The entrepreneurial state: more shoving, less nudging

What is the role of the state?

Since conservative ideology gained ascendancy in the 1980s, most people tend to regard the state as a sluggish, unwieldy and overbearing beast which often gets in the way of private enterprise and creativity by imposing higher taxes and burdensome regulation. 

Those advocating for a minimalist role for the state say that the growth of debt has caused the crisis in the EU, which makes the need for austerity paramount in rebuilding its fortunes.

Mariana Mazzucato, professor of economics at Sussex University has recently published a book called the Entrepreneurial State. The title will sound like an oxymoron especially to those steeped in the tradition of Adam Smith’s Invisible Hand and David Ricardo’s theory of Comparative Advantage in which the market not the state holds primary importance in the economic life of a nation.

Under this rubric of market ideology, the role of the state is to get out of the way of business. State investments are frowned on for “crowding out” private investment. Any type of intervention in the free market only leads to distortions that prevent capital from flowing to those sectors which deserve them the most. 

Today even the task of countercyclical spending when business and consumer sentiment collapses espoused by the Keynesian school of economics is challenged by pro-austerity advocates who question the effectiveness of stimulus measures.

The only place where the importance of the state is acknowledged in promoting growth and industrial diversification is in the developing and emerging world. But even there, the role of the state has been confined to that of a ‘facilitator’: nudging businesses along, addressing ‘market failures’, reducing transactions costs like corruption, providing basic infrastructure, the protection of property rights and the rule of law.

In the advanced economies of the West, where the state is relatively corruption free, where market institutions are mature and where economies operate on the edge of the technological frontier, there does not seem to be any role for the state except in providing tax credits for innovation, improving human capital and supplying basic research and development.

In popular culture, prestige is given to the entrepreneurial class, those rugged individuals who take risks, great visionaries that have given birth to new industries. The stories of Google, Apple and Microsoft are seen as shining examples of this. These are popular myths that Mazzucato’s book seeks to dispel.

Through programs funded by obscure agencies like DARPA, ARPA-E, the National Science Foundation, the National Institute of Health and the Small Business Investment Company, the US government developed the technological building blocks with which these companies built their innovative products. Far from being a bastion of the "market friendly model", the American state has in fact conducted industrial policy by stealth, according to the book. 

Far from being risk averse, these state actors showed the capacity to take risks, support nascent industries, took the role of “patient finance” as opposed to private venture capitalists who came in late in the piece and piggy backed on the wave of technology that the state generated. 

But instead of supporting the entrepreneurial state, what many iconic companies that have benefited the most from it have done is seek to diminish it by availing of tax loopholes.

This leads to another key theme of the book: the socialisation of risk and privatisation of reward deepens inequity in society. A certain amount of wealth creation and concentration is a natural consequence of disruptive innovation which gives rise to massive profits or rents. 

Although the state did much of the heavy lifting in producing general technologies which became the basis for such wealth, it is unable to reap a share of the rewards from it.

There are a number of policy implications presented by Mazzucato including the need for new risk-reward models in public private partnerships. She proposes income contingent loans as a possible alternative, allowing the state to be rewarded when the start-ups it funds become profitable. 

A model that would allow the state to recover its losses from some bad investments by making a killing from a few good ones sounds sensible.

The growing number of sovereign wealth funds in advanced, emerging and developing economies presents an opportunity for entrepreneurial states to fund the next round of innovation. For advanced economies, this would allow them to get out of the productivity rut that has been noticed since the 1990s. 

For emerging economies, it allows them to avoid the middle income trap by moving up the value chain. For developing countries, it would help them “catch-up” in the technological race.

Far from being an inhibitor of growth, the state according to Mazzucato provides the impetus for it:

And this is the punchline: when organized effectively, the State's hand is firm but not heavy, providing the vision and the dynamic push (as well as some 'nudges'- though nudges don't get you the IT revolution of the past, nor the green revolution today) to make things happen that otherwise would not have...This requires understanding the State as neither a 'meddler'nor a simple 'facilitator' of economic growth. It is a key partner of the private sector - and often a more daring one, willing to take the risks that business won't.