The Entrepreneurial State

Debunking Public vs. Private Sector Myths

When I was first getting interested in Cognitive Science, I started reading “How to Build a Brain” by Chris Eliasmith. By the end of it, I felt biologically plausible modelling was hugely important for the advance of Cognitive Science. I also knew this feeling was misleading given I had no familiarity with the argument landscape. Why wasn’t everyone else doing biologically plausible modelling? Why were they still using their seemingly inferior frameworks? It took me three years, a conference, part of my master’s degree, more than a hundred questions on CogSci.SE, multiple instances of soul-crushing intellectual humiliation and multiple blog posts to figure out satisfactory answers to those questions.

And now, after reading “The Entrepreneurial State: debunking public vs. private sector myths” by Dr. Mazzucato, I feel the same way, but I don’t have three years to dedicate to it’s investigation.

The central thesis of The Entrepreneurial State is that government funded research drives national economies more than shareholder or venture-capitalist investment. This contradicts common knowledge, wherein venture capital is percieved as bringing innovation to market and thus driving the economy. Whereas the government is seen as clueless and wasteful.

Mazzucato argues the greatest driver of an economy is the creating foundational technological innovations and bringing them to market. Furthermore, only the governement is able to fund foundational technological research. The government has this unique capability due to it’s size, which allows it to absorb risk and pursue long-term goals in ways that venture capital and industry is unable. This governmental investment is done via funding organisation and developmental banks such as DARPA, NIH and ARPA-e. Examples of countries currently doing this successfully are Germany and China.

Mazzucato gives multiple examples of the importance of basic research being funded by the government. Specifically, the IT revolution, drug development and the Green revolution.

The section on the IT revolution focuses on Apple and how every aspect of their products, including integrated circuits, small form-factor hard-drives, touch screens, and the software behind Siri, were funded by government initiatives. Consequently, Apple’s “innovation” lies in synthesizing products after all the hard research has been done.

The Green Revolution section more generally gives a tour of various attempts at solar/wind energy. It focuses on how government support differentiated companies (Vestas, Kenetech and Tesla) who fell versus those who succeeded after temporary setbacks.

Given the government is a core driver behind these successes, it follows it should also be at least a partial benefactor. However, shareholders typically extract the most value. Furthermore, Mazzucato argues the taxation reforms put forth by Piketty are insufficient to reclaim value from shareholders given the ease of tax evasion. Consequently, the government must tax the use of the technologies it creates via liscencing.

Counter arguments

Most of the counter-arguments I’ve found boil down to:

• The effect of “crowding out” needs to be taken into greater account. Basically, R&D personnel are a finite resource and government funding consumes the supply of talent unproductively compared to the private sector. This ties interestingly into the idea of there being no shortage of STEM graduates, but a glaring shortage of competent people.

• A statistic was mis-interpreted in an argument in the book

• The critic didn’t read the book, but doesn’t like what it’s implying. Consequently, instead of critique the arguments, they’re going to argue semantics to death.

Links to well thought-out criticisms, particularly in peer-reviewed journals, would be appreciated.

Overall, the book is masterfully written, but it raises more questions than it answers. What does a good developmental bank look like? Why are the DARPA folks so good at determining when to pull out of a bad investment? How does a government know when it has committed sufficient amount of funding? How does a government know if the distribution of spending is adequate? Can all of these goals be accomplished transparently? When are shareholder buy-backs reasonable and not a sign of a dysfunctional economy?

I supposed my inability to answer these questions is due to the fact I am neither a politician, nor an economist. However, recommendations for further reading to answer these questions would be appreciated. Until then, you’ll probably be finding me on Economics.SE in the near future.

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