SocialismToday           Socialist Party magazine

Issue 185 February 2015

The state and innovation

The Entrepreneurial State: debunking public vs private sector myths

By Mariana Mazzucato

Published by Anthem Press, 2014, £13.99

Reviewed by Tim Heffernan

Somewhere along the line, we’ve all heard these arguments in favour of capitalism. That progress is based on competition, risk taking and innovation. Capitalism encourages risk takers and rewards them. We might need state ‘enterprise’ for essential infrastructure like water and electricity but, in the area of new technology, the dynamism of the private sector will always outperform the bureaucratic, stodgy, risk averse state.

Mariana Mazzucato’s book begins with a quote from The Economist (21 April 2012) which demeans the role of the state and extolls the entrepreneurial philosophy: "Governments have always been lousy at picking winners, and they are likely to become more so, as legions of entrepreneurs and tinkerers swap designs online, turn them into products at home and market them globally from a garage. As the revolution rages, governments should stick to the basics: better schools for a skilled workforce, clear rules and a level playing field for enterprises of all kinds. Leave the rest to the revolutionaries".

Mazzucato is no socialist but, in this book, she unwittingly provides a great service to socialists. She does this by undermining the myth of the capitalist entrepreneur or revolutionary garage tinkerer as being at the heart of innovation and, conversely, she points to the key role played by the state in developing new technology. Along the way, she shows that the state has been pretty good at picking winners.

"Evidence abounds of the state’s pivotal role in the history of the computer industry, the internet, the pharmaceutical-biotech industry, nanotech and the emerging green tech sector. In all these cases, the state dared to think – against all odds – about the ‘impossible’: creating a new technological opportunity; making the initial large necessary investments; enabling a decentralised network of actors to carry out the risky research; and then allowing the development and commercialisation process to occur in a dynamic way".

Thus the algorithm that led to Google’s success came from a grant from the US National Science Foundation. Molecular antibodies (providing the foundation for biotechnology before the arrival of venture capital) were discovered in medical research labs in the UK. Most innovative young companies in the US were funded by public venture capital such as that provided by the Small Business Innovation Research programme.

It is unusual to see the word ‘visionary’ being used to describe the investment/research role of the state. That usually is reserved for the entrepreneurial heroes of popular mythology like Steve Jobs (Apple) or Mark Zuckerberg (Facebook). However, Mazzucato explains that the discovery of the internet and the emergence of nanotech did not come about because the state was filling some kind of void – substituting for a private sector that knew what it wanted but was unable to provide the resources to get it. "Both happened due to the vision that the government had in an area that had not yet been fathomed by the private sector. Even after these new technologies were introduced by the government, the private sector still was too scared to invest… It took years for private venture capitalists to start financing biotech or nanotech companies".

It is not an original idea to say that state intervention, rather than the ‘invisible hand’ of the market, has been the driving force behind much economic growth. The role of the modern state has been to articulate the interests of the capitalist class as a whole, to create and foster the conditions for profit-making and capital accumulation. This, at certain times, has not precluded nationalisation of key industries, bailouts, subsidies and tax incentives to make things happen which would not happen if market forces were left to their own devices.

Since the 1970s, however, with the advent of neoliberalism, there has been an ideological and hypocritical offensive against the state. On the one hand, the state is proclaimed to be an obstacle, its regulatory and bureaucratic weight sucking the lifeblood from those businesses looking to throw off its shackles so that they can innovate and market new products. On the other hand, these same businesses have no qualms in leeching off the technology derived from the long, costly and often ground-breaking research that has taken place in public facilities. In this era of globalisation and financialisation, they are not averse to biting the hand that feeds them by seeking out jurisdictions where they pay minimal taxes. Mazzucato calls it an ‘unfortunate’ consequence of modern day capitalism: that risks are socialised while rewards are privatised.

In the biotech field, Mazzucato observes that many venture-backed companies "end up producing nothing, yet make millions for the venture capital firms that sell them on the public market". In other words, venture capital, rather than being venturesome is, first and foremost, profit loving.

It is true that there has been a massive rise in the number of patents but there is little evidence to connect this to any actual increase in innovation: ie new products and processes. Not all innovations are equal and not all lead to economy-wide growth. If you were to examine the sources of overall R&D funding, the private sector seems to be doing more than its fair share – 67% in the US in 2008. Yet that figure hides the fact that business only contributes 18% to basic research, the rest coming from the state, universities and other non-profits. Basic research, where ‘real-world’ applications are not immediately apparent, is important for the development of what are called general purpose technologies (GPTs).

