The Entrepreneurial State: Debunking Public vs Private Sector Myths By Marianna Mazzucato

 

 

Any book that effectively challenges well established assumptions about how the world works is both an exciting and a disturbing read. Economist Marianna Mazzucato’s book under discussion here, is one such work.

The author, with hard data, establishes a set of simple but very powerful and provocative propositions.

During the   twentieth century, and beyond, consistently huge investments by the US state in scientific and tech research have yielded results that have been the basis of much of the economic growth -- and social transformation -- the US and the world have witnessed. The state has taken serious risks, met with some inevitable failures, but significantly created whole new spaces for human endeavour, transforming both economy and society in the USA and across the world.

All too often, in many industries, the direction of growth is path dependent. The huge historical investments in existing technologies deter any serious attempts to look at new and very different technical directions. The US state has, however, gone where no one has gone before and created new and previously unimagined possibilities.  The critical issue here is that while state investments create the wave, the private sector comes in and surfs the waves for huge profits. It simultaneously debunks the role of the state, asking for lesser taxes, a smaller state footprint and more commercial freedom; but not ‘freedom’ from state funding of scientific and technical research. The relationship tends to be frankly parasitical when ideally it should be symbiotic.

In effect, the risks of investment in scientific and technical research have been socialized while the rewards have been privatized.

The Internet has transformed the way the world works and it was created by the state funded Defense Advanced Research Projects Agency (DARPA).

Most significant General Purpose Technologies have been created by state funded research -- avaiation tech, space tech, Internet tech, information tech and nuclear power technologies, to name some of the more significant ones. Breakthroughs in life sciences, nanotechnology and new ‘green’ technology have come from state funded research as have the major discoveries in the pharmaceutical space. Basic scientific research has been funded primarily by the state with private funding constituting less than 20% of the total.

Between 1993 and 2004  75% of New Molecular Entities (new drugs) were based on research by publicly funded National Institute of Health (NIH) Labs. Big pharma has consistently reduced its basic research funding and focused it on ‘me too’ drugs -- slight variations on existing drugs. The annual budget of the NIH at the time of writing was USD 30 billion. The detailed story of big pharma’s exploitative pricing of drugs developed by state research -- taxpayers money -- given to them free or at minimal cost and out of reach of most taxpayers, is enormously disturbing.

It is interesting to note that the poster boys of the ‘from garage to world domination’ startups, viz Google and Apple, owe their success to state funding , both direct and indirect. Apple put together technologies created by state funded research to give their products their world conquering features and Google developed their famous algorithm with help from state funding. To elaborate a little -- ‘Apple’s success did not hinge on its ability to create new technologies; it hinged on its designing, operational and organizational capabilities in integrating, marketing and selling these low hanging technologies’ created by state funded research’.

The compulsions of profit maximization ensure that even the vaunted Venture Capitalists look at high potential growth, relatively low tech complexity, and capital intensity and a short time horizon to get to IPO status and bank their profits. Only the state has the capacity to look at high risk and high cost investments that may well fail to deliver results.

The policy conclusion from this is that the state needs to share in the rewards from the marketing of technologies funded by it so that it can continue to undertake high risk scientific and technological investments. The irony is that those who benefit the most from state sponsored research, work hard to avoid paying taxes. The ‘shifting’ of profits to tax havens thus deprives the state of resources that would, in the long run, contribute to tech advancement that would in turn benefit the self-same private sector that seeks to minimize its tax outflow.

It is interesting to note that over the years big private research labs have begun to be down sized or simply shut down. The Fortune 500 spent, between 2000-2010, US $4 trillion on share buybacks which benefit corporate bonuses and the relatively small set of share holders and left basic research to state funding ie: the taxpayer. (This applies particularly to Big Pharma and Big Energy.)

The US state, despite its many limitations, has served as an engine of growth and transformation. The knowledge economy that is the basis of continuing US domination of the world economy is underwritten by state funding. Somewhere, perhaps, there is a lesson for a dysfunctional state funded research infrastructure that we are familiar with in India.

The book is seriously worth reading for everyone curious about how the real world actually works.

