Book Review by Mark Langhammer
The Entrepreneurial State: Debunking Public Vs. Private Sector Myths
Mariana Mazzucato, 2013, Anthem Press, ISBN 978-0-85728-252-1
The Labour Party under Miliband and Balls appears to follow a low risk, ’don’t scare the horses’ economic strategy in favour of ‘playing the political game’ – responding to daily micro-movements in the 24 hour news cycle, to focus group feedback, and aiming to ‘triangulate’ its way back to Downing Street. Miliband’s Labour is gambling on inertia, gambling that the Tories fail to generate a consistent return to economic growth. But with the Tories using ‘Help to Buy’ to create another mini-bubble in the South East, and with the City getting back to ‘business as usual’ on the speculative financial front, a winning Conservative economic strategy may, just about, be electorally plausible. Labour can’t afford ‘more of the same’. Labour needs to be bolder.
In the midst of this pitiful, inadequate Labour economic narrative, totally lacking in ambition, self-belief or ‘real-life’ punch or traction, a body of mainstream, centrist, and centre-left economic thought has been developing, setting out a solid economic platform – an architecture of what needs to be done.
Labour Affairs reviewed the Elliot & Atkinson analysis “Going South” in the last edition. Ha-Joon Chang’s 2010 book “23 Things They Don’t Tell You About Capitalism” makes a similar analysis. The centre-left Compass group have set out a comprehensive “Plan B” (see http://www.compassonline.org.uk/ ), whilst Richard Murphy, John Christianson and others have mapped out the reform agenda for fair taxation. Now, The Entrepreneurial State by Mariana Mazzucato represents a further worthwhile contribution favouring a more radical economic architecture for innovation and growth.
Mariana Mazzucato was born in Italy and brought up in Princeton US, and has had a varied career – see http://www.marianamazzucato.com/ She specialises in industrial economics and the economics of growth as R.M.Phillips Professor in the Economics of Innovation at the University of Sussex (SPRU), Visiting Professor in Economics of Innovation at the Open University (UK), as Economics Director of the ESRC Centre for Social and Economic Research of Innovation in Genomics (Innogen); and as Scientific Coordinator of a 3 year EC FP7 project on Finance, Innovation and Growth (FINNOV, 2009-2012). It would appear that Lord Adonis, the former Blairite Minister, is amongst a coterie of influential supporters. He was a speaker at the launch event of this book – but don’t let that put you off – as Adonis will soon report on his labour policy commission on industrial development. Look there to see if Mazzucatto’s ideas find their way beyond the timidity of the current Labour front bench approach.
An Active Entrepreneurial State: Mazzucato argues that the economic crisis is unlikely to be overcome by a combination of austerity and enabling banks to return to ‘business as usual’ – that the crisis requires responses as bold as Bretton Woods or the post war welfare state and full employment consensus. She argues for an active role for the state in developing innovation and new products, a role well beyond that set out by the neo-liberal strictures of ‘market failure’ arguing that innovation requires time and patience, including patient finance. A confident state, capable of planning to put man on the moon, is central to the innovation process. The US, for instance, is a most interventionist state in innovation. A key part of DARPA’s secret (the agency which invented and commercialised the internet with the US Department of Defence) has been its ability to attract talent and create excitement through its various missions. Other visionary state investments cited include interventionist State investment banks in China and Brazil. In Brazil, the state investment bank, BNDES allows for bold risk taking in new sectors like biotech and clean-tech to occur.
Mazzucato tackles the narrow view of the state (as ‘crowding out’ entrepreneurial activity) developed by Friedman, setting out a view that “there are in practice, many parts of the risk landscape where private business fears treading and government leads the way.”
“Major socio-economic challenges such as climate change and ageing require an active State making the need for a better understanding of its role within public-private partnerships more important than ever.”
She argues for a more thoroughgoing understanding (or honest admission) of the division of innovative labour within capitalism. In particular, she argues that the inability of the State to argue its own position as the leading player in innovation and product development over a risk-averse, essentially parasitical, private sector debilitates the State, leads it towards timidity, easily captured by lobbies seeking less regulation or ‘red tape’, more tax breaks or more lobbying seeking public resources for private gain.
