Government, Not the Private Sector, Leads Innovation

This video, in which economist Mariana Mazzucato discusses her book The Entrepreneurial State, explains how most of what you think you know about innovation is wrong. Innovation is not led by the private sector; it lacks the long term horizons and risk appetite to do so. Instead, the most innovative countries and regions have the state playing a very active role, not just in funding basic research or making sure markets work properly, as in limiting anti-competitive practices that can stymie new entrants. Instead, the state plays an active role along the entire value chain. One result of the wide-spread misperception that the private sectors deserves most of the credit is that businesses are able to skim a disproportionate level of the returns for themselves.

From the introduction to this interview with Marshall Auerback at the INET website,

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.

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45 comments

  1. mikkel

    Not only is government essential for basic research and getting through the “valley of death” (which was the purpose of the Tesla loan) but they are often the first customers as well. For all the faults of the military industrial complex and the VA system, they are responsible for the successful commercialization of countless technologies and medical procedures by shouldering higher risk than the market/institutions will bear. The business cases only make sense after the kinks have been worked out and efficiencies of scale achieved, thanks to these early contracts.

    The idea that government should act more like business and be driven by short term metrics is a huge risk to society’s ability to create new markets, and without that, the private sector “heroes” will soon find themselves without much ability to “innovate.”

  2. StevenT

    Most innovations occur during war period. That settles the question of government vs private sector.

    1. Yves Smith Post author

      Um, please explain all the innovations that came out of the space race, or the Internet, which was not a war project, or America’s substantial, ongoing funding of pharmaceutical research, which is the big reason the US dominates that business globally.

      1. Lindsay Berge

        Surely the space race was an explicitly Cold War phenomenon and involved extensive military concerns and the reuse of missile technology.
        Equally the origin of the internet was a DARPA (Defense Advanced Research Project Agency) initiative to provide networking for the U.S. military which would be survivable in the event of nuclear war.
        Finally, the US pharmaceutical industry of 15 large corporations in the 1950s evolved from hundreds of small firms before 1940 ‘after the Office of Science and Research Development (OSRD), a bureau of the War Production Board for the US Military, received permission to enlist a series of firms in the production of penicillin for the war effort’.

        1. Yves Smith Post author

          Sorry, you are straw manning. The argument was that innovations came out of war, for instance, like the Manhattan project. The Cold War was not a hot war. Tanks , by contrast, came out of a hot war. They were invented during World War I. The video, if you’d bothered listening to it, also discusses Federal funding for alternative energy. That’s happened substantially after the fall of the USSR. Please explain how that fits your thesis.

          1. jayray

            Yves – No “straw manning” here (interesting gerund though). StevenT argued that innovation is primarily led by the government and used “war” as an example – or at least that’s the way I understood it. Lindsay spelled out some excellent examples of military funding used to develop defense technologies that are now used in everyday life. Your concept of war seems jilted. Developing weapons while killing Germans equals war innovations; killing millions of southeast Asians, arming jihadists to fight Russians, etc… while developing strategic WMDs (and associated defensive capabilities) to destroy the world does not equal war innovations?

          2. digi_owl

            If you are not in a war you prepare for the next war.

            The cold war was a arms race of both nuclear and conventional weapons under the concept of MAD.

            Meaning that either side was trying to create weapons that would destroy the others faster, so that they would have the least losses, and so make the other side reluctant to shoot first (or give up if you are already in a shooting war).

            If one want to be bleak about it, one can consider Vietnam and (80s) Afghanistan massive live fire exercises. This to pit the latest of both sides against the other without going to a full on confrontation.

            This much like how in the past armies would prance and posture across from each others, and then send out champions that would fight so that the larger armies didn’t have to clash.

        2. EmilianoZ

          I’ve been wondering about the Google self driving car and if it’s has been partially financed by DARPA (Google has a history of collaboration with DARPA according to the Assange article in the links a few days ago). After all, a self driving car can be used as a drone and it’s not hard to imagine the technology being adapted to a self driving armored vehicle patrolling the streets of some rebellious town (Ferguson comes to mind).

          1. digi_owl

            Lets not forget that Google scarfed up a bunch of robotics companies recently, including Boston Dynamics. The very company that has for years been working with DARPA etc to develop robotic pack mules.