Happy reading.

The Road to Freedom--Economics and the Good Society - --By Joseph Stiglitz

Nobel Laureate Joseph Stiglitz’s writing is clear, simple, convincing and very disturbing. The principal issues the author addresses are

·      How should freedom, a core human value, be defined

·      What economic and social structures are best suited to ensure freedom and deliver efficiency, equity, sustainability and justice

·      Under-regulated ‘free’ market systems (neoliberal capitalism, in the author’s words) do not ensure freedom and the good society.

 

Considering the last item first, Stiglitz emphasizes, most vigorously and effectively, that the theoretical conclusion that ‘perfect’ markets

 lead to an ‘optimal’ economic situation -- optimality being defined in a particular way -- is utterly irrelevant to the real world and the functioning of markets therein. Markets are imperfect and highly so. Furthermore, conflating theoretical ’perfect’ markets with unregulated ‘free’ markets in the real world  is incorrect because unregulated real world markets  are very, very far from ‘perfect’. The assumptions that underlie and define ‘perfect ‘markets are not to be found in the real world and so the contention that ‘perfect’ equals ‘free’ unregulated markets,  and these are the best possible economic option for any society, is technically false. But we need not enter into the technicalities of economic theory to understand this. My coal burning power plant may be making healthy profits for me and my shareholders, but by polluting the environment it contributes to global warming and disastrous consequences for the weather and the planet.

 

The availability of information is asymmetric and market power is unevenly distributed -- look at big tech, big pharma, big defense, big media, to name but a few. Real world markets when un/under-regulated can spell disaster for society. The financial crisis of 2008 was a direct result of under-regulation of financial markets in the USA, excessive risk taking and poor risk management by financial institutions. Overwhelming, unconstrained greed created an international crisis and the creators thereof -- the banks -- then demanded and got huge amounts of US taxpayer money to bail them out because they could not be allowed to fail. So powerful market players can cause disasters and then be rescued by the taxpayer for the mess they made! The crisis originated in the USA and spread worldwide, but the lesson is for all to learn. Real world markets need regulation and the only regulator can be the state.

 

The need for effective state regulation of markets is further underlined by the evident power wielded by big tech, big pharma and big social media.

Big social media collects data on individual preferences by our actions on the Internet and uses it to target us for whoever is prepared to pay. Moreover, it can also mould mindsets by pushing content that reinforce a perceived tendency or even propagate disinformation when paid to do so, contending that as a content distributor it is not responsible for the nature or accuracy of the content distributed.

The basic contention is that beliefs, tastes and consumer behaviour can, and  are, shaped by media and all too often we are unaware of this. The meta narrative of how society and economy work are all too often  set by big tech and big media platforms. ‘We do not freely choose the lens through which we see the world’.

 

A disturbing revelation in this context is that the most strident advocates of ‘freedom’ from state intervention are those that have benefitted the most from state intervention. Innovations that have driven huge growth and attendant profits have originated from heavy state investments in basic research—the Internet, the mRNA platform, to mention two major areas. Google, Apple and Tesla all benefited from state financial assistance too!

The matter has been brilliantly summarized in the phrase ‘socialized risk, privatized profit’ by economist Mariana Mazzuoato in The Entrepreneurial State (see my forthcoming blog).

 

This brings us to the vexed question of freedom and its definition. Freedom from want, freedom from fear, freedom from exploitation (in effect from injustice) and freedom to be able to live up to one’s full potential as a human being are some components of freedom that are undeniable. But freedom has tradeoffs -- one person’s freedom can be another’s unfreedom. The freedom that the first version of the US constitution promised was for rich, white men, some of whom were slave owners! Freedom for whom, and at whose expense, has to be worked out. A balance between individual freedoms and restraints is imperative and this requires collective action—a proactive welfare state that counterbalances the inequities of imperfect markets and corrects undue concentration of political power that inevitably results from concentration of wealth characteristic of imperfect markets. The ‘invisible hand’ can only do so much; the rest has to be done by the state. Adam Smith, incidentally, also qualified the virtues of the invisible hand and underlined the dangers of concentration of economic power. But this last is too often forgotten.