How many people, for instance, know that the algorithm leading to Google’s success was funded by a public sector grant from the US National Science Foundation? Or the molecular anti-bodies providing the foundation for biotechnology were discovered in public Medical Research Council labs in the UK?
Evidence abounds of the State’s pivotal role in the history of the computer industry, the Internet, the pharmaceutical-biotech industry, nanotech and the merging green sector. “In all these cases, the State dared to think – against the odds – about the impossible; creating a new technological opportunity; making the initial large necessary investments; enabling a decentralized network of actors to carry out risky research; and then allowing the commercialisation process to occur in a dynamic way.”
Acknowledging this basic understanding within public discourse will help the public awareness that venture capital and the private sector arrive later (15+ years later in the case of bio-technology, nanotechnology and the Internet) after the most important investments made by public sector funds. Who is the risk taker? Mazzucato is clear that “Risk capital is scarce in the seed stage of firm growth because there is a much higher degree of risk in this early stage.” and that, far from venture capital demonstrating the ‘animal spirits’ of capitalism, “Venture Capital funds are concentrated in areas of high potential growth, low technological complexity and low capital intensity, since the latter raises the costs significantly.”
Effects of Financialisation: Mazzucato argues that financialisation of the corporate sector from the 1980s onwards has further stripped away what private sector research and development (R&D) there is. Effectively, private sector R&D had both reduced in scale and in depth with increasing financialisation of the private sector. Whilst reducing R&D, corporations have been increasing their spend to repurchase their own shares – in tawdry “buy back” schemes aimed at boosting stock prices which will directly increase top executive pay and rewards linked to stock prices. She argues that this sort of ‘free-riding’ does not create value, but facilitates its extraction – that whilst the state increases R&D, the private sector reduces R&D in favour of short term rewards for shareholders and senior executives making for a parasitic relationship between State and private sector. Share buybacks are increasing in big Pharma and, depressingly, in the clean technology sector.
Mazzucato argues therefore that “we need to take care to build the type of partnerships which increase the stakes of all involved, and which do not lead to similar problems that financialisation of the economy led to: socialisation of risk, privatisation of reward.”
The Apple case study – sharing the rewards? There are valuable chapters on Wind and Solar Power, the green revolution and one particularly interesting chapter – The State behind the i-Phone -.on the development of the Apple corporation – which focusses not just on the development of a mass market in personal computing and electronics – but on who takes on the risks and who reaps benefits from the rewards. “What is uniquely apparent in the case of Apple however is that the company’s executives and shareholders are not the sole (nor the largest) bearers of risk that was part of developing innovative products such as the i-Pod, the iPhone and iPad. Rather…the success of these technologies is overwhelmingly due to the foresight of the US Government in envisioning radical innovation in the electronics and communications fields going back to the 1960’s and 1970’s.”
Mazzucato stresses that Apple incrementally incorporated in each new generation of iPods, iPhones and iPads technologies that the state sowed, cultivated and ripened – and the point is that “Apple understood this game: creatively pioneering the field of consumer electronic dreams by stepping up to the plate and playing off the positive externalities left behind by the government’s heavy hitters.”
“Apple is far from the ‘market’ example it is often used to depict. It is a company that not only received early stage finance from the government (through the SBIC programme) but also ‘ingeniously’ made use of publicly funded technology to create ‘smart’ products. In fact there is not a single key technology behind the iPhone that has not been state funded. Besides the communications technologies, the iPhone is smart because of features such as the Internet, GPS, a touch screen display and the latest new voice activated personal assistant, (SIRI)….the fact that the iPhone/iPad empire was built on these state funded technologies provides a far more accurate tale of technological and economic change that what is offered in mainstream discussions.”