Mazzucato cites research that large-scale and long-term government investment has been the engine behind almost every GPT in the last century. These include aviation, space, the internet, IT and nuclear power. Private companies have a short-term outlook – they will usually only invest in new products over a three- to five-year time frame. It is difficult for them to justify to their shareholders large investment in long-term, basic research. This is compounded by the fact that much of the required research is interdisciplinary which is incompatible with many corporate structures.

Even at a micro level, government is key. Between 1971-2006, in the US 77 out of the most important 88 innovations (rated by R&D Magazine’s annual awards) have been fully dependent on US federal research support, especially but not only in their early phases. Mazzucato argues that "not only has the 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".

The pharmaceutical industry is a classic example illustrating the differences between private and public research. Big Pharma justify exorbitant prices on the grounds that they have to cover high R&D costs yet the really innovative and socially useful drugs do not come from private pharma. New drugs are classified in two categories: new molecular entities (NMEs) and variations of existing drugs. According to Mazzucato, 75% of NMEs trace their research to the publicly-funded National Institutes of Health labs in the US. These labs have invested in the riskiest phase of research while Big Pharma have preferred to invest in the ‘me too’ drugs – variations of existing drugs which may simply have a different dosage. And, where there is genuine innovation, Big Pharma’s research priorities are market driven such as bringing out drugs for diet, hair loss, sexual dysfunction, etc.

The mythology of Apple and its products has been fostered by a media construction around Steve Jobs and his ‘innovative spirit’. Much quoted phrases from one of his speeches are "pursue what you love" and "stay foolish". All very well but, as Mazzucato argues, "without the massive amount of public investment behind the computer and internet revolutions, such attributes might only have led to the invention of a new toy". First, Apple received direct financial help from public funding sources when it set up business in the 1970s. Second, there would be no iPhone if not for previously developed public technologies – the internet, GPS, lithium-ion batteries, microprocessors, multi-touch screen, SIRI, click-wheel, liquid crystal display. Apple’s ingenuity or innovation does not lie in developing new technology but in integrating existing technology into an ‘innovative architecture’.

Taking the evidence as presented one could easily conclude that all that is needed is for everyone, especially business, to recognise and embrace the crucial role of the capitalist state in initiating and developing new technology. One could also conclude that the Marxist argument of capitalism outliving its usefulness is wrong, that the capitalist state can be the motor force to drive and rejuvenate the whole system. A cursory look at capitalism over the last 40 years shows how false this notion is.

While the state has been driving much of modern tech in this time, it has also presided over a period of booms and slumps including the most serious recession since the 1930s. It has allowed the economy to become dominated by finance capital that is less interested in real production and more into turning a quick buck through derivatives, sub-prime mortgages and hedge funds. While a relatively far-sighted wing of the capitalist class recognises the importance of the state for investment and innovation, the reality is that this group is not running the show. Capitalism is a profit-based system. The entrepreneurial elements in the capitalist state may, at certain times, be able to prod, push and bankroll the unadventurous, risk averse capitalists, but they are not in a position to resolve the inherent contradictions of the system itself.

The next ‘big thing’ in technological innovation is expected to be around nanotechnology – the manipulation of matter on an atomic, molecular and supramolecular scale. It requires cooperation and coordination among a variety of disciplines, such as physics, chemistry, materials science, engineering and computer simulation. To date, it has been governments that have been to the fore in financing this research. But nanotechnology has so far failed to create a major economic impact because of an absence of commercialisation of the new technologies and some critics have called on the government to fill the void. This prompts Mazzucato to ask: "If government has to do the research, fund major infrastructure investments and also undertake the commercialisation effort, what exactly is the role of the private sector?"

Indeed. Socialists are not interested in the commercialisation of technology in the sense of producing a product that will make a profit for an individual capitalist through clever marketing. We are for the development of new products that will benefit the mass of mankind. So, a socialist society would not only promote international scientific cooperation, it would also devote resources to producing useful and safe applications from that research.

What has been achieved already through international scientific collaboration – eg the CERN particle accelerator project – could be multiplied a hundred times if, from start to finish, technique and resources were harnessed with a view to producing for need rather than having an eye for future profit. The virtue of Mariana Mazzucato’s book lies in showing that the potential is already there for achieving this. For if the existing capitalist state can – in a limited way – innovate, jump start projects and bring the best scientific minds together across disciplines and borders, imagine what could be achieved in a democratically planned, socialist society.

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