The author, having been an advisor to the US President and Chief Economist of the World Bank, is well versed with economics as practiced in the real world. In this context, he underlines the imbalance and inequity in international agreements on trade and investment. He emphasizes that agreements between unequals makes for unequal and exploitative agreements! The IMF and the WTO are significant examples of institutions responsible for such agreements internationally. And these are not just assertions by a ‘guru’, he backs them up with examples relating to subsidies, tariff structures and taxation rules, all of which favour the developed nations.

 

As we read Stiglitz we realize that his primary focus is the US economy and polity. Nonetheless, the lessons from his study do have universal validity and hence are of great interest to the ‘developing world’.

The alternative to ‘neoliberal capitalism’ that Stiglitz suggests is Progressive Capitalism in which the state plays a positive and proactive role. The unbridled greed of unregulated markets is not allowed to destabilize the economy with periodic crises and equity, justice and social protection against the vicissitudes of life is ensured.

 

Stiglitz backs up his views with examples, data and reasoning. It is therefore important to read him without preconceived ideological blinkers. He emphasizes that the proponents of neoliberal capitalism, Friedman and cohorts, assert the significance of ‘free markets ‘ as a religious belief unrelated to reason and established technical economic logic. And he does not repeat that error.

Here lies the final lesson -- ideology based, emotionally charged points of view devoid of reason are not only logically incorrect, but also extremely dangerous for society at large.

Happy reading.

 

Seeing Like a State -- How Certain Schemes to Improve the Human Condition Have Failed ------James C Scott

 

Strong states have authoritarianism in their DNA and ruling elites -- political, administrative, technical and academic -- suffer from hubris. When this is combined with a ‘high modernistic ideology’— technical ‘experts’ know best and the masses and their experience and knowledge is largely irrelevant and obsolete -- and an incapacitated civil society, the stage is set for large grandiose schemes of socio-economic reengineering.

Such schemes often fail because they are ill conceived by ‘authoritarian high modernist states in the grip of a self-evident (and usually half baked) social theory’, formulated by experts with little knowledge of ground realities and their complexity and ruthlessly implemented by a ‘politicized authoritarian bureaucracy’. In effect ‘the progenitors of such plans regard themselves as far smarter and farseeing than they really are and, at the same time, regard their subjects as far more stupid and incompetent than they really are.”

But we have started with the conclusion and need to backpedal to get to the beginning.

Anthropologist and political scientist James Scott of Yale begins his remarkably disturbing book by establishing that as states gather the strength they need to expand their capacity for intervention in the socioeconomic entity that they govern. To create capacity, they have to make society and economy ‘legible’. They have to simplify, standardize and homogenize a complex, diverse reality to focus on the issues they want to tackle, and this necessitates a degree of ‘tunnel vision’. The author gives fascinating examples of how simplifications occur to facilitate ‘taxation, conscription and prevention of rebellion’ -- the immediate requirements of a strong state seeking direct control over its people instead of indirect control via feudal intermediaries. Systems of land tenure, which are often unimaginably complex in long established agrarian societies, were simplified and standardized to enable stable and growing land revenues (the Permanent Settlement is a case in point here). People, too, had to be made legible: surnames enforced, censuses conducted, language standardized… the list goes on.

Once society and economy are legible, ‘high modernistic ideology’ provides the desire, an authoritarian state the determination and an ‘incapacitated civil society the level terrain’ on which to build newly conceived socio-economic structures. What is far too often left out of all calculations is the complex organic ground reality. And this omission usually proved fatal for the success of the grand centrally thought out plan.

Powerful examples of such disastrous social engineering  are spelled out in detail: Soviet collectivization of agriculture, Tanzanian  attempts to transform agriculture by relocating and reengineering villages, and most interestingly, the creation of ‘scientific forestry’ in  Germany.

