Hamiltonians 1 – Jeffersonians 0: The Entrepreneurial State (Book Review)

Review of The Entrepreneurial State by Mariana Mazuccato

Mazucatto

Although this is a stand-alone review of The Entrepreneurial State I will make occasional comparisons with Life After The State by Dominic Frisby. Both are erudite, well written books, but Mazuccato’s is excellent where Frisby’s is dreadful. By excellent I mean that it works towards truth and economic justice and by dreadful I mean the self-serving opposite. The two books do of course represent opposing ideologies, and I may simply be accused of bias here. Mazuccato heads a chapter with a relevant insight on this: that the US founding fathers were torn between the principles of the activist Secretary of the Treasury Alexander Hamilton and the laissez-faire President Thomas Jefferson who believed that ‘the government that governs least, governs best’. She quotes this brilliant observation: ‘With time and usual American pragmatism, this rivalry has been resolved by putting the Jeffersonians in charge of the rhetoric and the Hamiltonians in charge of policy.’ How else can one explain decades of Tea Party activism to reduce government during which its expenditures as a proportion of GDP continuously increased? To put it another way, the public enjoys the myth of small government and tends to vote for it while the realities of large government remains uncommented upon, hidden from view, and deprived of the best talent. I am not in favour of large government from an a priori position, but observe merely that its spending is large – accounting from anything from 35% to 50% of GDP – and can think of no reason why this is necessarily a bad thing. The spending of government is one aspect of its size while its regulatory role is another, but I am sure of this: that the less the free market is regulated the more unethical it becomes, and that good regulation does not come cheap.

Mazuccato’s outstanding contribution to this debate lies in taking Apple, a poster-boy for laissez-faire, and showing how some of its most lucrative products were deeply dependent on State-funded research and State start-up funding, the outcomes of ‘Hamiltonian’ policy. I would also add that Apple has been greatly enriched by State laxity on taxation, and State laxity on wages and working conditions, the outcome of ‘Jeffersonian’ rhetoric. This is a central case study in Mazuccato’s book, which argues that the risk-taking entrepreneurial State was at the heart of the success of Apple and many other companies – Google’s core search algorithm came out of State-funded research for example – and for which the State does not recoup sufficient reward.

Mazuccato starts her book with reference to Tony Judt’s idea of a ‘discursive battle’ over the welfare state which has seen not only a withdrawal of the State from many areas it was previously involved in, but also a withdrawal or silencing of advocacy for the State itself. Later Mazuccato comments that we need to ‘upgrade, not downgrade, the status of government – and the words and images used to describe it.’ I agree with this. We need to enthuse a new generation with the romance and vision of what good government means and can be, and why good government, as opposed to small or no government, is essential for us to live a good life. However I do not think that the libertarian opposition to big government has a monopoly on fine words and phrases to argue its case; it is more that it is easy to argue for something simple than for something complicated. This is why we need a dozen Mazuccatos to one Frisby. The case for the State needs a dozen finely honed arguments to cover a dozen different functions. While a Libertarian Frisby can sweep away all of the State in one go by appealing to simplicity, each of the complex functions of State needs a book-length exposition to make its argument. In the case of Mazuccato we have a detailed defence of one specific role of the State: its support of entrepreneurial innovation.

