Reflections on The Entrepreneurial State, by Mariana Mazzucato

The full title of the book is “The Entrepreneurial State: Debunking Public vs. Private Sector Myths“, and the author is Mariana Mazzucato, Professor in the Economics of Innovation and Public Value at University College London (UCL), and Founder/Director of UCL’s Institute for Innovation and Public Purpose.

The key point made in the book is that entrepreneurship is not – and should not – the responsibility of the private sector. Indeed, it cannot be the responsibility of the private sector.

Early on in the book, she makes the strongest case there is to be made for her thesis, by arguing that the United States of America has known this, and practiced this, for years on end. The rest of the world, she says, would do well to emulate the USA:

If the rest of the world wants to emulate the US model they should do as the United States actually did, not as it says it did: more State not less.

LOCATION: 372 (Note that the location refers throughout to the Kindle version)

There are a lot of excellent reviews out there already. See this one in the New York Times, for example. It is a mostly favorable review. Or, if you want a slightly more critical one, see this one in The Guardian. Indeed, there are many others out there.

I want to focus on three key points in this essay: horizons, incentives and spillovers. Let’s tackle each in turn.

Horizons

Moonshots is a word that has become increasingly popular over the last two decades, and it refers to projects or even ideas that have a relatively low chance of succeeding. The payoff, if these ideas succeed, is so large that that it may compensate for the relatively low probability of this actually happening. That, of course, is exactly what expectations are all about.

But for a firm, particularly one that may not have the luxury of time and money on its side, placing bets on projects that may not work out – and indeed most of them will not – is a rather risky thing to do. Money is an obvious constraint, but a less obvious one is time.

Firms just do not have the luxury of waiting while a project turns out to be successful… eventually. These kind of moonshots, then, are perhaps best handled, for this specific reason, by the state.

In fact, the point is even more nuanced, because a firm is much more likely to (if at all) invest in a moonshot project based on a specifically desired outcome. The word project itself is an indication of this fact – this is not “blue sky research” that we are talking about.

But blue sky research is important!

A core difference between the US and Europe is the degree to which public R&D spending is for ‘general advancement’ rather than mission-oriented. Market failure theories of R&D are more useful to understand general ‘advancement of knowledge’–type R&D than that which is ‘mission oriented’ (Mazzucato 2015). Mission-oriented R&D investment targets a government agency programme or goal that may be found, for example, in defence, space, agriculture, health, energy or industrial-technology programmes (Mazzucato and Penna 2015).

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Governments need to focus, for the sake of their own economies, their domestic firms and their long term growth, on focusing on moonshot projects, precisely because firms are reluctant to do so. The state needs, in other words, to take risks that private firms will not.

Saying this is easy, but how to go about doing this?

That is, if governments need to tackle long-term low-probability-of-success and uncertain-outcome initiatives that are important, but unlikely to be taken up by the private sector, the question that then arises is: how?

Mazzucato offers two points in this regard that I found interesting:

Block (2008, 188) identifies the four key characteristics of the DARPA model:

1. A series of relatively small offices, often staffed with leading scientists and engineers, are given considerable budget autonomy to support promising ideas. These offices are proactive rather than reactive and work to set an agenda for researchers in the field. The goal is to create a scientific community with a presence in universities, the public sector and corporations that focuses on specific technological challenges that have to be overcome.

2. Funding is provided to a mix of university-based researchers, start-up firms, established firms and industry consortia.

3. There is no dividing line between ‘basic research’ and ‘applied research’, since the two are deeply intertwined. Moreover, the DARPA personnel are encouraged to cut off funding to groups that are not making progress and reallocate resources to other groups that have more promise.

4. Since the goal is to produce usable technological advances, the agency’s mandate extends to helping firms get products to the stage of commercial viability. The agency can provide firms with assistance that goes well beyond research funding. Part of the agency’s task is to use its oversight role to link ideas, resources and people in constructive ways across the different research and development sites.

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In effect, she is suggesting that government alone cannot do this, it needs to be a “scientific community” that is decentralized, has autonomy, sets the agenda, and applies Darwinian principles (see point 3). Hmm, sounds familiar. Different context, but a similar lesson!

