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Book Review — “The Entrepreneurial State: Debunking Public vs. Private Sector Myths”

The Entrepreneurial State: Debunking Public vs. Private Sector Myths

In the 1990s, I remember finishing Clayton Christensen’s “The Innovator’s Dilemma” and thinking to myself, “This book will matter to me 20 years from now.” In the 2000s, I remember finishing John Seely Brown’s “The Social Life of Information,” and thinking, “This book will matter to me 20 years from now.”

I think I’ve found my first legacy book for the 2010s.

That book is Mariana Mazzucato’sThe Entrepreneurial State,” which I believe should drive conversation for 20 years or more. It is a fundamental reshaping of stereotypes and a repudiation of sloppy thinking about risk, innovation, and long-term strategic thinking, a book brimming with facts, examples, cogent arguments, and macroeconomics. It is brilliantly readable and compelling, even though it is richly detailed and copiously sourced.

Many books feel like bloated magazine articles. This book reads like many interesting books condensed into a series of well-related chapters.

Mazzucato picks up on the conservative argument that governments should only function in the economy to address “market failures” — situations where private enterprise won’t or can’t involve itself. The “market failure” argument asserts that governments are best left on the sidelines as the invisible hand of capitalism does its magic — proponents of conservative economics believe governments can only burden business or embarrass themselves if they attempt to put a visible hand into the economy.

Mazzucato’s evidence argues quite the opposite — governments shoulder incredible risks, create markets, drive innovation, fuel economic growth, and define the future when they are operating with the kind of confidence and strength they should.

A key reason why the concept of market failure is problematic for understanding the role of government in the innovation process is that it ignores a fundamental fact about the history of innovation. Not only has government funded the riskiest research, whether applied or basic, but it has indeed often been the source of the most radical, path-breaking types of innovation. To this extent it has actively created markets, not just fixed them . . .

One of the concerns voiced throughout the book is how pro-business and anti-government rhetoric works against both business and government by decreasing the confidence of policymakers, and therefore the pace and scope of governmental spending on basic R&D, long-term innovation, and support for R&D in a nascent market. This leads to fewer opportunities for businesses to piggyback on the basic R&D and infrastructures that governments provide if they are functioning well.

A strong public-private partnership ensures economic vitality. The two are inseparable. Crippling the public side also cripples the private side. It just takes a long time for the damage to show.

A number of timely topics are taken head-on in this bracing book.

The increased socialization of risk and privatization of reward. The pharmaceutical industry is called out, as are universities and other industries, for relying increasingly on government-funded research while spending more time managing their financial portfolios and stock price than actually doing research and introducing products. This creates a long-term problem as taxpayers are asked to pay more for the development of the products they will ultimately buy. Because the economy is shrinking owing to less activity in the private sector (jobs, labs, and so forth), the parasitic nature of business relative to government portends a dire future if things aren’t sorted out.

The myth of Apple as a source of innovation. Apple has been fashioned and generally understood as the epitome of Silicon Valley creativity and drive. And while there is a lot to praise, Mazzucato’s chapter entitled, “The State Behind the iPhone,” provides a salutary reminder that it was not Apple that invented, funded, or sustained experimentation for the Internet, GPS, touchscreen technologies, Bluetooth, and more. In fact, Apple’s expenditures on R&D as a percentage of revenues have fallen from a high of 8.02% in 2001 to 2.24% in 2011. This is a far lower percentage than Microsoft (13.8%) or Google (12.8%), and poses the question captured in a figure caption — “Productive R&D or free lunch?” How did Apple become so wildly successful given these discrepancies? Because Apple is a technology integration company, not a technology innovation company. Taking a tour of an iPhone proves instructive as to the amount of public-funded research these devices rely upon:*

