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.