the Big Society, where responsibility for the delivery of public services is shifted away from the state to individuals operating either on their own or by coming together through the third sector.

And it is not a view that is unique to the UK Government. The Economist, which often refers to government as a Hobbesian Leviathan, (3) recently argued that government should take the back seat and focus on creating freer markets and creating the right conditions for new ideas to prosper, rather than taking a more activist approach. (4) The established business lobby groups have long argued for freedom from the long arm of the state, which they see as stifling their ability to succeed through the imposition of employee rights, tax and regulation. The right-wing Adam Smith Institute argues that the number of regulators in the UK should be reduced to enable the British economy to ‘experience a burst of innovation and growth’. (5) In the USA, supporters of the Tea Party movement are united by a desire to limit state budgets and promote free markets.

While business as a whole may not see the virtues of anything that does not have a clear and positive impact on its bottom line, and nor arguably should it, there is a danger when a general desire to reduce the size of the state translates into weak and non-ambitious economic policy. When that happens, we are all losers: policy is not as effective as it could be and the potential to create greater prosperity is not fulfilled.

This pamphlet argues that there is a real danger of that happening in the field of innovation policy, greatly limiting
its impact on economic growth. The view of the current government—shared by its predecessor—is that the role of the state in spurring innovation is simply to provide the ‘conditions for innovation to flourish’. (6) The UK Government states that if it invests in skills and a strong science base, ensures a strong legal framework within an amenable macroeconomy, and supports entrepreneurial clusters, then the market will do the rest through the incentive of the profit motive.

The evidence presented in this pamphlet challenges this minimalist view of the state in the field of economic policy, arguing that a far more proactive role is required. The case that is made in these pages is that the role of the government, in the most successful economies, has gone way beyond creating the right infrastructure and setting the rules. It is a leading agent in achieving the type of innovative breakthroughs that allow companies, and economies, to grow, not just by creating the ‘conditions’ that enable innovation. Rather the state can proactively create strategy around a new high growth area before the potential is understood by the business community (from the internet to nanotechnology), funding the most uncertain phase of the research that the private sector is too risk-averse to engage with, seeking and commissioning further developments, and often even overseeing the commercialisation process. In this sense it has played an important entrepreneurial role.

Of course there are plenty of examples of private sector entrepreneurial activity, from the role of young new companies in providing the dynamism behind new sectors (eg Google), to the important source of funding from private sources like venture capital. But this is the only story that is usually told. Silicon Valley and the emergence of the biotech industry are usually attributed to the geniuses behind the small high tech firms like Facebook or the plethora of small biotech companies in Boston or Cambridge in the UK. Europe’s ‘lag’ behind the USA is often attributed to its weak venture capital sector. Examples from these high tech sectors in the USA are often used to argue why we need less state and more market: to allow Europe to produce its own Googles. But how many people know that the algorithm that led to Google’s success was funded by a public sector National Science Foundation grant? (7) Or that molecular antibodies, which provided the foundation for biotechnology before venture capital moved into the sector, were discovered in public Medical Research Council (MRC) labs in the UK? Or that many of the most innovative young companies in the USA were funded not by private venture capital but by public venture capital such as through the Small Business Innovation Research (SBIR) programme?

Lessons from these experiences are important. They force the debate to go beyond the role of the state in stimulating demand, or the role of the state in ‘picking winners’ in industrial policy, where taxpayers’ money is potentially misdirected to badly managed firms in the name of progress, distorting incentives as it goes along. Instead it is a case for a targeted, proactive, entrepreneurial state, able to take risks, creating a highly networked system of actors harnessing the best of the private sector for the national good over a medium- to long-term horizon. It is the state as catalyst, and lead investor, sparking the initial reaction in a network that will then cause knowledge to spread. The state as creator of the knowledge economy.

It cannot be called ‘new’ industrial policy because it is in fact what has happened, though in a ‘hidden way’ to prevent a backlash, over the last three decades in the development of the computer industry, the internet, the pharma–biotech industry, and many more including today’s nanotech industry. (8) None of these technological revolutions would have occurred without the leading role of the state. It is about admitting that in many cases, it has in fact been the state, not the private sector, that has had the vision for strategic change, daring to think — against all odds — about the ‘impossible’, creating a new technological opportunity, making the large necessary investments, and enabling a decentralised network of actors to enable the risky research, and to allow the development and commercialisation process to occur in a dynamic way.

This pamphlet draws together recent academic literature to make new policy conclusions. In doing so it presents a very timely contribution to the debate around deficit reduction in the UK and elsewhere. And in passing, it confronts head-on some issues that have come to be taken for granted by mainstream policy makers, such as the usefulness of data on patenting and R&D expenditure as proxies for wealth-creating innovation. The part played by the small firm in creating growth is also put under scrutiny as is the role of venture capital.

This is not a pamphlet about innovation policy. Many themes on that general topic are missing here: the skills gap, diffusion of existing innovations, procurement and deployment. It is about the entrepreneurial role that the state has played in different innovation contexts, leading rather than following. Thinking out of the box, defining new radical technologies and the associated eras (the knowledge economy), rather than just reacting to them. Understanding this lesson forces us to rethink what the state brings to the ecology of the business-government partnerships so discussed today.