Mazzucato goes further – that our failure to explain and stand-up for the positive, pioneering role of the State allows the public narrative to be dominated by self serving ‘Private good, Public bad’ rhetoric, leading to a parasitic relationship in terms of risk and rewards. These are all present in the Apple case study, with Apple under the spotlight on aggressive tax avoidance and criticised for its offshore production and manufacturing strategies. Outsourcing is a key strategy with less than 20% of jobs created in the enterprise directly employed by Apple. Extreme inequities in pay rewards within Apple as well as labour disputes in Chinese production facilities are rarely scrutinized.
Apple sets up various subsidiaries in corporate tax havens such as Luxembourg, Ireland, the Netherlands and the British Virgin Islands in order to shuffle profits around. A complicated web of companies and subsidiaries has the net effect of reducing Apple’s obligations to pay tax, most notably in the US where the public purse took the risk to develop all the technologies that Apple has so skilfully exploited. The balance of risk and reward is never better demonstrated by Mazzucato in this fascinating case study.
Mazzucato compared the ‘Old Economy’ Business model which dominated the US in the immediate post-war era which was “characterised by stable employment opportunities, in hierarchical corporations, with generous and equitable earnings, subsidized medical coverage and substantial defined-benefit pension schemes upon retirement.” As compared to ‘New Model’ business models widely adopted by most new technology companies had “no or low commitment on the part of corporations to offer stable employment, skill formation and predictable and rewarding careers. On the other hand, employees not only do not expect to develop a life-long career in a single enterprise, but highly value the benefits of inter-firm mobility.”
Who dares wins? The final chapters of Mazzucato’s book consider the need to socialize risk, but also achieve for the public a better return. “In finance, it is commonly accepted that there is a relationship between risk and return. After the financial crisis, many have rightly noted that finance has increasingly privatised the rewards of their activities whilst socialising the risks…The bailouts highlighted the financial sector as a potentially parasitic drain on the economy that we are forced to accept.”
“In new economy sectors, companies like Apple reap the benefits from State funded technologies, as well as state funded risk finance, and then pay hardly any tax which could be used to fund future ‘smart’ technologies. Where is the future in such a system of socialised risk and privatized rewards?”
Where indeed? Mazzucato goes on to propose a fairer risk framework – market intervention and shaping to reflect better the actual risks and rewards, a framework which includes fair taxation, robust tax collection, royalty extraction by the state through golden shares, development banking with income contingent loans.
Mazzucato concludes with three broad principles:
First, that it is not enough to talk of an entrepreneurial state, there is a need to build it with concrete, stable institutions and organisations in government able to create long-run growth strategies and to embrace or ‘welcome’ the inevitable failure that this will, on occasion, entail.
Second, if the State is being asked to engage in the world of uncertainty, with inevitable wins and losses, then it is only right that when the ‘wins’ arrive there is also a return commensurate to cover the losses/downside.
Third, by focussing on the role the state plays in the bumpy risk landscape, acting actively and courageously rather than just ‘de-risking’ the private sector or correcting market failures, the need is for informed balanced policy directed towards all actors in the innovation ‘eco-system’.
Labour “too frit”! Oh, but for a Labour spokesperson who could “step up to the plate” and outline, in plain language, such a bold, balanced agenda! Any remotely adequate Labour economic strategy will contain elements set out in Mazzucato’s book.
These include the reform of banking, patient finance through industrially focussed banking and regional banking; reform of company law to stress wider societal obligations than mere shareholder returns; rebalancing the share of GDP going to wages as compared to profits; implementation of fair taxation; an active, interventionist, industrial strategy; the development of “Green New Deal”, measures to develop industrial democracy with active tri-partite sectoral bodies taking a strategic role in economic development and in workforce planning, skills and apprenticeships.
These are basic, rudimentary, building blocks implicit in economic recovery in the UK. Mariana Mazzucato does us all a service in setting out an ambitious, necessary and centrist role for an active state. Will it go heeded? On current evidence, and to use Mrs Thatcher’s term, the Miliband and Balls axis is too “frit” to set out a populist, workaday, economic narrative as suggested by Mazzucato – their current response isn’t remotely of the scale (or direction) required to tackle the collapse of Anglo-Saxon financialised capitalism.