“The Entrepreneurial State” by Mariana Mazzucato

Mazzucato_Entrepreneurial_StateISBN 978-0-85728-252-1. “The Entrepreneurial State – Debunking Public vs Private Sector Myths”” by Mariana Mazzucato was published by Anthem Press in 2013. The publishers are part of “Anthem Frontiers” which is an organisation seeking to “trigger and attract new thinking in global political economy“. This and “Anthem Other Canon Economics” seek to publicise “reality economics“. The cover page shouts “…a book whose time has come” whilst that bastion of conservative economics The FT gives it a good write up too. So, does Mazzucato and Anthem have the next big idea? Arguably not a new idea but more the correct interpretation of the evidence if current beliefs are removed.

There is much “conventional wisdom” out there (for which we can also call “dogma”) that the State must be minimised in size for fear of ‘crowding-out’ private investment. Such dogma idolises private capital and entrepreneurship as the only source of wealth creation. It cites such cases as the building of Concorde as examples where the State attempts to pick winners and fails – wasting millions in taxpayers money as a consequence. This is today’s ideology. The great “truth”. It is a powerful mantra simply because it is a narrative that suits the elite. THEY benefit. Such an idea can be used to justify the minimisation of taxation upon the wealthy. It can be used to cut benefits for the poor and to demonise life’s losers as being “undeserving”. It creates vast social inequality and leads to gutting of the middle-classes. It is the ultimate path to serfdom… (And where have we heard that before?)

This is a path that can only lead to one result. A world of gated-communities protecting the ‘deserving’ rich from the ‘undeserving’ 99%. Few of us will be invited to the party. This conclusion about today’s dominant economic model is not one shared by those who enforce the regime as “normal” and “right”. Instead they see only market efficiencies leading to some Shangri-La – since the model pumps up GDP then they believe everyone benefits until utopia is realised. But it has been a long time since anyone seriously preached trickle-down economics. IF this had worked we would live in a very different place. But wealth under State-Capitalism flows upwards by design or by serendipitous-accident.

Marx was a very astute economist who was very good at defining the problem: the crisis of Capitalism – a problem of consumption. If you remove wealth from the 99% then there is no longer any money to flow upwards. Nobody will be able to afford consumer products or borrow the money to start small businesses. So an impasse will be reached where the model becomes unsustainable OR reaches some kind of equilibrium… or collapses. Of course Marx was less smart when it comes to solutions which as forever besmirched his reputation. But that is the way it is.

Since we have read Ha-Joon Chang’s “Bad Samaritans” and “23 Things they don’t tell you about Capitalism” we have learnt that today’s dominant economic theories have been built up from cherry-picking the evidence. Chang has shown that there is plenty to contradict the dogma we are meant to accept as normal. Professor Steve Keen’s “Debunking Economics” has also shown that it is relatively easy to blow massive holes in the efficient-market theory. Alternative theories can evolve based upon the reality of observed events. Less dogma, more reality. Hence it was of no surprise to find that Ha-Joon Chang is on the Anthem Editorial Board.

So what has Mazzucato brought to this discussion? She argues that venture capitalists are too short termist and will never invest in the kind of slow-burn innovation that is the life-blood of modern post-industrial western economies. Our supposed “free-markets” are in fact driven by State-funded (ie, taxpayer-funded) innovation. Not only that – they always have been. Not wholly of course. For every example the author conjures up it is easy to think of some exceptions. One that came to mind was Formula One motor-racing. Mind you, no doubt there will some technologies from State-funded Universities that have entered the automotive industry too. Since they often trawl the trash of the aerospace industry which, in turn, is nearly wholly supported by defence contracts and the space-race.

“…the notion of the market as self-regulating is a myth unsupported by the historical origins of the market: the road to the free market was opened and kept open by an enormous increase in continuous, centrally organised and controlled interventionism”

If we are honest with ourselves this is a truth we all know. The free-market doesn’t fight wars. The free-market didn’t put a man on the moon. Coca-Cola didn’t build the atom bomb. McDonalds will never build highways. We simply have to question what it is that we as a human society wish to count as a desirable civilisation. What do we value? There is no scientific answer in the mathematics of economic modelling. We create a reality we want to be true. Modern free markets are the invention of the State but we choose NOT to see this. It won’t even enter the public discourse.