The main task is to unpack the role of the state in fostering radical growth-enhancing innovations, and so to make recommendations that would not only improve the effectiveness of economic policy but also ensure that the limited taxpayers’ money that is available is more effectively spent. The fear is that without understanding the proactive role required of government for an effective economic policy, the UK economy will fail to achieve its potential at precisely the time when economic dynamism is most necessary.

The report is structured as follows. Chapter 1 sets the scene by summarising the academic framework regarding the debate around growth; whereas a generation ago, technological advance was seen as something that was externally given, there is now extensive literature to show that actually it is the rate, and direction, of innovation that drives the ability for economies to grow. This provides the justification for increased focus on the role that government can play to facilitate precisely that innovation, while at the same time exploding some of the myths that abound in Westminster, the European Commission and Washington about what actually drives innovation and growth. Specifically, it draws on recent academic literature to show that targeting resources towards R&D spend, patenting or small firms in isolation misses the point and that similarly waiting for venture capital to do all the heavy lifting is likely to be futile.

Chapter 2 describes the importance of the government’s role in investing where the private sector will not, in the most uncertain risky areas. But rather than understanding this through the usual lens of ‘market failures’, the concept of entrepreneurial risk-taking is introduced. The public sector has indeed fulfilled an important role in undertaking the most risky research, even when that research was not ‘basic’. Private sector examples are provided from the pharmaceutical and biotech industries where it has been the state, not the private sector, that has created economic dynamism. Risky research is funded by the publicly funded labs (the National Institutes of Health or the MRC) while private pharma focuses on less innovative ‘me too drugs’ and private venture capitalists enter only once the real risk has been absorbed by the state. And yet make all the money. In industries with such long time horizons and complex technologies, it is argued that return-hungry venture capital can in fact sometimes be more damaging than helpful to the ability of the sector to produce valuable new products.

Chapter 3 argues that it is only by creating a so-called national system of innovation built on sharing knowledge that the necessary, if not sufficient, conditions start to be established. An example is drawn by comparing and contrasting the two examples of Japan and the Soviet Union. It then develops the concept of the entrepreneurial state where not only is there a fully functioning national system of innovation, but this system is catalysed by proactive, flexible, decentralised action on the part of government.

Chapter 4 examines aspects of the recent industrial policy history of the USA, and shows that despite common perceptions, the US state has been extremely proactive and entrepreneurial in the development and commercialisation of new technologies. Four examples—the Defense Advanced Research Projects Agency (DARPA), Small Business Innovation Research (SBIR), orphan drugs and recent developments in nanotechnology—are used to illustrate this point.

Chapter 5 provides some reflections that are relevant to the situation faced by the UK at the moment, with policy recommendations for the development of green technology, and technology, generally. Green technology has the potential to become the next technological revolution, but as no other technological revolution has simply been ‘nudged’ by the state, it is unrealistic that this one can be without the type of large scale (though decentralised) investments that have been made in the case of other important new technologies.

And finally, chapter 6 concludes with some reflections on the implications of the concept of the entrepreneurial state for the debate around fairness and distribution.

Taken together, the pamphlet paints a fuller understanding of the public sector’s centrality to risk-taking and radical growth fostering technological change. It builds a very different picture of the state from that envisaged by present economic policy, which denies it any leading role in innovation and production, and that of conventional industrial policy, which unduly downplays its scope for pioneering and promoting new technologies. In contrast, it describes scenarios where the state has provided the main source of dynamism and innovation in advanced industrial economies, pointing out that the public sector has been the lead player in what is often referred to as the ‘knowledge economy’ — an economy driven by technological change and knowledge production and diffusion. Indeed, from the development of aviation, nuclear energy, computers, the internet, the biotechnology revolution, nanotechnology and even now in green technology, it is, and has been, the state not the private sector that has kick-started and developed the engine of growth, because of its willingness to take risk in areas where the private sector has been too risk-averse. In a policy environment where the frontiers of the state are now being deliberately rolled back, that process needs more than ever to be understood so that it can successfully be replicated. Otherwise we miss an opportunity to build greater prosperity in the future.

 


(2)  See Wheeler B, ‘David Cameron says enterprise is only hope for growth’, BBC News, 6 Mar 2011, www.bbc.co.uk/news/uk- politics-12657524 (accessed 7 Jun 2011).

(3)  ‘Taming Leviathan: how to slim the state will become the great political issue of our times’, The Economist, 17 Mar 2011.

(4)  Special report on the world economy, The Economist,9 Oct 2010.

(5)  Ambler T and Boyfield K, ‘Reforming the regulators’, Adam Smith Institute, 2010, www.adamsmith.org/files/ reforming-the-regulators.pdf (accessed 7 Jun 2011).

(6)  BIS and HM Treasury, The Plan for Growth, London: Department for Business, Innovation and Skills and HM Treasury, March 2011, http://cdn.hm-treasury.gov. uk/2011budget_growth.pdf (accessed 6 Jun 2011).

(7)  Battelle J, The Search, New York: Penguin, 2005.

(8)  The ‘hidden’ nature of US industrial policy is the core theme of Block F and Keller M (eds), State of Innovation:
The US government’s role in technology development, Columbia: Paradigm, 2011.