Do we need government to promote innovation and economic growth?

 

According to Mariana Mazzucato, the RM Phillips Professor in the Economics of Innovation at the University of Sussex, government is an important factor in the promotion of innovation and thus economic growth. In particular, she challenges the popular view that innovation happens in the private sector, with government’s playing a limited role. Many commentators regard her as a revolutionary thinker that challenges the accepted dogma regarding the role of government in promoting innovations and economic growth (https://www.wired.co.uk/article/mariana-mazzucato)

 

In her 2013 book The Entrepreneurial State: Debunking Public vs. Private Sector Myths, Marianna Mazzucato argues that the United States’ economic success is a result of public and state funded investment in innovation and technology. In his critique of the book Alberto Mingardi (A critique of Mazzucato’s Entrepreneurial State, Cat Journal, vol. 35, No.3 Fall 2015) writes that,

 

The Entrepreneurial State. Mazzucato’s award-winning work has been widely acclaimed as a turning point in scholarship on innovation (e.g., Upbin 2013 and Madrick 2014). Martin Wolf Wolf, M. (2013) “A Much-Maligned Engine of Innovation.” Financial Times (4 August 2013) argued that the book provided a successful justification for the role of government in promoting innovation, which he claimed had unduly “been written out of the story.” Based on The Entrepreneurial State, Wolf deduced that our “failure to recognize the role of the government in driving innovation may well be the greatest threat to rising prosperity.” Lack of adequate government funding for research and development (R&D), he suggested, could slow the pace of innovation.

 

Mazzucato holds that understanding the difference between the “myth” and the reality of this success is particularly important: “If the rest of the world wants to emulate the US model, they should do as the United States actually did, not as they say they did”.

 

Professor Mazzucato is on the mission of changing the perception of the government from a bureaucratic machine that stands in the way of innovation, to government being the lead risk taker in terms of investing in innovations.

 

She then details the history of how the US government is actually in many ways responsible for much of the large-scale innovation, which drove the country to economic success such as the internet. She also gives the example of how the US National Science Foundation funded the algorithm, which helped create Google’s search engine.

 

Mariana Mazzucato holds that the real driver of innovation isn’t lone geniuses but state investment. She is of the view that “Steve Jobs has rightly been called a genius for the visionary products he conceived and marketed, but this story creates a myth about the origin of Apple’s success,” Mazzucato writes in her 2013 book The Entrepreneurial State. “Without the massive amount of public investment behind the computer and internet revolutions, such attributes might have led only to the invention of a new toy.”

 

According to Mazzucato it seems that if not for the government investment we would not have all the technological advancements that most people take for granted and mistakenly attributing to the private sector. In this respect, she follows the footsteps of John M. Keynes that wrote in the paper in 1926 – The End of Laissez Faire,

The important thing for Government is not to do things, which individuals are doing already, and to do them a little better or a little worse; but to do those things, which at present are not done at all.

 

How the Government funds its actions?

It is all well to suggest that the government bureaucrats’ initiative was responsible for US economic growth, but the question arises of how all these government actions were funded? After all the government is not a real wealth generating entity.

 

For the government to implement a particular project it must obtain the funding from the real wealth generating private sector so in this sense, projects such as the internet and the Google search engine were funded by the private sector and not the government as such.

 

The diversion of real funding from the private sector towards government projects – no matter how important these projects ‘appear’ to be – in fact disrupts the process of real wealth generation.

 

As an analogy, it is all well to suggest that it would be a good idea that every individual should be driving a luxurious Mercedes, however at present this would not be realistic if individual’s income can only support a bicycle. A policy, which will force people to have a Mercedes is going to undermine their important priorities i.e. being able to feed themselves.

 

Contrary to Mazzucato, the fact that the private sector appears to be passive in its willingness to invest in new technologies does not suggest that the businesses are shortsighted and therefore governments’ bureaucrats must replace the private sector entrepreneurs.

 

It means that the private sector entrepreneurs have reached a conclusion that investments in new technologies are likely to be on the lowest priority list of consumers – given the consumers’ state of real wealth. This means that such investments are likely to be not profitable.