        3. EmilianoZ

          I’ve been wondering about the Google self driving car and if it’s has been partially financed by DARPA (Google has a history of collaboration with DARPA according to the Assange article in the links a few days ago). After all, a self driving car can be used as a drone and it’s not hard to imagine the technology being adapted to a self driving armoured vehicle patrolling pacifying the streets of Fergu some unruly town.

      2. rusti

        This is something near to my heart as a young engineer. When I was finishing my bachelor’s degree, several large defense contractors were willing to fly me across the country and put me up in a nice hotel to interview for jobs working on various weapon systems. It’s a terrible tragedy that rather than spending the resources on something like space exploration, renewable energy or low-carbon transport we have doubled down on ever more sophisticated machines to kill impoverished Middle Eastern peasants and suppress dissent at home. Something a historian in the distant future would find abjectly absurd.

        I use technology and methods from NASA and the European Space Agency daily in my work (not in the defense or space sector), and there’s no reason technological innovations couldn’t continue to filter down from these sorts of organizations instead of getting bread crumbs from the highly secretive military industrial beast.

        1. digi_owl

          Renewable energy may well come out of fighting abroad. This because right now the most vulnerable part of a expeditionary force is the supply line.

          I Think the US Navy is investigating creating jet fuel from sea water for instance, so that the carriers don’t need that umbilical of tankers following them around. Similarly the US Army is looking into solar and biofuels (like say from latrines) for powering bases. Heck, i think right now a ever growing percentage of a soldiers field kit is made up of batteries. This for things like radios and night vision.

    2. Moneta

      Because that is the time when people are willing to accept risk!

      Right now a large chunk of the population with most of the wealth is nearing retirement and only wants guaranteed returns.

      1. Moneta

        Right now we are burning the furniture to heat the house… share buybacks and debt to increase dividends.

  3. Moneta

    This is why I believe Canada needs to be more socialist to survive. Economies of scale are limited and Cdn businesses are risk averse. We need to pool our resources and cooperate if we want to get anything done.

    That’s why the US is not doing many countries a favor by forcing its one-trick pony economic model on everyone.

    1. MRW

      Canada’s economic model is the same as the US. Both have sovereign non-convertible currencies. Both have floating exchange rates. Canada issues its own currency. So does the US. What Canada has that the US trashed is a regulatory system that would not permit the chicanery that produced the financial crisis of 2008 here.

      Another difference is that the Bank of Canada’s 50,000 shares are owned by the Ministry of Finance. The US Federal Reserve’s shares are owned by individual banks in each of the 12 districts, which was done in 1913 because of the American fear then of “socialism.”

  4. Xelcho

    This is a great post, thank you.

    Dean Baker has addressed this issue at length in a few different reports. He has spent some time on debunking the whole big pharma song and dance.
    http://www.cepr.net/index.php/clips/dean-bakers-publications/

    As one who abhors propaganda, advertising, marketing and sales to the same degree as Noam Chomsky, as it makes anything possible and I think that this is one of those things. Particularly when there are so few studies or mentions of this in the MSM but a continuous stream, check that, a Niagara Falls level of flow, of bullsh!t ads supporting this trope. This garbage is very effective in persuading the ignorant to join the Tea Party etc..

    Write a book as Piketty did on inequality to expose it and watch all the hand-wringing you can stomach… Any one serious about this already knows the score.

    We are discussing a feature not a bug/problem of our republic-CAPITALISM system.

  5. Jamie

    Public risk, private profit… of course. Mazzucato is very strong (yea!) placing the correct emphasis on raising the question of what it means to have an entrepreneurial state… but whoa!…. someone needs to give her a short description of monetary sovereignty. The obvious way for the public to ‘profit’ from socialized risk is to retain ownership (through the public domain) of the results of that risk. The myth that needs to be exploded is the myth that companies will not introduce new products if they can’t own the intellectual property behind the products. That may be true in the system as it is now set up. But it is inconceivable that a growing public domain of technical know-how would sit unexploited under rules that socialized the knowledge. All this talk of taxes and funding is way off the point.

    1. scraping_by

      The myth is that incentives will lead private companies to create the innovations they sell as a competitive advantage. Looking at the real world, most successful companies harvest the experience of others to repackage proven technologies. The second mouse gets the cheese.

