[A2k] FT review: A much-maligned engine of innovation

Thiru Balasubramaniam thiru at keionline.org
Mon Aug 5 00:49:58 PDT 2013


http://www.ft.com/intl/cms/s/2/32ba9b92-efd4-11e2-a237-00144feabdc0.html

<SNIP>


Mazzucato notes that “75 per cent of the new molecular entities [approved
by the Food and Drug Administration between 1993 and 2004] trace their
research ... to publicly funded National Institutes of Health (NIH) labs in
the US”. The UK’s Medical Research Council discovered monoclonal
antibodies, which are the foundation of biotechnology. Such discoveries are
then handed cheaply to private companies that reap huge profits.


A perhaps even more potent example is the information and communications
revolution. The US National Science Foundation funded the algorithm that
drove Google <http://www.ft.com/topics/organisations/Google_Inc>’s search
engine. Early funding for
Apple<http://markets.ft.com/tearsheets/performance.asp?s=us:AAPL> came
from the US government’s Small Business Innovation Research Program.
Moreover, “All the technologies which make the iPhone ‘smart’ are also
state-funded ... the internet, wireless networks, the global positioning
system, microelectronics, touchscreen displays and the latest
voice-activated SIRI personal assistant.” Apple put this together,
brilliantly. But it was gathering the fruit of seven decades of
state-supported innovation.


Why is the state’s role so important? The answer lies in the huge
uncertainties, time spans and costs associated with fundamental,
science-based innovation. Private companies cannot and will not bear these
costs, partly because they cannot be sure to reap the fruits and partly
because these fruits lie so far in the future

--

August 4, 2013 3:17 pm

A much-maligned engine of innovation

Review by Martin Wolf

A brilliant exploration of new ideas in business argues that government is
behind the boldest risks and biggest breakthroughs

The Entrepreneurial State: Debunking Public vs Private Sector Myths, by
Mariana Mazzucato, *Anthem Press, RRP£14.99, RRP$18.95*


Conventional economics offers abstract models; conventional wisdom insists
the answer lies with private entrepreneurship. In this brilliant book,
Mariana Mazzucato, a Sussex university professor of economics who
specialises in science and technology, argues that the former is useless
and the latter incomplete. Yes, innovation depends on bold
entrepreneurship. But the entity that takes the boldest risks and achieves
the biggest breakthroughs is not the private sector; it is the
much-maligned state.Growth of output per head determines living standards.
Innovation determines the growth of output per head. But what determines
innovation?

Mazzucato notes that “75 per cent of the new molecular entities [approved
by the Food and Drug Administration between 1993 and 2004] trace their
research ... to publicly funded National Institutes of Health (NIH) labs in
the US”. The UK’s Medical Research Council discovered monoclonal
antibodies, which are the foundation of biotechnology. Such discoveries are
then handed cheaply to private companies that reap huge profits.

A perhaps even more potent example is the information and communications
revolution. The US National Science Foundation funded the algorithm that
drove Google <http://www.ft.com/topics/organisations/Google_Inc>’s search
engine. Early funding for
Apple<http://markets.ft.com/tearsheets/performance.asp?s=us:AAPL>came
from the US government’s Small Business Innovation Research Program.
Moreover, “All the technologies which make the iPhone ‘smart’ are also
state-funded ... the internet, wireless networks, the global positioning
system, microelectronics, touchscreen displays and the latest
voice-activated SIRI personal assistant.” Apple put this together,
brilliantly. But it was gathering the fruit of seven decades of
state-supported innovation.

Why is the state’s role so important? The answer lies in the huge
uncertainties, time spans and costs associated with fundamental,
science-based innovation. Private companies cannot and will not bear these
costs, partly because they cannot be sure to reap the fruits and partly
because these fruits lie so far in the future.

Indeed, the more competitive and finance-driven the economy, the less the
private sector will be willing to bear such risks. Buying back shares is
apparently a far more attractive way of using surplus cash than spending on
fundamental innovation. The days of AT&T’s path-breaking Bell Labs are long
gone. In any case, the private sector could not have created the internet
or GPS. Only the US military had the resources to do so.

Arguably, the most important engines of innovation in the past five decades
have been the US Defense Advanced Research Projects Agency and the NIH.
Today, if the world is to make fundamental breakthroughs in energy
technologies, states will play a big role. Indeed, the US government even
helped drive the development of the hydraulic fracturing of
shale<http://thebreakthrough.org/blog/Where_the_Shale_Gas_Revolution_Came_From.pdf>rock.

Mazzucato insists this involves more than state support of research and
development, vital though that is (in the US, the government funds a
quarter of R&D and nearly 60 per cent of basic research). But the state is
also an active entrepreneur, taking risks and, of course, accepting the
inevitable failures. America has been a developmental state since the days
of Alexander Hamilton. Indeed, the nation’s recent role as the premier
promoter of fundamental innovations owes as much to its state as to the
get-up-and-go of its entrepreneurs. Germany’s failure to remain at the
forefront of today’s new technologies, in contrast to before the second
world war, may be down to the limited role now accorded its state.

Mazzucato loves puncturing myths about risk-loving venture capital and
risk-avoiding bureaucrats. Does it matter that the role of the state has
been written out of the story? She argues that it does.

First, policy makers increasingly believe the myth that the state is only
an obstacle, thereby depriving innovation of support and humanity of its
best prospects for prosperity. Indeed, the scorn heaped on government also
deprives it of the will and capacity to take entrepreneurial risks.

Second, government has also increasingly accepted that it funds the risks,
while the private sector reaps the rewards. What is emerging, then, is not
a truly symbiotic ecosystem of innovation, but a parasitic one, in which
the most lossmaking elements are socialised, while the profitmaking ones
are largely privatised. Do ordinary taxpayers understand that their taxes
fund the fundamental innovations that drive their economy?

This book has a controversial thesis. But it is basically right. The
failure to recognise the role of the government in driving innovation may
well be the greatest threat to rising prosperity.

-------------------------------------------

*The writer is the chief economics commentator of the Financial Tim*



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