 

With the expansion in real wealth, entrepreneurs are likely to discover that some times in the future investments in new technologies could be the right decision.

 

What Mazzucato is in fact endorsing is central planning, which failed badly in economies such as the former Soviet Union. She is on the mission to improve the free market. We suggest that what we have today is not free market but a government-controlled economy. True reforms could be achieved by removing the government bureaucrats input from the decision making process of the private sector.

 

 

3 Comments

  • James Murray says:

    Mazzucato may be right in what she says and that the Government can invest in blue sky – or at least leading edge – research which can be the basis of new new industries and opportunities for our entrepreneurs.

    As we are now out of the EU, it is important to ensure full patents are made on all discoveries and that any free use of such patented innovations for development are limited to UK companies.

    I do agree that Governments are dreadful at ‘picking winners’ but incipient fields surely an be identified, supported and then leveraged by the Government for the country’s benefit.

    We do this anyway in our university research labs.

    Jim Murray

  • James Murray says:

    In Germany, Sparkassen Public Banks and the like are famous for investing local innovative companies with an idea that needs investment and support.

    Our own big five are also famous for being risk averse so that out of every £100 they lend a derisively small 8% to UK firms for investment and only a quarter of that goes to SMEs – demanding security at every turn.

    Their risk aversion is ridiculous and is a symptom of their obsession with paper profits from the financial markets rather than from investment int he real economy – unlike the German public banks.

    These small, regional publically-owned banks that are all over Germany and which saved their country from the 2008 Crash.

    These banks stabilised the country when it needed it by keeping up, or increasing, the local lending to local commerce all over Germany – completely unlike the big German banks – and the big five UK banks.

    These were the Sparkassen as the most numerous sub-sector with 431 savings banks – there are 8 similar Landesbanken.

    The German public banking system has a significant 40% share of total banking assets in Germany – here in the UK, nil.

    The damage of the 2008 Crash to business was avoided in Germany when these public banks (who do not make profit or give staff bonuses) become a major factor in avoiding a destructive Minsky Moment in the business cycle.

    I believe it would be a legacy to beat all legacies if Boris Johnson were to give the opportunity to city (and town) councils to lend to those local businesses through a chain of local banks like the Sparkassen as this would create local jobs for local people and so keep money made and spent back in the locality.

    Everyone wins – except those multinational shareholders who no longer are able to siphon off our salaries as they are being spent and send the money abroad where those multinationals are based.

    Based abroad, of course, which is where they pay the tax on the profits made here which otherwise would be paid to our own Exchequer.

    While he is about it, Boris should ignore the siren lobbying of the dreadful UK banking industry who are doing everything they can to stop challenger banks from obtaining a banking licence allowing them fractional reserve banking.

    There is not one advantage in having more than 7 in every 10 of UK current accounts in the big five UK banks.

    So, the answer for our entrepreneurs is local banks, geared to lend to local enterprises, and so to kick-start investment lending to create real wealth – instead of the paper profits of the financial markets.

    Cheers

    Jim Murray

  • Ralph Musgrave says:

    I agree with Dr Shostak that Mazzucato spouts a large amount of nonsense. But she has good presentational skills, and that’s all that really matters – even in academia where presentational skills are supposed to come second to command of the facts, logic and so on.

    I don’t entirely agree with Shostak that because the money for government research comes from the private sector that therefor the private sector if left to its own devices would bring scientific advances as quickly as taxpayer funded labs. The reality is that BASIC RESEARCH (as distinct from firm specific or industry specific research) is EXTREMELY RISKY: it often results in failure. I suggest the private sector if left to its own devices would not bring scientific advances as quickly as the many taxpayer funded labs (e.g. university labs).

    A flaw in Mazzucato’s argument which Shostak failed to mention is that her claim that many if not most scientific advances come from taxpayer funded labs is hardly news: anyone with half a brain knows that the many scientific advances in WWII (radar, rockets, computers) were government funded. Plus anyone with half a brain also knows that many if not most scientific advances since WWII have come from taxpayer funded labs.

    In short, Mazzucato spends much of her time teaching grandmothers to suck eggs.

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