This, as a bottom-line, proves to be the best take-way from Mazzucato’s work. This may not be what she wishes her readership to learn but it is very telling that we delude ourselves. Whilst Governments TALK about free markets what they actually DO is very different. It is as if we all live in a make-believe land where we pretend there is no elephant in the room. Free markets will finally collapse without the State apparatus to supply the infrastructure to make them work. What Mazzucato has done is to put this on the agenda so that we can start to see just how far the State has gone to successfully make the market work. We may well think of “infrastructure” as roads but it includes security and the rule of law. Beyond that Mazzucato demonstrates that it also includes the State picking winners. In fact the State has a very good track record of picking winners. General Motors didn’t conjure up the Internet. State & Military-funded laboratories brought us the modern world, NOT Smithkline-Beecham.

Hence the State is NOT a burden, it is the fundamental source of most ingenuity. Writes Mazzucato:

“…politicians [..] need to overcome their fear of government action and design the bold policies that can unleash growth and restore wellbeing to all.”

The problem is the vast moral peril that now saturates our society:

“..the unfortunate consequences of modern-day capitalism: risks are socialised and rewards that are privatised

Modern dogma insists that this is not a problem since what is good for business is good for everybody. Mazzucato tackles this myth head on with suggested policies to better align risk and reward. She cites numerous times where the big businesses (who campaign so effectively against big government and taxation) are the self-same businesses that are making such enormous profits from exploiting state innovation. Innovation they picked up for a song. There are examples in this book that should enrage the reader. Big business will go to any corner of the world where the Government will give them innovative and profitable research to exploit. It isn’t the taxation rates or regulations that matter – it is the free Research and Development. Many heavy-touch countries in Europe are proof of that.

Of course BIG government can engage in ineffective State spending, but this is not to conclude that ALL State funding cannot generate wealth. The problem with the modern ethos is that it is so “light-touch”. It is based upon the erroneous assumption that the State cannot ever pick “winners”. Hence the State resorts to minor policy tinkering that is as effective as pushing on a piece of strong. At worst the tax deductions (designed to gently ‘nudge’ innovation) result in the State being unable to reap the financial rewards from its own measures! The Government needs those tax receipts to pay for the profitable innovation they fund that big business gets for free. Here is an obvious and self-destructive irony.

Taking an example the pharmaceutical industry (that so often claims its high costs are based upon high R&D); Mazzucato demonstrates that few pharma companies have large R&D labs anymore. Most “new” drugs are just reworkings of existing drugs that themselves came from State-funded research from the world of academia. The big cost to pharma is from drug regulation, clinical trials and marketing. They simply are not coming up with any genuinely new drugs. The same is true of the hi-tech companies like Apple and Google who have a long track record of using innovation in their products that were never developed by them. They all came from Government funded labs. Of course this does not stop the boss of GSK or Steve Jobs from perpetuating the myth of THEIR entrepreneurial spirit. The truth is that the bundle of tech that is the iPad resulted from the US Government picking & backing numerous winning technologies long before Apple had i-anything up their sleeves.

Having proven her case so well Mazzucato moves on to study the fledgling green industries: solar and wind. Should the State “push” or “nudge”? Clean-tech will not respond to nudges. It needs a push. We need only look towards the world’s most successful developing economy to see the answer: China. Sometimes China is the elephant in the room that disproves all dogma about free-markets. There has to be a very long term commitment to clean power for it to bear fruits:

“The lack of focus and commitment to a clean technology future is what is preventing a more rapid transformation of the fossil energy infrastructure into a clean energy infrastructure.”

“State support for clean technologies must continue until they overcome the sunk-cost advantage of incumbent technologies, and these sunk costs are a century long in some cases.”

Sadly the UK is singled out for criticism here for its inadequate funding of clean-tech. We will be the losers in the green race because we are not pushing it. We are wasting money on ineffective nudges. Britain is “fiddling with play money” writes the author whilst China made 47 times more money available to their Solar sector than it could actually use. We will lose this race. If we lose the clean-tech race then we are not only economically impoverished but it shortens our sustainability options too. Unless, of course, you assume that it is more efficient to export this to China and then buy back the technology from them. The author asks if it were a national security issue then maybe we would do something about it? Defence spending outstrips energy spending hundreds-to-one.

“Leaving direction setting to ‘the market’ only ensures that the energy transition will be put off until fossil fuel prices reach economy-wrecking highs.”

The profits taken from State-funded innovation are now moved offshore via numerous corporate tax-avoidance schemes. We spend taxpayers money on creating jobs over-seas whilst our treasuries are impoverished due to lack of tax-receipts. Where will the money come from for the next wave of innovation? Venture Capitalists will NEVER fund the sort of long-term innovation that our modern economy needs. It is a downward spiral re-inforced by a faulty ideology. We will cut taxes on business again and again in the vain hope that they will stay in our countries. The reality is that they will simply move to where the innovation is. So we will cut R&D spending again and again only to be left with nothing to offer the hi-tech and green-tech sectors.