In order to efficiently exploit forest resources for financial purposes (maximize timber yields) the German state apparently experimented with replacing organic diverse forest cover with mono cropped (most profitable tree species) strictly regimented forests that could be scientifically harvested. However, diverse forests are resilient while monocultures are vulnerable and fragile. The removal of undergrowth, dead trees and the whole ‘mess’ of an organic and diverse vegetation cover led to declining soil quality and timber yields. The environmental impact on animal and bird species and vegetation was also significant.

An interesting sidebar here -- the British colonial state used German experts to ‘manage‘ Indian forests for revenue maximization too. And in the tropics, diversity of vegetation is far more -- and more significant -- than in temperate climes. The rights of forest dwellers and other people living on the periphery in the forests and the products thereof were, of course, swept aside when scientific forestry became the norm.

Such top-down, expert driven development planning excludes local knowledge and expertise accumulated over generations. The experts are really not very knowledgeable at what they pretend they know and the end results are far from satisfactory.

This argument, when examined in the context of modern development planning is disturbing in the extreme. Economists are hailed when they shed light on how the processes of poverty work, but the irony is that the self-same economists are also charged with planning for poverty removal -- and they’ve been doing it long before they understood poverty. Of course, none of the experts have ever been poor themselves or even lived amongst them!

Administrative convenience, expert ignorance and political ambition-cum-arrogance determine the direction and details of development plans and perhaps account for their rather dismal progress in most post-colonial economies.  

The author does offer some commonsense rules for development planning:

Take small steps because consequences are not always clear

Ensure reversibility because irreversible interventions have irreversible consequences

Plan on surprises

and

Plan on human inventiveness at all levels

Do not plan for abstract citizens but real ones in a particular socio-economic -geographical context.

Develop institutions that are multifunctional, plastic, diverse and adaptable.

I can imagine a senior administrator looking at such recommendations and setting them contemptuously aside. (He went to Harvard for a three- month course on development! Besides… Yalies …you know..)

Happy reading.

The Narrow Corridor-How Nations Struggle for Liberty by Daron Acemoglu and James A Robinson

 

 

 

It can be safely assumed that human beings and agglomerations of humans that we call societies, aspire for peace, prosperity and liberty. It follows therefore, that an interesting subject for study and debate is the whole issue of how these aspirations can be fulfilled and whether societies have managed to fulfil these aspirations in history, and if not, why not.

The 1640s were very violent and troubled times in Britain and political philosopher Thomas Hobbes responded in 1651 with the book, Leviathan, in which he recommended that people should ’submit their Wills’ to a strong centralized state - the Leviathan - to ensure peace, and presumably, prosperity.

Unfortunately, strong states have a penchant for dominance - despotism is part of a state’s DNA - and liberty, all too often, is quietly abandoned by the powers that be, as neither necessary nor sufficient for social welfare. This very frequently leads to the emergence of a Despotic Leviathan.

The authors argue that between an Absent Leviathan and a Despotic Leviathan there is a very narrow ‘corridor’ in which a strong and effective state can coexist with a capable, well-organized society that can take collective action to keep the state ‘shackled’ and control its naturally despotic tendencies without curtailing its effectiveness in other areas of endeavor.

Theorizing about the nature of great states is interesting, but what is fascinating about this book is the wealth of real world examples that the authors have collated and put forth for our edification.

Athens, around 594 BCE, built a Shackled Leviathan through the efforts of Solon, who was appointed Archon - a kind of executive President - for a year. The authors quote Plutarch as saying,”The rich found him(Solon) acceptable because of his wealth and the poor because of his integrity.” Solon instituted reforms that created a balance of power between the rich and the poor and empowered the common man without crippling the executive capability of the state. Apart from his perspicacity, a significant point in this example is Solon’s integrity - a rare quality in modern day leaders and perhaps the reason for the predominance of Despotic Leviathans rather than Shackled Leviathans in today’s world.

The Chinese state from ancient to modern times offers an example of a Despotic Leviathan, while Western Europe has several examples of  Shackled Leviathans. The role of history is significant here. The fall of the Western Roman Empire at the hands - or swords - of Germanic tribes brought together the centralized hierarchical administrative structures of the Roman Empire and the Catholic Church with their traditions of consensual decision making via assemblies characteristic of the Germanic tribes. The confluence of these two rather divergent societal characteristics enabled the emergence of Shackled Leviathans - effective states constrained by strongly mobilized, well-organized societies. ’Path Dependence’, as the academics call it, makes history important,  though the authors argue that agency - charismatic leaders, cohesive civil society groups et al - is very significant too.