And elsewhere in the book, her example of how Japan did this in the 1970’s is instructive:

The general point can be illustrated by contrasting the experience of Japan in the 1970s and 1980s with that of the Soviet Union (Freeman 1995). The rise of Japan is explained as new knowledge flowing through a more horizontal economic structure consisting of the Ministry of International Trade and Industry (MITI), academia and business R&D. In the 1970s Japan was spending 2.5 percent of its GDP on R&D while the Soviet Union was spending more than 4 per cent. Yet Japan eventually grew much faster than the Soviet Union because R&D funding was spread across a wider variety of economic sectors, not just those focused on the military and space as was the case in the Soviet Union. In Japan, there was a strong integration between R&D, production and technology import activities at the enterprise level, whereas in the Soviet Union there was separation.

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And…

Equally important were the lessons learned by Japanese people that went abroad to study Western technologies for their companies, and relationships between those companies and US firms. These companies benefited from the lessons of the US (hidden) ‘Developmental State’, and then transferred that knowledge to Japanese companies which developed internal routines that could produce Western technologies and eventually surpass them.

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So, bottom-line: the state has to get in this business, but it can’t “go” it alone. There needs to be a community of academicians, researchers, firms, scholars – and as the example of Japan shows, this community needs fostering, and horizontal collaboration.

Or, if you prefer to put it simply, this is going to be hard.

Incentives

Academia suffers from the same problem that government bureaucracy does in India: the incentives are all wrong. Both are about risk minimization.

A professor in a college has no incentive to try and do something new, something risky, something innovative. Why, if you think about it, should she? Your best case scenario is that it works, but you get no upside for it: remember, wages aren’t a function of what you do, they are a function of how long you have been in the system. Your worst case scenario is that what you tried to do blows up in your face. So why take the risk?

And it is the same, of course, with a government bureaucrat. And that makes the conclusion of the previous section even more problematic, for where, exactly, are you going to unearth government bureaucrats willing and able to make this happen?

I’m all for the state being more entrepreneurial. I buy into the idea. But I worry, especially in a country like India, about the feasibility of it, for hey, incentives matter!

In a blogpost I had written earlier this year about the budget, I had touched upon this point:

Here is Ninan’s solution:

“Is there a solution? Yes, railway engineers of old like the metro builder E Sreedharan, builders of government companies like D V Kapur and V Krishnamurthy, and agricultural scientists like M S Swaminathan have shown how they made a difference when given a free hand. Vineet Nayyar as head of Gas Authority of India was able to build a massive gas pipeline within cost and deadline in the 1980s. The officers who are in charge of Swachh Bharat and Ayushman Bharat, and the one who has cleaned up Indore, are others who, while they may not match China’s speed, can deliver. Perhaps all we have to do is to spot more like them and give them a free hand.”

But as any experienced HR professional will tell you, spotting them is very difficult, even in the corporate world. And as any corporate CEO will tell you, giving these talented folks a free hand is even more difficult. And as any student of government bureaucracy will tell you, achieving the intersection set of these two things in a governmental setup is all but impossible.

And so what we need to study and copy from China is not so much anything else, but lessons in achieving, and sustaining, excellence in government bureaucracy. Or, if you prefer, how to improve state capacity.

In short, quality of government, not size of government, is what matters for freedom and prosperity.

https://econforeverybody.com/2020/02/17/how-to-think-about-the-budget/

That point resonates even more in this context: fostering an ecosystem led by the government is dead in the water without either the proper incentives, or at least bureaucrats who are able to work through poorly designed incentives. It is a hard problem, state led entrepreneurship, and made harder by the problem of incentives.

Spillovers

Or externalities, if you prefer. It doesn’t matter how hard the problem is, the payoffs are worth it!

Ruttan (2006) argues that large-scale and long-term government investment has been the engine behind almost every GPT (general purpose technology) in the last century. He analysed the development of six different technology complexes (the US ‘mass production’ system, aviation technologies, space technologies, information technology, Internet technologies and nuclear power) and concluded that government investments have been important in bringing these new technologies into being.

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(Note: emphasis added)

If those GPT’s are the outcome of general, as opposed to specific, R&D, sign me up. They are magnificent positive externalities. Indeed, elsewhere in the book, Mazzucato points to how almost everything produced by Apple today simply could not have been produced without an entrepreneurial state:

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The final point that I’ll make relates to how Mazzucato proposes “capturing” some of these externalities:

Where an applied technological breakthrough is directly financed by the government , the government should in return be able to extract a royalty from its application . Returns from the royalties , earned across sectors and technologies , should be paid into a national ‘ innovation fund ’ which the government can use to fund future innovations . Granting a return to the State should not prohibit the dissemination of new technology throughout the economy , or disincentivize innovators from taking on their share of the risk . Instead it makes the policy of spending taxpayers ’ money to catalyse radical innovations more sustainable , by enabling part of the financial gains from so doing to be recycled directly back into the programme over time .