As we saw in our review of “Green Gone Wrong” by Heather Rogers the callous indifference to large corporate bodies to basic research is remarkable. The boss of Chrysler told Rogers straight:

“…it’s not up to the Chryslers of the world to forge greenhouse gas busting breakthroughs. “That’s for the entrepreneurs to do […] …and when they’ve got something really good, we’ll come in and either buy that product from them or buy their company.” “

..and when modern corporate America means “entrepreneurs” they often are describing State-funded academia. Take the Pharmaceutical company Genzyme that earns $1 billion annually from sales of a drug developed by the State-funded National Institutes of Health. The Taxpayers that funded the drug got not a penny. The drug costs $350,000 for one year’s dosage. Needless to say most taxpayers (who have already paid for it) can’t afford it. Such is the needless, irresponsible, corruption of modern State-Capitalism. It’s enough to make your blood boil… If my anger seems out of keeping with the cool academia of this economics book then take this quote:

“Many people correctly highlighted the financial crisis and subsequent bailouts as proof that we were operating an economy that socialised risk and privatised rewards of economies in a manner that enriched elites at the expense of everyone else.”

Mazzucato goes on to describe the bailouts as a “parasitic drain on the economy“. Her words, not mine. The solution? We must relearn our economics:

“….rather than relying on the false dream that ‘markets’ will run the world optimally for us ‘if we just let them alone’, policymakers must better learn how to efficiently use the tools and means to shape and create markets..”

This is anathema to our deeply-held belief systems. For developing nations this advice:

“The conditions being imposed on the weakest countries, via the ‘fiscal compact’, should be conditions not about reducing the public sector across the board, but conditions that increase the incentives for governments to spend on key areas like education and R&D, and also to transform the public sector from within so that it is more strategic, meritocratic and dynamic.”

After-all it is not a private company that wishes to build the High Speed two rail link in the UK. It is the far-right Conservative Government. It seems that such projects flatter the egos of Government Ministers. These career politicians enjoy mega-capital, legacy-making, projects like the expansion of Motorways and Airports. Then they see no irony in preaching free markets for everything else. The Emperor really has no clothes. Why are we afraid to point this out in public debate?

Unlike other economics books we have read this one actually contains real policy recommendations for the UK economy in the appendices. It really is worth checking out. Although Mazzucato occasionally gets distracted by arguing the semantic-differences between the State addressing ‘market failures’ and the ‘entrepreneurial State’ her point is, finally, well made. Some readers may well get easily lost in the arguments made in this book. It isn’t always an easy read. However even the casual observer will be left a little unsure exactly what the author wishes to prove by continually reminding us that the iPad uses the Internet conceived in Government labs.

This focus on Apple gets pretty sincere at times. It seems to me that we should simply observe the apparent hypocrisy of Corporate America and then move on. Apple had been very successful in going through the bins of the State-funded research institutes to find the technologies to market in their gadgets. Steve Jobs can still be applauded for bringing this tech together – the downside is that the US taxpayer, that paid for all the basic research, only ended up with cheap iPads. Apple avoids taxes like the plague and all products are made in China. Apple is a famous example that most people are familiar with. However you don’t half get the feeling that Mazzucato is rather stretching the point at times. Apple is acting in a very rational fashion. Everyone likes free stuff especially when they can make money out of it. The is no moral problem here. Dozens of tech firms will be piling in to use the same tech – there is no crime in being first. The fault rests with Governments and Economic academia.

Gripes to one side this is a book making a good point. It is focussing on a very specific area of public policy making it a little too obscure for many a reader. You can read much more about corporate American hypocrisy in Chomsky and Chang and their work will be more entertaining. However – point made – conservative academia did sit up and take notice of this. We need a lot more of this from Anthem Press please. It may be nothing more than a soft blow against the side of the neoliberal juggernaut but, with enough “reality-based economics” like this packing the book cases of academia, maybe, just maybe, the next generation of students graduating from Economics schools might take better ideas out into the real world. And that cannot do any harm at all.

About post-carbon-man

A passionate advocate of a peaceful transition to a sustainable political-economy, Mark hails from a working class farming background. Today he is a Company Director and Chairman of the Low Carbon Chilterns Co-operative. Whilst at University (Engineering Masters) he was active in Conservative Student politics but has had no affiliation since. He has travelled widely on business covering the USA, Europe, Middle East and Central Asian Republics. In 2007 Mark founded Post-Carbon-Living and a year later co-founded Transition Town High Wycombe. He lives with is wife & daughter in a home they retrofitted to be carbon-neutral. Today he blogs about surviving politics on a shrinking planet and is passionate in his rejection of Nationalism.

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