An interesting ,though far too brief, analysis of the Indian situation is worth mentioning here. A fragmented society divided by caste and so at war - or at least in conflict - with itself cannot come together to shackle a strong state. Furthermore, Colonial powers created state institutions, but not any means whereby society could monitor and control them. And post Independence these institutions continued without any significant alteration in ethos.  Thus India, the logic goes, is unlikely to evolve into a Shackled Leviathan. This analysis can be the starting point for a detailed examination of the state in India, the path dependence leading to the Despotic Leviathan and the conditions needed to get to the corridor of the Shackled Levaithan. This is an exercise waiting to be done.

Sub Saharan Africa yields several examples of the Absent Leviathan and Russia and Georgia yield outstanding examples of the Despotic one.

A detailed analysis of the evolution of the American Leviathan is remarkably educative. The limitations of the Constitution, the compromises with the slave owning constituencies of the South, the Bill of Rights and its limitations and much more make for fascinating reading.

The problem and its history have been brilliantly analyzed by the authors .The solutions are, however, hard to pin down. There is no single route to reach the ideal Shackled Leviathan; history matters a great deal; the emergence of charismatic leaders is important…

There is no clear prescription for curing the despotic tendencies of a strong centralized state. Societal mobilization of the non-elite is required, but how can that be achieved in a fragmented, hierarchical society?

We have to look elsewhere for answers.

The knowledge that this book imparts and the questions it raises are worth the effort required to read it.

The book is highly educative and strongly recommended.

Happy reading.

The Lessons of History ---Will and Ariel Durant

Will and Ariel Durant were famous and prolific historians who have written heavy tomes, and many of them, on various dimensions of human history.

The book under consideration here, however, is by contrast a slim volume that they call an essay and is a much easier read. Though a quick and easy read it is, nonetheless, a disturbing one.

To begin with, they sympathize with the assertion that ‘most history is guessing and the rest is prejudice’ and confess that in matters historical we ‘must operate with partial knowledge and be provisionally content with probabilities;…and all formulas should be suspect’.

With this caveat, they proceed to outline the lessons that history has taught them.

Geology and geography have perforce, a major impact on history but technology tends to reduce their significance. Biology and its laws however, continue to apply and exert overwhelming influence on human history.

The process of evolution involves competition for survival and selection of those fittest to do so. This process has hard coded acquisitiveness, greed and pugnacity in the Homo Sapien Sapien and these characteristics have not been diluted over the millennia that (wo)man has walked on earth, and remain the principal drivers of human behaviour and history.

Societies and the states that govern them, are aggregations of human beings and are founded not on human ideals but human nature which has changed very little over the centuries and remains overwhelmingly greedy and aggressive. When we combine this with the fact that nature distributes abilities very unequally, we have history characterized by inequalities in the accumulation of wealth and power and conflicts both in the small and the large. Since inequalities are inevitable as is the resentment they generate, history witnesses cycles of growing inequality and partial redistribution ‘violent or peaceable’.

The core propensities of human beings ensure that social equilibria are fragile and conflicts are an inalienable part of history. While individuals may be constrained by laws, conventions and cultural conditioning states are less constrained and wars are thus a principal characteristic of human history.

Modes of governance do change but despotism in various avatars has been most common. Democracy is very new and very fragile and prone to often morphing into dictatorship.

The one thing democracy could do to validate itself is, the authors feel,is to bring about a degree of equality in access to education and to opportunities for individual growth, both material and cultural.

The harsh conclusion is that ‘we repeatedly enlarge our instrumentalities without improving our purposes.’

Life may not be as nasty, brutish and short as in times past but is still driven by greed and aggression, under a thin veneer of culture, and characterized by inequality and conflict.

A thought -provoking essay well worth the time and effort needed to read it.

Happy reading.