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Mazzucato does present alternative schemes to the one shown above, but this is the one that strikes me as being the one with the most promise, if administered well, with appropriate risk-mitigation built in. But again, saying that is much easier than actually getting it done.

But all the being said, one simple fact is inescapable: India needs to be thinking about how to get something like this off the ground, and ASAP.

For that reason alone, more of us should be reading this book.

Notes on “Why Tech Didn’t Save Us From Covid-19”

The MIT Technology Review recently published an interesting, thought-provoking article with the title in quotes above. It was also a little bit one-sided, but we’ll get to that later.

  • The title itself brought to mind Peter Thiel’s quote about being promised flying cars, and being given 140 characters instead. You may want to make a snarky joke about whether 280 characters counts as progress or not, but the point is well taken. And indeed, reinforced by this quote from David Rotman’s article:
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    “In an age of artificial intelligence, genomic medicine, and self-driving cars, our most effective response to the outbreak has been mass quarantines, a public health technique borrowed from the Middle Ages.”
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  • The article then goes on to highlight at least three separate aspects of why tech has failed us: lesser government support for technology and innovation (particularly in the USA), a sclerotic bureaucracy, and policy-making that is not a) proactive enough b) good at managing risks effectively c) far too focused on short-term issues d) aware of the pitfalls of focusing solely on efficiency.
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    Let’s begin with the last of these points:
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  • ““The pandemic has shone a bright light on just how much US manufacturing capabilities have moved offshore,” says Erica Fuchs, a manufacturing expert at Carnegie Mellon University.”
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    I teach courses in international economics at the Gokhale Institute, and one of the fundamental insights that I think students need to walk away with is the concept of a non-zero sum game. Trade makes both parties better off, and therefore more trade is good, is literally the basic starting block of a course on trade. For an excellent summary of this idea, read this article by Paul Krugman, or watch this TED talk by Matt Ridley.
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    But two basic concepts from economics have come to haunt this rather neat idea. One is scale, and the other is the need to diversify. Both are very closely related.
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  • If, conventional theoretical thinking goes, a firm is able to scale up effectively, it will be able to produce more for cheaper. Yes, it is more complicated than that, but that’s the gist of the benefits of scale. Now, think of all countries as firms, and China is the obvious example of a country that scaled more rapidly than other countries, and was able to produce stuff cheaper than almost anywhere else. And that’s how China became the “manufacturing centre of the world”. The more you import from China, the more they scale (and effectively!). The more they scale, they cheaper they can make stuff. The cheaper stuff gets, the more you have an incentive to import from China. And once the loop is up and running, it becomes difficult to stop.
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  • And that’s a simple explanation for how the world ended up putting all of its eggs in one basket. We failed to diversify, because we focused on efficiency, without worrying about risk. What happens if an increasingly efficient global trading order suddenly breaks down? The price of efficiency is two fold: a) a lack of diversification b) not enough risk mitigation measures that allow one to fall back on domestic production. Which is where most of the world finds itself today. Readjusting global supply chains away from China is necessary, but it will not be easy. Especially because most countries will not want to pursue twin objectives: a) diversification away from China into other potential export powerhouses b) some production to be kept at home, especially in crucial sectors such as healthcare.
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    Scale, and a lack of diversification. There’s a lesson in there for us at the individual level as well, of course. A single minded pursuit of some goal (say money, or career growth) at the cost of other things isn’t necessarily a good idea.
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  • “Why couldn’t the US’s dominant tech industry and large biomedical sector provide these things? It’s tempting to simply blame the Trump administration’s inaction.”
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    The truth is always more complicated than you think, and beware simple explanations, but that being said, you might want to read The Fifth Risk. Here’s a slightly tangential review from The Guardian if you are feeling lazy, and a quote from that article follows:
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    “But we’re actually much more likely to die driving to the shops. The fifth risk is something impossible to conceive of in advance, or to prepare for directly. What matters is having a well-organised government in place to respond to these contingencies when they hit – exactly what the Trump administration has failed to do.”
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    No government, or Big Ol’ Central Planner is perfect, of course (and there’s a very readable book about that topic, or here’s a fascinating review of the same book), but Michael Lewis makes the claim that the Trump administration is rather less than perfect even by our less than exacting standards.