  • Hard drives – Initial research funded by France and Germany, with refinements funded by US agencies (Department of Energy [DOE], Defense Advanced Research Projects Agency [DARPA], Department of Defense [DOD]).
  • Silicon-based semiconductors – Initial research initiated as a public-private endeavor, with major expenditures by the US Air Force (USAF), Navy, and DOD to purchase and refine semiconductors and lower their costs, with the DOD starting the Strategic Computing Initiative (SCI) and investing $1 billion in their improvement, ultimately founding a consortium it funded to the tune of $100 million per year over many years.
  • Capacitive sensing technologies – British, Swiss, and US funding agencies supported the major research into this technology.
  • Multi-touch screens – The National Science Foundation (NSF) and CIA provided initial funding through the University of Delaware. Apple bought the resulting company.
  • Internet protocols (HTTP, HTML, TCP/IP) – DARPA, NSF, and CERN all had a funding hand in their development.
  • GPS – The DOD and the USAF played major roles in conceptualizing and deploying the satellites and protocols that make GPS possible, and the USAF still supports it to the tune of more than $700 million annually.
  • SIRI – DARPA asked the Stanford Research Institute (SRI) to develop a “virtual office assistant,” and SRI created a 20-university consortium funded by DARPA. A voice-recognition system emerged, was spun off as SIRI, and sold to Apple in 2010.
  • LCD displays – Developed at Westinghouse but funded almost entirely by the US Army. When management at Westinghouse sought to shut down development, the chief scientist sought support from other technology companies, but was refused. DARPA came to his rescue with a $7.8 million contract, allowing him to spin off the company that ultimately commercialized the displays.
  • Lithium-ion batteries – DOE and NSF funding for the basic research and development.

If you are using a smartphone, you are leveraging a lot of government research outputs. The same goes for your GPS- and Bluetooth-equipped car, and for many other items you take for granted.

All this dependence on public funding would make for better corporate citizens, you might think. Not so fast. As Mazzucato writes about Apple:

. . . nearly every state-of-the-art technology found in the iPod, iPhone and iPad is an often overlooked and ignored achievement of the research efforts and funding support of the government and military. . . . we ask whether the US public benefited, in terms of employment and tax receipts, from these major risks taken by such an investment of US tax dollars? Or were the profits siphoned off and taxes avoided?

Apple is not alone. Google developed its algorithm through public funding, yet profits tremendously and avoids paying US taxes by creating holding companies in tax havens.

Manufacturers like Apple have systematically socialized risk and privatized rewards over the past 30 years while employing the term “open innovation.” (I’m beginning to think “open” is actually a proxy term for “socialized.”) “Open innovation” has allowed manufacturers to dump the former methods of private innovation epitomized by Bell Labs, Xerox PARC, and Alcoa Research Labs – where risks and rewards were better balanced – and instead take government-funded research on board, either directly through licensing or through the acquisition of small firms doing initial trials of government-funded R&D.

This imbalance between public spending and private rewards is most poignantly captured in stories of patients who cannot afford to receive life-saving drugs discovered and developed using their tax money and subsidized with tax write-offs for industry.

By taking little risk in R&D but reaping all the rewards, industry has become more focused on financial games than on true innovation. This is what “business” means now — maximizing “shareholder value,” at all costs, and at a faster rate and on more unforgiving terms. Our society-wide acceptance of this became apparent last week as I accompanied my daughter on two college visits. At both universities, the business schools were most proud of having functioning stock market rooms, complete with tickers, Bloomberg terminals, and real money students put into the market during their semester.

