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What the State Can Do

by Mariana Mazzucato and Karl Gaulhofer Thursday, Dec. 14, 2017 at 5:50 AM

The power of ideology is so great it easily creates a distorted perception of facts. Where money is spent is crucial, not the size of the public sector. The Internet, the touch screen, semi-conductors and the GPS were developed with state risk capital. Tax havens cause revenue shortfalls.


Neither the Internet nor Nano-Technology Would Exist Without Public Investments

By Mariana Mazzucato

[This article published on 8/6/2014 is translated abridged from the German on the Internet,]

According to a frequent argument, the distresses of the “peripheral” countries of the euro zone like Portugal and Italy are caused by a “wasteful” public sector. What is obvious is ignored. These countries suffer in a stagnating public sector that neglected the strategic investments made for decades by the more successful countries like Germany.

The power of ideology is so great that it easily engenders a distorted perception of facts. Concerning the financial crisis that erupted in 2007, many people later convinced themselves that its main cause was the indebtedness of the public budgets and excessive private borrowing (mainly in the US real estate market).

Obviously, there are countries with low growth and high budget deficits. However, the question of cause and effect is very controversial. Many people have persuaded themselves that state indebtedness of more than 90% of the GDP breaks growth. The opposite conclusion was a new dogma. Savings will bring back growth (automatically).

Even more obviously, where the money is spent is crucial, not the size of the public sector. Spending for senseless bureaucracy or for bribery can certainly not be equated with expenditures for improving the health system, for top-quality educational systems, and pioneering research, investments in “human capital” and the development of new technologies.

The variables that are important for economic growth according to economists – like education, research, and development – are expensive. The fact that the weakest countries in Europe with the most debts in relation to the GDP have spent less in these areas should not surprise us. Still, the economic measures now forced on them will only worsen their problems. This is a self-fulfilling prophesy. The more we drive back the role of the state in the economy, the less it can be an important actor and the less top talent it can attract.

Is it an accident that the US Department of Energy responsible for most spending on research and development in the US government and most spending (per capita) for energy research of all OECD countries could win a Nobel Prize for Physics as a leader? Or that less ambitious countries function more according to the principle of nepotism and have less expertise in their ministries? Obviously, the problem is not simply deficient expertise. When talents are won, that reflects the respect enjoyed by the public institutions in a country.

We constantly hear the state should stay in the background in economic affairs because it cannot recognize “winners,” whether new technologies, up-and-coming branches or certain firms. The state often ventures in projects that a private firm would hardly undertake. Either it would extend the heyday or golden age of a developed industry (as examples, the French Concords that could fly from New York to London in three hours or the failed US project of a supersonic jet) or actively promote a new technology sector (as examples, the Internet and the IT-revolution).

The likelihood of failure increases on this difficult terrain. However, we don’t have any reliable standard to fairly judge its investments and do not only reproach the state rashly for failures – when we constantly criticize that the state could not be a more efficient and innovative actor. Public risk capital is very different than private risk capital. It flows in areas with much greater risk in which patience is necessary and the expected profits are lower. By definition, this is a more difficult situation. Nevertheless, the profits from public and private risk capital are compared as though these differences did not exist.

That the state is unable to defend its position and explain what it would do with the selected winners (from the Internet to firms like Apple) ironically makes criticism easier in the cases where it fails (for example, in the supersonic transport project). Even worse, the state becomes vulnerable, nervous and anxious through criticism. Then it can easily be taken over by lobbies. Public funds can be transformed into private profits. The state can be silenced by supposed experts who rehash the same myths about the origins of economic dynamism.

In the US, the tax burden on capital income was significantly reduced at the end of the 1970s thanks to the lobby work of the risk capital branch. To the government, the lobbyists argued risk capital donors financed both the Internet and the beginnings of the semi-conductor industry and that innovations are impossible without them. The same actors that conquered the realm on the wave of opulent state investments that later produced the revolution persuaded the government to lower their taxes. Those who depended on state funds ensured that the pockets of the state were emptied.

The myth of the origin of innovations

Because the state has too little trust in its role, the myths about the origin of innovation and entrepreneurial daring do not easily fall apart. Big Pharma likes to complain to its governments that it suffers under excessive regulation and bureaucracy while simultaneously depending on state funds for its research and development.

Even small business associations in many countries have convinced governments that this type of business is under-financed. In many countries, small businesses receive more financial support than the police without creating the jobs and innovations that would justify such support. [1] If the state had better understood how its investments contributed to the rise of the most successful new businesses like Google, Apple and Compaq, it could successfully oppose these arguments.

But the state does not practice good marketing in its own cause. For example, the struggle of President Barack Obama would have been much more successful if US citizens had known the importance of the state’s financial contribution in developing many innovative medicines. Knowledge about technology history should have been spread, not propaganda.

In the public health system, the state has introduced innovations and has not “meddled.” However, another story is told – and unfortunately believed – of innovative Big Pharma and the state that intervenes unauthorized. Explaining this complex history correctly is important for many reasons. Whether developed with or without state funds, the pharmaceutical industry justifies the high prices of medicines with their alleged “high costs for research and development.” Uncovering the truth can contribute to a better functioning market and not only help governments improve their political strategy.

By the way, emphasizing the entrepreneurial role of the state does not mean denying the entrepreneurial activity of the private sector: from new businesses that bring a dynamic in new sectors (for example, Google) to important financing from private sources by risk capital. Rather, the problem is that often only the story of the private sector is told. Silicon Valley and the successes of the biotech branch are usually ascribed to the brilliant minds behind high tech firms like Facebook or behind the many small biotech firms in Boston and Cambridge.

