Government Risk and Private Sector Reward

Is there a role for the state in fostering innovation?

The usual caricature of government involvement in business, which has become especially prominent in the last 40 years, can be seen in the classic American aphorism: “The government that governs least, governs best.” Admittedly, it’s a nice, pithy expression. And it has gained a powerful following among policymakers starting in the Reagan years.

But is it true?

In her work and in this interview, Prof. Mariana Mazzucato of the University of Sussex in the U.K. debunks the pervasive myth of a lumbering, bureaucratic state versus a dynamic, innovative private sector. In fact, as Mazzucato shows in her latest book, The Entrepreneurial State, the opposite is true. Typically the private sector only finds the courage to invest in breakthrough technologies after a so-called “entrepreneurial state” has made the initial high-risk investments.

This can be seen today in the green revolution, the development of biotech and pharmaceutical industry, and the technological advancements coming out of Silicon Valley. Mazzucato argues that by not giving due credit to the state’s role in this process we are socializing the risks of investing, while privatizing the rewards.

So who benefits from the state’s role in the development of technology? Consider Apple’s iPhone and Google’s search engine. In both cases these extremely popular consumer products benefitted mightily from state intervention. For the iPhone, many of the revolutionary technologies that make it and similar devices “smart” were funded by the U.S. government, such as the global positioning system (or GPS), the touchscreen display, and the voice-activated personal assistant, Siri. And for Google, the creation of its algorithm was funded by the National Science Foundation. Plus, of course, there’s the development of the Internet, another government funded venture, which enables the iPhone to be a valuable tool and makes Google searches possible.

But despite the fact that these companies directly benefitted from taxpayer-funded technologies, they and other high tech outfits have strategically “underfunded” the tax purse that helped lead to their success. This is a troubling development.

So how should the government recoup the benefits from the fruits of its research? And what role should the government play going forward in important areas such as clean tech? Mazzucato seeks to address these issues in this interview.