Mazzucato’s exasperation with our worship of financial idols comes through in the following extended passage, which leads to a section of the book that lays out in icy clinical terms exactly why we have an economy with soaring stock prices, bankrupt cities, large government debts, tax burdens shifting to the middle-class, and wild income disparities:

Many people correctly highlighted the financial crisis and subsequent bailouts as proof that we were operating an economy that socialized risk and privatized rewards of economies in a manner that enriched elites at the expense of everybody else. The bailouts highlighted the financial sector as a potentially parasitic drain on the economy that we are forced to accept. In the financial sector, banks have sliced risk so finely, traded it, and cashed it in so many times that their share of profits far outweighs those of the ‘real economy.’ Financial firms have grown to such incomprehensible sizes and embedded themselves so deeply in the world economy that they could be described as ‘too big to fail’; many fear that regardless of their recklessness, their essential survival ensures that the next time their hubris peaks they will get bailed out by the State (bankrupting the State in the process). Fairly or not, they are positioned to win on the upside and also on the downside. The fact that interest rates are counted in GDP as a ‘service’ rendered for the sector’s intermediation of risk should be revisited now that we know who assumes the real risk. Interest in this sense is purely rent, usury. . . . a similar dysfunction occurs in the world of manufacturing . . .

Venture capitalists are risk-takers. This book seriously challenges the stereotype of venture capitalists as risk-takers. Yes, they take risks, but very carefully, and for very short periods of time. They also work to minimize risk before making any play at all. Are venture capitalists who leverage government-funded systems and innovations, attenuate risk through 3-5 year bouts of risk-mitigated investment planning, and offshore their profits really the entrepreneurs and titans of industry the media casts them as?

Businessmen take a lot of long-term risks. At one time, yes, they did. But not today. Are the businessmen pursuing that local sports stadium after extracting civic tax incentives and municipal bonds really taking the kinds of risks that create broad financial vitality, or are they merely socializing risk for their own private reward? Are stock holders who can flit in and out of stock obligations in minutes, often using automated scripts, really taking the kinds of risks that create long-term financial well-being? Are drug companies that charge $200,000 per dose for an NIH-discovered drug, while also evading taxes and writing off their R&D and marketing expenses, truly taking any risks?

The real reasons clean energy initiatives are stalled out. Alternative energy systems have been nibbling at the periphery of existing fossil-fuel systems for decades, without taking off in the US and Europe in any serious way. Mazzucato shows how a lack of consistent government investment on both the demand and supply side is largely to blame. She also shows how leaving clean energy development to private companies is doomed to failure, as they have neither the resources nor the power to effect approaches like carbon taxes, infrastructure improvements, pricing policies, or applied research build-outs. Contrasting this situation with China’s five-year plans and confident roll-outs of wind, solar, and biofuel programs, Mazzucato reveals clearly the role governments must play in developing and establishing new strategic directions for nation states and the world in general.

Mazzucato argues that the concept of “capture,” where governments that find themselves in the thrall of propaganda from the business sector — or, more generally, a culture that fails to appreciate the role of government — creates a lack of confidence among government actors and policymakers, which sabotages both legitimate state functions while inhibiting funding to expand, establish, and support new and emerging industries and research directions.

We can see this “capture” all around us, from the way the demise of the solar panel company Solyndra was portrayed (it was actually the victim of impatient VC money, and the government’s major mistake was involving VCs too early), to a Congress that is anti-science and anti-government to its core, to a public that has been force-fed a steady diet of “government is bad” rhetoric. Yet, all this ultimately backfires, as the vanguard of government funding and action withers and businesses are left with inadequate means or risk tolerance to create the future, and find themselves mired in stagnant economic circumstances of their own making.

While this book throws a bright and unforgiving light on some lurking problems — tax havens for wealthy corporations leveraging US taxpayer-funded innovations have been taking trillions from US coffers; VCs have been taking mature, government-funded innovations and flipping them for quick profits while stashing their profits offshore; and right-wing politicians have participated wittingly or unwittingly in crippling the best source of long-term R&D our nation has by attempting to “shrink it down to the size where we can drown it in the bathtub” — the main social ill seems to be a lack of understanding about how vital governments are to long-term economic growth and vitality. Until we’re clear about the role of government funding in long-term structural innovations, the consequence of our imbalanced approaches will be allowing large interests to socialize the risk of business while they privatize the rewards.

