University of Buckingham
Mariana Mazzucato, The Entrepreneurial State (London: Anthem Press, 2013)
On the 4th August 2013 Martin Wolf, the celebrated Financial Times columnist, reviewed this book in glowing terms. It was, he wrote, “a brilliant exploration [of] government … not the private sector, [as] the entity that achieves the greatest breakthroughs.” This book established, Wolf wrote, that it is the state that provides the research and investment that underpins the drugs and biotechnology industries. It is the state, even, that underpinned the achievements of two iconic companies, Google and Apple. And it is the state’s research that gave us fracking
The book does indeed make those claims, but unfortunately they are false – and they are falsified by a key passage in the book itself, on page 26:- “top pharmaceutical companies are spending decreasing amounts of funds on R&D at the same time that the State is spending more … this is free riding.” So it is. Yet Professor Mazzucato’s solution to the problem is, paradoxically, even more government money for research.
It is now over a decade since Walter Park of the American University, the OECD and I reported, independently, that the international data showed that the government funding of R&D simply crowded out its private funding. The US, for example, was laissez faire in research until 1940, but by 1890 it was already the richest (and therefore the most technologically-advanced) country in the world, and in the absence of government money it produced scientific and engineering giants such as the Wright brothers, Edison and Tesla. Grievously, the introduction of government money for research did not increase the US’s long-term rates of economic growth or of total factor productivity, it simply crowded out its private funding.
But Professor Mazzucato denies the existence of crowding out in science funding, because she defines crowding out (page 24) as the state using “up savings that could have been used by the private sector for its own investment plans.” But that is a narrow definition which allows Professor Mazzucato to thus claim that by definition (page 26) free riding is “not the ‘crowding out’ effect.” But that is exactly what it is, as even Professor Mazzucato’s natural supporters such as
Paul A. David, Bronwyn H. Hall and Andrew A. Toole confirmed in their classic review of the field “Is public R&D a complement or substitute for private R&D? A review of the econometric evidence” (Research Policy 2000, 29: 497–529.)
Professor Mazzucato dislikes venture capitalists. She believes that they capture a disproportionate share of the profits of innovation, and that they make false claims to courage and risk taking and entrepreneurship. Indeed they do. But it was the Professor Mazzucatos of this world who created venture capitalists. The proper home of research is in-house in industry, but because governments have been persuaded to put research where it shouldn’t be (ie, in the universities, which are institutions that lack capital or manufacturing facilities) the market had had generate this new industry of venture capital to harness innovation to manufacture.
Professor Mazzucato dislikes industry’s contemporary short-termism, and on page 178 she laments that “in the thirties a corporation like DuPont [could invest] for a decade in the fundamental research that led to nylon.” But in the thirties governments in the US did not fund long-term fundamental research, so companies did it themselves. Now that governments do fund long-term fundamental research, industry needs no longer do so: yet again Professor Mazzucato advocates the very policies that lead to the outcomes she deplores.
Professor Mazzucato claims that government, working with industry, can be entrepreneurial and thus help stimulate economic growth. That is true, as was confirmed by the Glorious Revolution in England and Wales, the Golden Age in the Netherlands and the city states of Renaissance Italy inter alia. When government has been captured by the mercantile classes then it is indeed entrepreneurial in the interests of commerce. But Professor Mazzucato is dismayed by tax avoidance, tax evasion, tax havens, excessive executive compensation, transfer pricing, bankers’ bonuses and all the other ills that modern capitalism is heir to, and she overlooks that these have been generated by states that have been too sensitive to the needs of industry and too entrepreneurial in the interests of capitalists: we need a smaller, less entrepreneurial state, one that – in the interests of free markets – ceases its relentless corporate welfarism to focus on reining in individual capitalists, not on subsidising them.
And in advocating ever-more government action, Professor Mazzucato never considers opportunity cost. Indeed, she never invokes the concept, she only praises government for its courage and risk taking which, she freely acknowledges, means it’s not worrying about the costs and likely commercial returns on (our) money being spent by politicians and bureaucrats. For Professor Mazzucato, the state’s indifference to cost-effectiveness is a virtue.
This book is confused. As Adam Smith pointed out back in 1776 in his Wealth of Nations, there is no evidence that science is a public good, and for as long as the Professor Mazzucatos of this world maintain that it is, they will continue to advocate policies that generate the very outcomes that they – and most of us actually – deplore.
As for Martin Wolf: the world has followed his intellectual journey from supporting the Labour Party to advocating free markets to a latter-day Keynesian distrust of those self-same markets. Nonetheless, there is no evidence that science is a public good, so it needs no government support.