      The problem comes when they only strip mine the knowledge base. It’s pure ideology that prevents government from making the gains public. And while Ms. Mazzucato doesn’t say it, keeping the gains private will create an endpoint where that system is doing to break down.

      Making the gains public through taxes vs equity brings up a lot of issues of fairness, liquidity, personal interest, etc. Better a cash-out/cash-in system. But definitely a proper level of cash-in.

  6. rusti

    Her point about Apple “innovations” being almost entirely government work is interesting. In addition to this, most of the gigantic companies like electronics manufacturers, car manufacturers, or even defense contractors are merely systems integrators who are sourcing components from a massive number of suppliers with only limited in-house competence to understand how the different subsystems work in detail.

  7. zephyrum

    The government does not lead innovation, if you look at how it actually starts. Most innovation begins with a crazy inventor somewhere–an individual. Period. He or she is crazy because by definition, the invention is outside the mainstream. Sometimes they are funded by the government, but often they are inadvertently funded by having a bit of freedom in their job, or some idle time in their lives. They attract others who join and expand the vision, and push it towards a concrete form. Later, when it’s safer and more proven, the government and the private sector start playing a role. In this latter phase I don’t doubt that government is more important than the private sector for many or most innovations. But both government and the private sector have a terrible track record for causing the spark of creation. Frequently they suppress it instead. Been there; seen it.

    1. archer

      This is the Hollywood/19th century and earlier version of innovation, and it wasn’t innovation as much as invention. Go read about any major innovation in the 20th century. They typically came about through scientists and researchers collaborating, or at least building on each others’ work.

  8. NOTaREALmerican

    The government “pulling forward” innovation is as “good” as the Krugmanians “pulling forward” demand.
    The real-question is: was society ready for the innovations “pulled forward” by government?
    Tell ya what, let’s go back in time and eliminate the direct and indirect innovations caused by Big-MIC and – then, fast-forwarding back to the future – tell me if society would have been “happier”.

  9. Vatch

    The Internet emerged from the U.S. government’s ARPAnet. One can argue about the relative importance of government and private industry, but the mere existence of the Internet is proof that the government plays a major role as an innovator.

  10. impermanence

    “…economist Mariana Mazzucato discusses her book The Entrepreneurial State, explains how most of what you think you know about innovation is wrong.”

    Thank God some intellectual has the courage to tell everybody why they are right and everybody else is wrong!!

    Somebody needs to dig a very large hole and bury all the assumptions people make without having a clue as to what’s really going on. Only the individual is capable of creative thinking. The group takes this and does what it always does…war, fraud, stealing, etc.

    1. scraping_by

      Be kind to ‘the group’, if you’re talking about the mass of American citizens. They’ve been bombarded with better than fifty years of anti-government, pro-business, anti-peace, pro-empire, anti-cooperation, pro-grasping propaganda in the media, the schools, and political life. Think of it as a plague where the natural immunity gets worn down by continuous exposure.

      Indeed, those who haven’t taken sick are a mystery. In the land of the blind, the one-eyed man is mad.

      1. impermanence

        What groups do [better than anything else] is exploit the greatest fears/desires of the individual. For this travesty alone, any gathering of more than two adults should be looked upon as being highly suspicious.

  11. brian

    Great points.

    I would also point out that the recent fracking revolution is based government research. Government funded researchers developed the technique for horizontal drilling, and entrepreneurs took advantage of this technology to make a lot of money. Note that despite the massive tax subsidies to the big energy companies for ‘exploration’ none of them was involved in this energy revolution.

    You can listen to the story on this podcast:
    http://www.econtalk.org/archives/2014/06/gregory_zuckerm.html

    Amuse yourself as the ‘libertarian’ host ignores the role of the government, while extolling the virtues of entrepreneurs.

  12. Gliftor Draken

    I’m surprised nobody is talking about Stiglitz & Greenwald’s “Creating a Learning Society”. OK, I haven’t read it all myself yet, but there are various videos of Stiglitz lecturing about it. His thesis is that first, productivity enhancements due to learning are far more important than financial capital accumulation in raising standards of living, and second, markets are intrinsically ill-suited to supporting important kinds of learning because they’re based on collecting rents from scarce knowledge rather than encouraging wider dissemination of knowledge. It’s interesting that S & G are doing this from a more or less mainstream economic perspective rather than political economy… maybe someone will listen.

