The entrepreneurial state - debunking public v private myths - review

The public sector should take the lead in backing innovation, believes the author. But do civil servants really make the best investors, asks reviewer John McLaren.

by John McLaren
Last Updated: 29 Sep 2015

Mariana Mazzucato is an economist specialising in the relationship between finance and innovation, with a sideline in green fundamentalism. This book is an expanded version of a report she wrote for Demos. I haven't sought that out, but I suspect we are looking at a case of 'more is less'.

Her basic thesis can be summarised pretty easily. Only 'The State' can possess the resources, vision, wisdom and patience to make the sort of massive, very long-term investments necessary for the development of breakthrough technologies. The State should be courageous in selecting and leading these initiatives and not restrict itself to merely 'nudging' industry or correcting market failures.

The contribution state-backed programmes have made to technological development is vastly underestimated, especially in fields such as biotech, nanotechnology, electronics, everything green, and the internet (which, deliciously, she says was 'discovered', but, sadly, we are not told if it was found in a distant galaxy or in the attic). The State is - or anyway should be - the good guys.

By contrast, the managers of businesses and venture capitalists (VCs) are the bad guys - impatient, short-term, parasitic and out for themselves. The willingness of VCs to take risks is hugely overestimated. All they do is finance companies whose technology has been derisked by piggy-backing on all that brilliant government-backed science, and then they hope for an exit after just a few years.

Meanwhile, the sole aim of executives of publicly traded businesses is to boost the value of their stock options. Both groups are always complaining unreasonably about red tape and demanding favourable tax treatment, which should steadfastly be refused.

Unfortunately, the author seems to have less than a complete grasp of how venture capital actually works. She would prefer VCs to invest for the much longer term, and to keep reinvesting, even when a company like the failed solar-panel maker Solyndra has burned through over $1bn of their money and still lacks a competitive product.

The problem is that the money VCs invest isn't their own - it comes from institutions such as pension funds, and if they don't get a return during the fixed life of funds, they won't put another dime in, and the whole venture ecosystem will die. So the VCs can't sit tight for decades.

On the subject of R&D, the book is laden with contradictions. Having first excoriated big pharma for spending on stock buybacks rather than research, she then argues there is very little correlation between spending on R&D and innovation, stating that there has been little increase in new drugs, despite an 'exponential rise in R&D spending'.

She then overlooks this lack of correlation in innovation when she shows that Apple has a much lower R&D to sales ratio than Microsoft, Nokia, Google or Sony Ericsson (RIP) and insists that the only reasonable inference is that the scoundrels at Apple are just freeloaders packaging state-developed tech in cute little boxes.

Part of the problem here may be a tendency to believe that taking a basic technology platform and converting it into a product that people want or need is terribly straightforward. A bit like grudging Boeing much credit for the Chinook or Apache because that clever Mr da Vinci did the hard yards.

However, my biggest difficulty with this book is its 'one-size-fits-all' approach. Yes, the US is still big and rich enough to be able to throw a vast amount of public money at R&D. China definitely will do so selectively, not only because it can, but because its leaders don't have to fret about getting re-elected.

However, to suggest (as she does) that countries the size of Greece and Portugal should follow suit seems nuts. What innovation can the poor Greeks expect to lead the world in, apart from maybe new ways of pressing olives?

And where are even medium-sized but heavily indebted countries like our own supposed to find the tens of billions of 'patient' money to compete with the superpowers?

The author suggests governments should receive a return for the risks they take, but is strangely silent on how to do this, and her specific recommendations for the UK are far too modest to make much difference.

The essence of Mazzucato's faith in government investment in emerging technologies is a valid one. But the argument is let down by patchy analysis, excessive faith in bureaucrats, and ultimately pointless bile against businesspeople and investors.

John McLaren is chairman of the Barchester Group

BOOK

The Entrepreneurial State: Debunking public vs private sector myths

Mariana Mazzucato

Anthem Press, £13.99

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