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  • “Any country’s capacity to invent and then deploy the technologies it needs is shaped by public funding and government policies. In the US, public investment in manufacturing, new materials, and vaccines and diagnostics has not been a priority, and there is almost no system of government direction, financial backing, or technical support for many critically important new technologies. Without it, the country was caught flat-footed.”
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    The book to read about this topic, if you ask me, is The Entrepreneurial State, by Mariana Mazzucato. Here’s the Wikipedia link about the book. Governments need to play, she says (and I suspect the author of this article would agree), a more active role in fostering the tech ecosystem in a country. Shades of Studwell, perhaps, but I have a counterargument here:
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  • “Incompetence and a sclerotic bureaucracy” is a phrase David Rotman uses early in the article when speaking about the Center for Disease Control in the USA. I find myself in complete agreement with the adjectives used. Why presume, then, that other government departments are likely any better? The truth, as always, lies somewhere in the middle. You can certainly make the case a la Michael Lewis, that the Trump administration took us to one end of the spectrum – but you should beware equally the other end of it!
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  • “Economists like to measure the impact of innovation in terms of productivity growth, particularly “total factor productivity”—the ability to get more output from the same inputs (such as labor and capital). Productivity growth is what makes advanced nations richer and more prosperous over the long run. For the US as well as most other rich countries, this measure of innovation has been dismal for nearly two decades.”
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    Well, yes, sure. And there is more than a grain of truth to the charge laid above, and not just for America. But keep in mind that measuring TFP is really and truly hard, and I am nowhere close to being convinced that we do a good job of it, even for a country like the USA, forget India. I am writing this post while sitting in my bed, using a laptop that allows me to keep multiple tabs (well over 50 right now) open in a modern browser, while being seamlessly connected to an overwhelming variety of news sources. All this while I listen to a Spotify playlist, and sip on excellent coffee that is made using home delivered Arabic beans. I’ll stop channeling my inner Keynes now, but most of this was not possible, especially at these prices, two decades ago.
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    Progress may not be fast enough for our tastes, sure – but it has been taking place. If you would like to read a book with a take contrarian to mine, try this on for size: The Rise and Fall of American Growth, by Robert Gordon.
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  • “The problem with letting private investment alone drive innovation is that the money is skewed toward the most lucrative markets.”
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    Churchill’s quote about democracy comes to mind!
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  • “In a widely circulated blog post, internet pioneer and Silicon Valley icon Marc Andreessen decried the US’s inability to “build” and produce needed supplies like masks, claiming that “we chose not to have the mechanisms, the factories, the systems to make these things.” The accusation resonated with many: the US, where manufacturing has deteriorated, seemed unable to churn out things like masks and ventilators, while countries with strong and innovative manufacturing sectors, such as China, Japan, Taiwan, and Germany, have fared far better.”
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    Here’s is Andreessen’s post, and also, this is your periodic reminder to read How Asia Works. China, Japan, Taiwan and Germany being up there isn’t a coincidence.
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  • ““The great lesson from the pandemic,” says Suzanne Berger, a political scientist at MIT and an expert on advanced manufacturing, is “how we traded resilience for low-cost and just-in-time production.””
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    Options are easy to teach, but difficult to grasp, and even more difficult to implement. See put, long.
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  • “…they are calling for an immediate ramp-up of public investment in technology, but also for a bigger government role in guiding the direction of technologists’ work. The key will be to spend at least some of the cash in the gigantic US fiscal stimulus bills not just on juicing the economy but on reviving innovation in neglected sectors like advanced manufacturing and boosting the development of promising areas like AI. “We’re going to be spending a great deal of money, so can we use this in a productive way? Without diminishing the enormous suffering that has happened, can we use this as a wake-up call?” asks Harvard’s Henderson.”
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    More participation from the government than is currently happening, but throw also into the mix a more venture-capital-ish approach, and don’t forget prizes! In fact, I found myself wishing midway through the article that the author had explored other options, rather than the government-or-markets binary.
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  • I hope I haven’t comes across as overly critical of the article, and my apologies if I have. That has certainly not been my objective. We rely far too much on the private sector now, that is true – and government can and should play a bigger role than is the case currently. But an extreme position, in either direction, always worries me a little!