Professor Mazuccato holds a chair in Science and Technology Policy at Sussex University, and her book contains carefully-researched case studies showing how State-funded research has been capitalised on by the private sector. Furthermore it shows how risk-taking by the State can be more extensive, longer-term, and more blue-sky than that of private companies. In addition, State capital funding often gives new technology companies, such as Apple, their start in life. Instead of being a drag on private enterprise, or merely there to fix what are called ‘market failures’ Mazuccato shows that the State can be be not only a key partner to the private sector, but also the greater risk-taker. Two classical arguments against the State are deployed by the enthusiast for the pure free market, firstly that Government spending and borrowing ‘crowds out’ the private sector, and secondly that the State is incompetent at ‘picking winners’. I know already from the work of Ha-Joon Chang on South Korea and economists writing on the Japanese economy that the State can be efficient indeed at nurturing enterprise and industry: just think of Daewoo and Sony for example. But in case after case Mazuccato shows that the US – supposed bastion of free enterprise – has provided equally positive State support for some giants of American innovation. It seems that the State, far from crowding out the private sector and failing to pick winners, can spot and nurture highly successful companies. What private enterprise is simply unable to do is conduct sufficient basic and applied research. We might not be surprised at the inability of a private firm to pursue the kind of science that wins Nobel Prizes, but we may well be unfamiliar with how much applied research makes the leap from State funded universities to innovative firms. One example is the multi-finger gestural input at the heart of the iPod’s success. In fact nearly all the applied research that has made Apple products market leaders have been carried out under State funding, according to Mazuccato. This is not to deny the genius of the company in bringing it together with razor-sharp design, but to say that Apple could not have made its billions without the State and the ‘low hanging’ fruit of its research programmes. As Mazuccato puts it: ‘Not only has government funded the riskiest research, whether applied or basic, but it has indeed been the source of the most radical, path-breaking types of innovation.’

Mazuccato devotes considerable space to green technologies such as solar and wind power, both of which have required substantial State backing. Here she may not help persuade the green sceptics in the US and UK of her overall thesis, as they see such technologies as precisely a brake on the private energy companies. The German example however is a very different story, and I suspect that once the world wakes up to how Germany has ‘crowded in’ renewable energy generation – having determined it to be a winner – and stolen a carbon reduction march on the rest of the world, Mazuccato’s work will also gain acceptance on the green front.

Mazuccato has focused on innovative technologies which power economic growth. In discussing Concorde as an example often cited of the State picking a loser, she sees it as a project extending ‘the period of glory of a mature industry’ as opposed to a project launched in the new technology sector. I would like to see her thesis extended in fact to the mature industries, where innovation is in fact no less important but perhaps less glamorous. In other words, while it makes sense to argue that the poster boys of new technology success such as Apple and Google owe their success to the State, as a refutation of the ‘crowding out’ hypothesis, I don’t see why her thesis cannot be extended across the whole economy. The focus on new technologies raises another issue. She is clear that new technologies are a key factor in productivity growth, but this assumes growth to be the only solution to social problems such as inequality. Here we probably need a new generalised economic theory of the steady state to help us understand why Japan, for example, has had a decade of little growth, but still provides very high standards of living for its citizens. The green economy that Mazuccato advocates certainly needs inspired entrepreneurship – in which the State can play a key role – but it may end up replacing the entire concept of growth with something like a concept of dynamic equilibrium.

Mazuccato’s thesis remains indispensible however. We need to persuade people that far from being something we tolerate with held noses, the State can be risk-taking, glamorous, and visionary. It also needs to be said that the State should recoup more of its investment in its risk-taking. Some of the billions that Apple sits on, courtesy of State research and State tolerance for tax havens, needs to be returned to fund more innovation. It is time that the ‘Jeffersonian’ rhetoric department took a long look at what the ‘Hamiltonian’ policy department has actually achieved, and change its tune. We should no longer assume an infantilised public capable of understanding only the simplest of concepts. Our populations are now vastly better educated than in Jefferson’s day – at great expense by the State – so why should they not grasp a more nuanced rhetoric than the kind peddled by Frisby? A rhetoric of the entrepreneurial State?

I give The Entrepreneurial State plus five stars for ethical capitalism. Although it is not focussed on ethics it quietly makes a strong ethical case for business to give more back to the State. I give the book five stars for economic competence. The book is careful in its sources and research, and also avoids many of the traps that left-of-centre economists fall into. These pitfalls often include unchallenged Marxist assumptions, or little things like putting ‘profit’ in quote marks – a sure sign that entrepreneurialism is misunderstood.

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