As the Harper government considers a change of economic direction for next week's Speech from the Throne, it could do worse than consider the cogent arguments of University of Sussex economist Mariana Mazzucato in favour of an "entrepreneurial state."
Her recently published book, The Entrepreneurial State, has been favourably reviewed in the Economist and the Financial Times, widely debated in Britain, and certainly deserves the attention of Canadians as we consider how best to build a modern, innovative, environmentally sustainable economy.
Ms. Mazzucato provides a refreshing new take on rather stale debates on the economic role of government. On the one hand, the right celebrates private-sector entrepreneurship and so-called free markets as the only sure road to prosperity. On the other hand, progressives tend to stress the role of the state as a needed regulator of economic activity, as a Keynesian backstop to stable growth, and as a vehicle for achieving a fairer distribution of income and wealth.
Ms. Mazzucato attacks the conventional view that the role of the state should be largely confined to promoting free markets, correcting market failures, and maintaining a low-spending, pro-free-enterprise climate. Instead, she argues that state entrepreneurship plays a pivotal role in successful modern economies – a role that has been neglected and, indeed, "hidden in plain sight."
In a nutshell, she agrees with the famous Austrian economist Joseph Schumpeter that innovation and "creative destruction" are key to dynamic capitalism, with the twist that the state is absolutely central to creating a dynamic, innovative – and environmentally sustainable – economy.
It has long been recognized by economists that state support for research and development is important, given the fact that the social benefits exceed costs, and that private returns to investment in basic scientific research are highly uncertain and may be very hard to capture.
Ms. Mazzucato goes several giant steps further in arguing that the most radical and ground-changing new technologies – such as information and communications technologies – are the result of far-sighted investments by a risk-taking, innovative state that "picks winners" (quite contrary to the conventional wisdom), and also plays a major role in ensuring the widespread adoption and diffusion of system-changing new technologies by a risk-averse private sector with short-term horizons.
Her book details at length the key role played by the U.S. government and its agencies, especially DARPA (the Defence Advance Research Project Agency), in anticipating and developing major new technologies such as the Internet – first through funding of basic research in public labs and universities, and then through a planned transfer of knowledge through grants and subsidies to the private sector.
While venture capital has played a significant role in the development of U.S. advanced technology firms, it is argued that they will not invest in research with truly unknown payoffs, and indeed usually invest only at a relatively late stage of development when the potential for a big commercial payoff is becoming clear.
In a particularly telling chapter, "The State Behind the iPhone," Ms. Mazzucato shows that almost all of the basic technological breakthroughs embodied in Apple Inc.'s iconic products such as the iPod, iPad and iPhone were the result of decades of U.S. federal-government-financed innovation. The major new technologies supported by the government and incorporated into Apple products include microprocessors, micro hard drives, liquid crystal displays, lithium-ion batteries, the Internet, HTTP and HTML protocols, click wheels, and multi-touch screens.
To be sure, Apple has contributed a lot in terms of integrating these new technologies into beautifully designed products that are avidly sought by consumers. But the phenomenal success of the company is based on much more than the widely applauded technological and entrepreneurial savvy of Steve Jobs. The U.S. government also made equity investments in Apple in its early years.
In a close examination of the development of new clean-energy technologies, especially wind and solar power, Ms. Mazzucato underlines the importance of the entrepreneurial state in building major new industries that are a key part of the needed transition to a low-carbon, sustainable economy. She shows how state investment in basic research was fundamental to the development of wind and solar power technologies for commercial application and, more importantly, shows how the state set the stage for widespread adoption of these new technologies, and the displacement of dirtier forms of energy such as coal power in Germany and China.
In the U.S. and Britain, by contrast, the adoption and scaling-up of new energy technologies has been much slower because of inconsistent government support.
The Entrepreneurial State is a forceful reminder that governments have a major role to play in building a highly productive, innovative and sustainable economy. Markets and companies have to play their part, but the private sector is often short-sighted and risk-averse, and has to be shown the direction of change.
As Ms. Mazzucato puts it, the state has to push, and not just nudge.
Andrew Jackson is the Packer Professor of Social Justice at York University and senior policy adviser to the Broadbent Institute.