Scholarly publishing fits into this picture, as the assertion inherent to open access (OA) is that publishers are parasitic relative to government funders and thereby taxpayers. Whether subscription publishing has been symbiotic or parasitic historically has fueled a long-running debate. Wherever you stand in this debate, it’s clear that while subscription publishing has benefited from government spending on research initiatives, OA may actually socialize more of the risk and further privatize the rewards. After all, with funds coming from taxpayers for APCs and PubMed Central and the like, and VC firms like PeerJ having entered the picture to exploit the less risky money associated with OA publishing, we may be drifting into a more parasitic role through profit-driven OA.

This book will matter for the next 20 years, as the problems it describes are deep, structural, political, and significant. They were not created overnight, and they will not be solved overnight. But just as we’ve learned how to slip the innovator’s dilemma and to allow information to have its own social life, we will spend many years learning how major governments work best fostering innovation and how to strike a fair and virtuous bargain between public and private players.

* Mazzucato points out that all this was laid out in a 2006 OSTP document. However, for all the OA proponents out there, the document she cites is not available through the OSTP site (they have a shallow archive), nor could I find it online through searches. Yet, my taxes paid for it. Interesting.
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About Kent Anderson

I am the CEO/Publisher of the STRIATUS/JBJS, Inc., the home of the Journal of Bone & Joint Surgery, JBJS Case Connector, JBJS Reviews, JBJS Essential Surgical Techniques, the JBJS Recertification Course, PRE-val, and SocialCite. Prior to this, I was an executive at the New England Journal of Medicine. I also was Director of Medical Journals at the American Academy of Pediatrics.

Discussion

6 thoughts on “Book Review — “The Entrepreneurial State: Debunking Public vs. Private Sector Myths”

  1. Here’s a “chartacle” that makes many of the same points: http://www.scienceprogress.org/wp-content/uploads/2011/02/SciProgResearchandDevelopment-101.pdf The iPhone example has been made before as well: http://www.digitaltonto.com/2013/where-did-the-iphone-really-come-from/
    Were government to seriously tackle the issues of higher education, a major producer of future value, we’d see much more than OA dabbling. We’d see inquiries that go to the very root of the system to find ways and means to improve the assessment and credentialing of both students and faculty as well as elevating the level of the objectives pursued there.

    Posted by Frank Lowney | Aug 19, 2013, 10:40 am
  2. Kent, your left wing is showing.

    Posted by David Wojick | Aug 19, 2013, 11:34 am
    • If we give into politicization to such a degree that we can’t see exploitation for what it is, and instead can only see through the broken lens of polarized political language, I think that only makes us more vulnerable to exploitation.

      Posted by Kent Anderson | Aug 19, 2013, 11:52 am
      • I agree completely, which is why I was sad to see you using polarized political language like “anti-science.”

        Posted by David Wojick | Aug 19, 2013, 12:09 pm
        • Yet, this quote comes from a Congressman (who is shockingly also an MD):

          “All that stuff I was taught about evolution and embryology and the Big Bang Theory, all that is lies straight from the pit of Hell. And it’s lies to try to keep me and all the folks who were taught that from understanding that they need a savior. You see, there are a lot of scientific data that I’ve found out as a scientist that actually show that this is really a young Earth. I don’t believe that the Earth’s but about 9,000 years old. I believe it was created in six days as we know them. That’s what the Bible says.”

          This is also a Congress that is so anti-government it sets new records every session for regulatory apathy.

          I am ending this thread now. It’s off-topic.

          Posted by Kent Anderson | Aug 19, 2013, 12:23 pm
  3. Thank you for this very illuminating review of Mazzucato’s book. A propos the Apple segment, I created an event for members of Congress and their staff to provide the very same information in order to help them gain an appreciation for why federally funded science is critical. It went over like gangbusters. They never knew that Apple did not create the GPS, touchscreen or semiconductors. Here is a video of the event, which we did in the Senate:

    http://vimeo.com/40104374

    Posted by Jodi | Aug 19, 2013, 12:00 pm

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