  13. Pelham

    Excellent interview. All that’s lacking is an entirely appropriate degree of towering, all-consuming rage over this positively treasonous practice of letting government innovation go to waste creating ever more concentrated wealth at the utterly undeserving top of the economic pyramid on the backs of taxpayers at the bottom.

    Government innovation is great, necessary and far beyond anything the preening private sector is capable of, and government — and the taxpayer — should reap most of the rewards, not a handful of freeloading bilious billionaires.

    And yet, it appears there’s nothing we can do about it within the sorry confines of our phony, farcical democracy. It’s time for the pitchforks.

  14. ewmayer

    “So how should the government recoup the benefits from the fruits of its research?”

    Um, tax the resulting corporate profits at a fair and non-small-enterprise-disfavoring rate, rather than writing bookshelves’ worth of convoluted loophole-riddled tax laws which allow the big multinationals to engage in endless accounting games and pay effectively zero tax?

    Or is that idea just “too way out there?”

  15. Rosario

    Been clear to me for a while now. Trick is, convincing the USA deep state to devote “limitless funds” to research outside of military applications. It almost cost us a near extinction in the 60s so I’m not entirely sure I’m feeling optimistic about what craziness will fly out of military labs next (or what already has). The benefits may come at some later time, if civilization survives to see it.

      1. Rosario

        Admittedly less facts and more intuition. Though at the large scale it is pretty difficult to distill the facts from culture, politics, and religion. When things are impossible to measure I feel we should look for repeated behaviors and error on the side of caution when making a decision for action. That is all I am implying. There is no single entity vis-a-vis the “deep state”, but there is a single political culture presented at every moment and I have yet to see it behave any differently then it has for thousands of years. Politicians in dissent are milquetoast, and I’m not hoping for their providing our deliverance anytime ever. The onus is on us (commoners) to define our boundaries. I’m uncertain that government as it is currently structured can meet our needs with a purposeful, reasoned design, and I feel it is, in a subsequent form, the only thing that can indefinitely provide our security and health as a species.

  16. AQ

    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.

    It’s called pulling up the ladder so no one can follow in your footsteps.

  17. Tony Wikrent

    The historical role of the U.S. military is crucial in understanding how the US economy developed. So far, almost all the comments are focused on the post-world war 2 era – and furthermore, don’t even mention how the computer and microelectronics industries are really spin-offs from the war work on radar, fire control computers, and integrating the two. For example, Stanford Industrial Park was created by Frederick Terman, who had directed a staff of 850 at Harvard’s Radio Research Laboratory, designing, building and testing jammers to block enemy radar, and tunable receivers to detect radar signals. Terman was deeply impressed with the close cooperation between Harvard and MIT, and the War and Navy Departments, especially the way faculty members were encouraged to apply for and utilize defense research grants. In 1946, Terman returned to Stanford to become Dean of the engineering school. “He introduced salary splitting, where Professors were urged to find a patron, normally the Government, to fund up to 50% of their salary. This provided funds for Terman to increase faculty size and increase the graduate student base.”

    Terman had pursued his doctorate at MIT under Vaneevar Bush. It was Bush, who oversaw the university contributions to the war effort in World War II. It was Bush’s July 1945 report to the President “Science, The Endless Frontier” which laid out the rationale and methods for the post-war collaboration between the government and academia.

    In 1951, Terman’s proposal for Stanford Industrial Park was made reality. The first tenant was Varian Associates, founded by Stanford University alumni to build military radar components. After the war, Stanford graduates William Hewlett and David Packard set up their business in Stanford Industrial Park. That’s the beginning of Silicon Valley.

    Wikipedia notes that “Using money from NASA and the U.S. Air Force, Doug Engelbart invented the mouse and hypertext-based collaboration tools in the mid-1960s, while at Stanford Research Institute (now SRI International). When Engelbart’s Augmentation Research Center declined in influence due to personal conflicts and the loss of government funding, Xerox hired some of Engelbart’s best researchers. In turn, in the 1970s and 1980s, Xerox’s Palo Alto Research Center (PARC) played a pivotal role in object-oriented programming, graphical user interfaces (GUIs), Ethernet, PostScript, and laser printers.”