That Europe lags considerably behind the United States is explained in that its risk capital sector is underdeveloped. High tech businesses are often highlighted to show we need more market and less state. The balance only needs to be shifted in favor of the market and Europe will have its own “Google.”

But how many people know that the algorithms to which Google owes its business success was developed with the funds of the National Science Foundation? [2] Or that the molecular antibodies, the foundation of the biotechnology industry, were discovered long before the risk capital donors were discovered in the laboratories of the state Medical Research Council (MRS)? Who knows that financing many of the most innovative new US businesses was based on government risk capital, not on private risk capital, that came for example from the Small Business Innovation Research (SBIR)?

Market and basic research

Learning from these insights is vital. Then the role of the state must be discussed differently – and not only under the aspect of promoting demand and “picking winners.” We need an active, entrepreneurial goal-directed state able to take a chance and create a linked, top-flight system of actors able to achieve the best for the public welfare in the long-term. In this network, the state must be the main investor and catalysor and steer the communication of knowledge. It can be active and need not be satisfied with the role of promoter of the knowledge economy.

Demanding an active entrepreneurial state is not a “new” industrial policy because the state is already active, even if hidden – making life difficult for the little agile start-ups. Overly rigid regulations, too much bureaucracy and excessive taxes are the refrain of the middle class-liberal ballad or wailing. The underlying worldview is simple. The less regulation, the freer the market. The weaker the state, the better the conditions for innovation and the better the prerequisites for growth and prosperity.

The state promotes innovation

Can this worldview survive a reality test?... The importance of state action is the theme of the book “Das Kapital des Staates: (The Capital of the State). The polemical text of the economist Mariana Mazzucato fulfills what it promises in the subtitle. It tells “another story of innovation and growth.” The economist teaching in Britain argues with great factual knowledge that the state is the main source of creativity and innovation, not the free market. “The earliest, most daring and capital-intensive 1entrepreneurial’ investments came from the state in the most radical, revolutionary innovations in advanced capitalism – from railroads and the Internet to nano-technology and pharmaceutical research.” (Mazzucato refers to Apple products whose technologies (Internet, GPS, the touch-screen or the Siri assistant) originated from state initiatives and investments.

Switzerland depends on a strong state that acts and invests intelligently to maintain its prosperity. Politicians should finally abandon their fixation on the diet vocabulary. The country needs intelligence, resolution and efficiency, not political weight-watchers (TagesAnzeiger newspaper).


“The Entrepreneurial State,” Mariana Mazzucato, Thinking Big Again, the Introduction to Ms. Mazzucato’s 2017 book, 21 pages


By Karl Gaulhofer

[This article published in 2015 is translated from the German on the Internet,]

The economist Mariana Mazzucato turns pictures of the world upside down. The public authority financed the great innovations, not businessmen. The state invoked by her is not the one we know…

The iPhone sparks the furor of Mariana Mazzucato. For a journalist, it is a practical tool. For the temperamental economist with Italian roots, it is a symbol for everything going wrong in the “bungled gossip” about the state and the public.

The official Apple story is a eulogy to the market daring inventors from the garage, brilliant ideas, growing from one’s own steam, past the sluggish greedy state that puts bureaucratic stones and taxes in the way. Innovation comes from the invisible hand. The public should only provide rules and frameworks. Nearly everyone agreed – until Mazzucato came. With “The Entrepreneurial State,” the 46-year old who teaches at the University of Sussex created quite a stir. Her passionate polemical writing should tear us from our dogmatic slumber and “debunk myths.”

Apple serves as an argumentative weapon. With great relish, she proves that not a single genuine innovation in the PC or Smart phone really came from the house of Apple. Government laboratories, military programs or universities were always responsible for the breakthroughs – whether semi-conductors, Internet, Touch-screens, GPS or language assistant. Without money from the taxpayer, there would be no Silicon Valley, no medicines against rare sicknesses, no nano-technology and no green energy. Google and Apple thrived as tender plants with public funds. However, there is no trace of gratitude. Mammoth IT- and Internet corporations in the US eagerly shoved their billions in profits outside the country to avoid any taxes in their homeland.

So much for the counter-picture drawn with much verve by Mazzucato. The book seduces to a misunderstanding. Mazzucato writes of an abstract state but thinks of a very concrete state. Nearly all her success stories occur in the US where she grew up. Decentralized and hardly known authorities spun the threads, not the White House and bureaucrats. In them, first-class scholars and Nobel Prize winners mediate between universities, laboratories and private firms – and create a biotope where technological breakthroughs are possible. Politicians could cut the funds (which they previously never did)… This is a paradoxical state that evades the grasp of the parties and the short-term campaigns in election cycles – to not decay into “slaves of politics,” as Mazzucato admonishes.

How strange that the US, the stronghold of capitalism, trusts a strong public authority in matters of innovation – irrespective of whether democrats or republicans are at the helm. This pragmatism oriented only in results – was shown in the financial crisis. Of all people, the Americans bravely seized the instrument of temporary nationalization to save banks and car manufacturers.

The state is rhetorically shown its limits but on the quiet is allowed to act powerfully where this promises success. “The secret of success” lies there for the “economist” who rethinks Mazzucato’s theses – in a society “obsessed with competition” including academics. For Mazzucato, working for the government for a long time must be an honor for researchers – for the “next big thing” like nano-technology. In her criticism of the “right-wing,” “whoever does not like the state describes it as desolate and boring so no interested person will work for it any more.”

Many pioneering or revolutionary technologies like the Internet and GPS were invented by the US military. That is a blemish. Is war the father of all things here? No, the peace-loving researcher resists. There are also civilian missions like the struggle against climate change or for health outcomes – if only the pharmaceutical firms did not act so dreadfully parasitically.

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