In Defence of Liberty

Driven by data; ridden with liberty.

Rethinking the Entrepreneurial State

Marianna Mazzucato is a professor of economics at the University of Sussex, and has written a book entitled The Entrepreneurial State: debunking private vs. public sector myths. Professor Mazzucato’s argumentation is revealed in an article for The Observer: the state is the source of major innovation, which are then later utilised by entrepreneurs.

Despite her credentials, Professor Mazzucato defines ‘public goods’ in the following manner:

Public goods are goods whose benefits are spread so widely that is hard for business to profit from them (or stop others profiting from them). So they don’t attract private investment.

The actual definition of a ‘public good’ is:

A product that one individual can consume without reducing its availability to another individual and from which no one is excluded. Economists refer to public goods as “non-rivalrous” and “non-excludable”.

Are government R&D expenditures really the key to innovation? (Photo: Robert Scoble)

Are government R&D expenditures really the key to innovation? (Photo: Robert Scoble)

The non-rivalrous and non-excludable characteristics of public goods often generate distinct problems with their production. These are intrinsic characteristics independent of its provision. Radio broadcasts are the prototypical public good, but they also demonstrate that public goods can be produced privately – by tying broadcasts with sponsoring advertisements. Public goods are not merely goods that the public find it desirable to be produced. Even Professor Mazzucato’s definition is inconsistent throughout the article:

When public goods are privatised they lose their “public good” nature: it does become possible to profit from distributing mail, running trains, renting out homes and providing education.

The reason such profits are possible is precisely because postal services, trains, rental properties and education are not public goods. Professor Mazzucato’s definition appears to be that of a public service, buttressed by the assertion that the “public sector must produce public goods”.

In spite of this terminological trickery, Professor Mazzucato’s illustrative arguments should be examined. It is claimed that “all the technologies that make the iPhone so smart were indeed pioneered by a well-funded US government: the internet, GPS, touch-screen display, and even the latest Siri voice-activated personal assistant”. As economist Tim Worstall points out at Forbes, FingerWorks – developed by John Elias and Wayne Westerman – was seemingly not funded by the US government. The state can, of course, hire scientists, researchers and innovators. Entrepreneurs utilise whatever technology and inventions that exist to further their own products and services – regardless of their source.  However, very few of the provided examples could be described as demonstrating necessity, that is, “to make big things happen that would not have happened anyway”. All that has been shown is government can fund desirable innovation. Furthermore, state regulation can stifle and restrain private invention and improvement.

Raw Antipathy

A raw antipathy towards limited government courses through Professor Mazzucato’s article: “To foster growth we must not downsize the state but rethink it”. In 2010, research and development (R&D) by the government sector represents only 0.17% of British GDP, compared to 0.48% by universities and 1.08% by businesses. Since universities receive government funding, the British state supports 32.1% of R&D in our country, whilst domestic businesses maintain 45.1%. Foreign sources provide 16.4% of R&D. Far from being a major expenditure, research and development is simply not a primary function of government. According to Eurostats, there is rather weak correlation between business R&D spending and the combined corresponding expenditures by governments and universities. There is no clear relationship because innovation can fail.

The article is littered with bold and unsubstantiated claims, such as: “While social welfare is relentlessly trimmed and targeted, corporate welfare grows inexorably”. Tax reductions are not welfare, unless income tax cuts for individuals should also be considered. The single data point of high taxes under Dwight Eisenhower along with high US growth is exalted, as ‘proof’ that present taxation is not too burdensome. There is nothing “unclear” about the statement that tax, like government spending, affects incentives. It is insinuated British railways are now worse after privatisation, but this ignores the effect of privatisation on freight travel.

The book is an echo of intellectual exhaustion: private businesses may be the oxygen and heat, but the state is the innovative spark that lights the economic flames. These research and development expenditures are neither necessarily large nor largely necessary. Whilst there are some stories of success, the overall effect of government on innovation should be studied.

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This entry was posted on December 17, 2013 by in Economics and tagged , , .
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