    The military has historically been the origin of much new science and technology, because the military is always striving to improve its technological capability to impose the nation’s will on someone else through the controlled application of violence. And especially to make sure that “our” means of applying violence is superiors to “their” means.

    But what I think is especially fascinating is the cultural tradition of the military, which encourages service to the nation and to others. This is a radically different cultural tradition than that found in business, which encourages self-aggrandizement and self-enrichment (especially since the 1950s mounting success of the Mont Pelerin Society for the adoption of neo-liberalism). This military tradition is highly conducive to a promotion of the Constitutional concept of the General Welfare. Neo-liberals, by contrast, explicitly attack the concept of the General Welfare as “the road to serfdom” as von Hayek titled his book.

    This cultural superiority of the military over business (and I think you have to call it “superior” when viewed from the perspective of nation building; the disaster in Iraq a decade ago was in no small part the result of the neo-cons rejecting the professional military officer corp’s planning for post-war occupation, and imposing a “free market” imperative instead) was further reinforced by the simple facts of history. Which are: at the beginning of the nation, “…numerous urgent technologically difficult tasks demanded attention: coastal defenses, forts, and fortifications to be constructed; coastal; and interior waterways to be surveyed; lighthouses, public buildings, roadways, bridges, and railroads to be built; tunnels to be bored; canals to be dug; rivers to be dredged; hazards to river navigation to be removed; harbors to be deepened, wharfed, and revetted; and the West to be explored, surveyed, drawn, mapped, and policed…. The only organization with the men having the engineering, technical, and organizational skills to accomplish these tasks was the army, and the only institution capable of training such men was the military academy” at West Point. In fact, up until the Civil War, a significant portion of the nation’s scientific and engineering academics and professionals were trained at West Point: “15 graduates became college presidents or chancellors; Henry Eustis (Class of 1842) became the dean at Harvard, and his classmate George Rains became the dean of Georgia Medical College; 43 became professors of engineering, mathematics, or science at such schools as Columbia, Yale (having established the engineering programs at both Columbia and Yale) [William Augustus Norton (Class of 1831) founded the the School of Engineering at Yale in 1852], University of Pennsylvania, Princeton, and others as far west as the University of Arkansas; Alexander Bache (Class of 1825) was the first president of
    the National Academy of Sciences; Jacob Bailey (Class of 1833) was president of the American Association for the Advancement of Science; and Charles Davies (Class of 1815) was the nation’s leading author of college mathematics textbooks during the 19th century.”

    It was professional Army engineers who surveyed, planned, and supervised the building of the railroads – and railroads were the first trans-continental industrial enterprises. There simply was no one else who had the administrative and managerial skills needed to assemble, supply, and move massive, organized groups of men, often numbering in the hundreds, over distances of hundreds of miles. Logistics and planning is what military officers did as a matter of course. The result was that the management practices of the railroads were imported wholesale from the Army officer corps. ” More than one in ten of the 1,058 graduates from the U.S. Military Academy at West Point between 1802 and 1866 became corporate presidents, chief engineers, treasurers, superintendents and general managers of railroad companies.”

    Of course, once the railroads were spinning off huge profits, the bankers became interested….

    This pattern is repeated in the development of steam power for maritime applications; the development of radio, and the development of aviation.

    1. Rosario

      Here’s to a “pacifist military”. All the discipline, structure, and common purpose without the murder, destruction and instability. A Manhattan project for energy technologies would be a sweet start with the Pentagon acting as the central hub for these public initiatives. This is my vision after the proles march into that multi-layered monstrosity. All the private enterprise geeks would still get their kicks through contracts except they are no longer making the, literally, disposable tools of destruction.

      1. Tony Wikrent

        I’m working on a book; one of the points I want to make exactly your point: we should be smart enough by now to no longer have to rely on “accidents of history” to develop our economies, but can go about developing them with deliberate forethought, informed by an understanding of history. For example, the First Great Depression was finally ended by the industrial mobilization for World War 2, and by unemployment being ended by pulling 14 million people into the armed forces. Why does it have to be an industrial mobilization for war to get us out of the Depression now? We need $100 trillion of new industry and infrastructure built to get out of the era of fossil fuels. Let’s have an industrial mobilization on the same scale as the 1940s, but this time to build a new economy based on renewable energies.

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